C.A. Overrules Itself, Says Homeowner Not Liable for Fraudulently-Obtained Mortgage

It is not every day that the Court of Appeal says that one of its earlier decisions was wrongly decided, but that is what happened today. In Lawrence v. Maple Trust Company, a five-member panel of the Court said that its 2005 ruling in Household Realty Ltd. v. Liu was wrong in its result and its reasoning. (It will probably be distressing for Mr. Liu to discover this…)

The Lawrence case garnered a great deal of publicity, probably because the decision struck fear into the heart of any homeowner. Susan Lawrence owned a home that was mortgaged to the TD Bank. In October, 2005, an impostor, posing as Ms. Lawrence, retained a lawyer and gave that lawyer a fraudulent agreement of purchase and sale, under which the impostor was purporting to sell the home for $318,000 to one Thomas Wright (another impostor). Wright applied to Maple Trust Company for a mortgage to finance the acquisition. Maple Trust followed its usual procedures and approved the loan. Neither it nor Ms. Lawrence knew anything about the fraud that was being perpetrated.

The transfer to Wright was registered on title and the mortgage funds were advanced to Wright on the same day. Maple Trust also registered its mortgage (for about $291,000) on title.

Several months later, the real Susan Lawrence discovered the fraud. Shortly after that, Maple Trust began proceedings to enforce its mortgage. Ms. Lawrence brought an action to have the fraudulent mortgage and transfer set aside.

She lost at trial. Mr. Justice Edward Belobaba, considering himself bound by the Court of Appeal’s decision in Household Realty, set aside the transfer to Wright (as having been obtained by fraud) but refused to set aside the mortgage. So, Ms. Lawrence found herself in the position of having had a mortgage fraudulently registered against title to her property, being completely blameless herself, but owing $291,000 to Maple Trust.

On appeal, the case turned on whether registration under the Ontario Land Titles Act provides the registrant with a valid interest, even if the interest was acquired by fraud (and on whether Household Realty was correctly decided).

In an interesting analysis, Madam Justice Eileen E. Gillese, writing for the court, held that someone who registers an interest in land acquires a title that is one of “deferred indefeasibility”. This means that someone who obtains title from a “fraudster” acquires no interest as against the person defrauded (in this case, Ms. Lawrence) because the registrant (Maple Trust) “had an opportunity to investigate the transaction and avoid the fraud”. However, that same person could convey good title to a third person and that conveyance would be “indefeasible” because the third person (“the deferred owner”) would have relied on the register and would have had no opportunity to avoid the fraud.

Applying that theory to this case, the Court held that Maple Trust was not entitled to enforce its mortgage against Ms. Lawrence:

Moreover, unlike the intermediate owner, the homeowner has no opportunity to avoid the fraud. Ms. Lawrence had no ability to discover that her home was being fraudulently sold and mortgaged. By contrast, Maple Trust made the decision to advance money and had the opportunity to avoid the fraud. By interpreting the Act in accordance with the theory of deferred indefeasibility, the law encourages lenders to be vigilant when making mortgages and places the burden of the fraud on the party that has the opportunity to avoid it, rather than the innocent homeowner who played no role in the perpetration of the fraud.


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