In a rare move this week, the Ontario Court of Appeal effectively reversed its decision in Household Realty v. Liu, giving a mortgage fraud victim back her home, making Ontario’s mortgage fraud case law consistent with legislation, and putting the public outcry over mortgage fraud to rest.
Homeowners realized they could easily find themselves in Lawrence’s position, and the resulting uproar played out in the media convinced the province to introduce legislation to ensure first-level homeowners do not lose their property because of mortgage fraud.
On Feb. 6, the five-member panel unanimously set aside the charge in favour of Maple Trust and ordered the lender to pay $25,000 in costs to Lawrence.
“Ownership of a person’s home is fraudulently transferred. The property is then mortgaged. In a contest between the two innocent parties - the homeowner and the lender of mortgage monies - who wins? This appeal answers that question in favour of the homeowner,” wrote Justice Eileen Gillese on behalf of the panel, comprised also of Chief Justice R. Roy McMurtry and justices David Doherty, Stephen Goudge, and James MacPherson.
“We’re happy that we won,” says Lawrence’s lawyer, Morris Cooper. “We showed them that they made a profound mistake in an earlier decision that was less than a year old. We turned it around and did it for all the right reasons, protecting widows and orphans, so how much better can it get?”
However, the court did not accept one of Cooper’s key arguments: that only the true owner of land can grant an interest in land and all transactions resulting from fraud are void. This created a problem for the court, because any fraud that occurred before someone bought a home, no matter how long ago it occurred, could break the chain of title.
Everyone in Ontario would always be subject to a risk that they could lose millions of dollars if someone, someday, somehow can prove there was a fraud earlier in the chain, says Jeffrey Lem, a real estate partner at Davies Ward Phillips and Vineberg LLP.
David Golden, of Torkin Manes Cohen Arbus LLP, who acted for Maple Trust, argued this would grind real estate transactions to a halt and took the opposite approach that title should become valid immediately after it is registered, even if it is fraudulently transferred, which would put innocent homeowners who become victims of mortgage fraud at risk.
The court rejected both theories and sided with the intervener, the provincial government, on this point by ruling that the theory of “deferred indefeasibility” accords with Ontario’s Land Titles Act.
This theory creates three classes of parties: the original owner (Lawrence), the intermediate owner (the person who dealt with the fraudster, Maple Trust) and the deferred owner (a legitimate purchaser unaware of the fraud who buys the home from the intermediate owner; there was not one in this case).
The court ruled that an intermediate owner cannot defeat the original owners’ title because the intermediate owner had a chance to investigate the transaction and uncover the fraud.
However, if the intermediate owner sells to a deferred owner, this new owner has good title. The original owner would then become the unfortunate party that has to apply for government compensation.
“And so they basically drew a policy decision that says if you lose your house like this, you’re okay,” says Cooper. “If it flips another time, you may be lost. And that’s because we’ve got to draw a line somewhere so people can rely on the title.”
Even though he knew the court would have trouble with his initial approach, Cooper says he advanced the argument because he believed it accords with correct interpretation of the statute (as well as with a previously overlooked but important Supreme Court of Canada decision he dug up). At the same time, he said, he was happy to accept the deferred indefeasibility theory because it won the case for his client.
And although Maple Trust lost, the court opened a door that may allow it to apply to the compensation fund.
The Land Titles Act is worded in such a way that only persons who have lost an interest in property are eligible to seek compensation from the fund, Golden says, and a previous compensation fund decision denied a mortgage lender access to the fund.
But the court offered up an additional comment stating that, under the theory of deferred indefeasibility, it is arguable that the intermediate owner does have an interest in the property because if it didn’t, how could it pass along the property to the second level innocent purchaser?
“I felt that the comments in relation to innocent lenders who have also suffered losses as a result of the potential problem of accessing the compensation fund was an attempt to balance the interests of the parties,” said Golden, who will discuss this option with his client.
The court clearly stated its comments are “not intended to decide the question of whether Maple Trust is entitled to seek compensation from the fund” and said “that determination is for another body at another time.”
But its comments carry weight and convey that the prohibition comes from the fund, not the court, and that court doesn’t even seem to agree with it, said Cooper.
The court’s comments on this issue are fascinating, he added, because what was driving these cases, in large part, was the fact that the mortgagee said they can’t access the fund, but Lawrence can.
“Let’s not kid ourselves, they were asking her to go to the fund because they couldn’t. And the court of appeal is saying, ‘Why don’t you just go to the fund yourself and stop screwing around like this?’ ”