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Court looking for middle ground in Lawrence

|Written By Jennifer McPhee

In Household Realty Corp. Ltd. v. Liu, the Ontario Court of Appeal upheld a decision that a fraudulently signed mortgage was binding once registered against an innocent homeowner.

The old common law rule that once a fraud, always a fraud was modified by changes to the Land Titles Act, argues David Golden.

Now the Ontario Court of Appeal is considering arguments in the appeal of Susan Lawrence and Maple Trust Company and Thomas Wright, heard in mid-December, and must decide whether to overturn its 2005 decision in Household Realty.

Lawrence, a Toronto resident, became the innocent victim of a fraud in November 2005 when an imposter forged an agreement of purchase and sale, along with another imposter posing as Thomas Wright, for a purchase price of $318,000. The fraudulent mortgage and transfer and the discharge of Lawrence’s existing mortgage were registered, and Maple Trust registered a mortgage against her property for $291,924.

At trial, Superior Court Justice Edward Belobaba returned title of the property to Lawrence, but did not dismiss the mortgage on her home on the basis of the Household Realty ruling.

Among other arguments, Morris Cooper, acting for Lawrence on her appeal, used case law and a Supreme Court of Canada decision to argue that a fraudulent transfer has no validity - ever.

“The imposter Thomas Wright had no legal basis upon which to grant a mortgage to any mortgagee, whether that mortgage is registered or not. The mortgagee’s absence of knowledge of the fraud is immaterial in creating a valid mortgage, and there exists no legal authority for the proposition that a fraudster, pretending to be a valid transferee, has the legal capacity to give a mortgage,” he wrote in his factum.

Cooper argued that s. 155 of the Land Titles Act is a central tenet of the common law and land titles system, and has been part of the law in Ontario since 1885.

Section 155 states: “Subject to the provisions of this act, with respect to registered dispositions for valuable consideration, any disposition of land or a charge on land that, if unregistered, would be fraudulent and void is, despite registration, fraudulent and void in like manner.”

In 1960, the government of the time changed s. 78(4) of the Land Titles Act to read: “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.”

Maple Trust’s lawyer, David Golden, a partner at Torkin Mane Cohen Arbus LLP, responded that the change to the Land Titles Act modified the common law rule that a forged document is a nullity and void.

“The old common law rule that once a fraud, always a fraud was modified in the very sections that we were examining, but it is supported by the whole concept of having a land titles act where the register is supposed to mean something,” he says.

If all fraudulently signed mortgages are void, he adds, there wouldn’t have been any reason for the act to include provisions for compensating people who lose an interest in the land through fraud.

However, Cooper pointed to statements by the government in 1960 to suggest the change was meant to be a minor, administrative change.

“Yet our Court of Appeal has repeatedly ruled that that little change in 1960 overruled s. 155, which has been part of Ontario’s statute law since 1885. The minute you look at the history of the act, you realize that can’t possibly be true. Nobody had looked to realize they had gotten it wrong for years.”

Cooper also cited the 1976 Supreme Court decision, United Trust v. Dominion Stores Ltd., which held that s. 78 did not abrogate the common law in Ontario.

“You cannot reconcile what our Court of Appeal had been doing with the Supreme Court of Canada decision,” says Cooper.

But if the appeal court accepts Cooper’s position, it will have serious implications for the real estate profession and consumers because any fraud could break the chain, so no one will ever know for sure whether they truly have good title to their property, or whether they are in a position to grant mortgages, says Golden.

“Real estate transactions would grind to a halt,” he says.

However, Cooper says the government considered this argument before it recently passed legislation that made it clear fraudulent transfers, even though registered, will not be valid.”

“They decided, not that important,” says Cooper.

The Consumer Protection and Service Modernization Act, 2006 effectively reverses Household Realty v. Liu, although it does not apply retroactively. The legislation ensures that ownership of a property cannot be lost as a result of a falsified mortgage, fraudulent sale or a counterfeit power of attorney, and modifies the Land Titles Assurance Fund so that title is returned and a decision on compensating victims is made within 90 days.

Still, Cooper says the new legislation does not mean that fraudulent transfers are never valid.

“What the government’s change said was that the immediate fraudulent transfer is not valid, but subsequent transfers will be valid.”

The Court of Appeal’s decision in  Wright v. Lawrence will be fascinating, says Cooper, because one of the judges on the panel ruled on Household Realty, and the other two judges on the panel have ruled on similar cases that came to the same conclusion.

“The problem was that they found neither my argument nor Mr. Golden’s position acceptable. I was pushing from one side, and he was pushing from the polar opposite. His argument was the current law is fine; my argument was that the common law still applies. They didn’t like either position, but the middle position, which they were looking for, cannot be found in the statute.”

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