When fraudsters pull off a scam, they often 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 continued making the monthly payments. They then sought financing from two other institutions, securing three different mortgages on the same property.
When the house of cards collapsed and the financial institutions 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 Computershare mortgage.
In maintaining that the discharge was fraudulent, Computershare 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 decision, 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 situation like that? It really is between a rock and a hard place.”
The scam breaks down into two parts. The first was discharging the mortgage without Computershare knowing; the second was securing additional mortgages for the same piece of property — essentially selling the same property over and over again.
The regular payments made for more than four years on a mortgage that had already been discharged served as a clever ruse to cover the fraud and it allowed the pair to access even more money.
Lenders have underwriting procedures of what they need to ask those seeking a mortgage. Brosseau 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 additional questions, the court added.
Justice John Murray wrote, “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.”
“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,” wrote Murray.
Lisa Laredo, a sole practitioner 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 obvious signs of the scam. And any innocent parties who became involved after the discharge ended up being defrauded.
So it’s really up to the third-party lender providing the mortgage to make the necessary inquiries to determine that the borrower can take on a new mortgage and that there are no prior undisclosed mortgages.
“I would suggest any transactions with the title within the past six months must be scrutinized and questioned so the purchaser can have some comfort 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 inquiries as if acting for the purchaser. 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 consequences of successful fraud.
Insurer LAWPRO (Lawyers’ Professional Indemnity Company) 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 director 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 typical real estate fraud scenario involves 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.
Correction: Update: This version contains a change to the wording of the ninth paragraph to reflect "lenders have underwriting procedures” rather than criteria set out by Office of the Superintendent of Financial Institutions. Law Times apologizes for the error and any confusion it may have caused.