The fact pattern and implications presented by this case would make for a good moot court competition. Orzech involved multiple frauds over a period of time. The decision of the Court of Appeal is not clear on certain particulars of the frauds; that is who perpetrated the frauds and the beneficiaries thereof.
R. A. & J. Family Investment Corporation (R.A. & J.) held a valid first registered charge which was fraudulently discharged. Relying on title, Royal Bank registered a new first charge subsequent to the fraudulent discharge. It is unclear whether or not non-payment under the mortgage prompted R.A. & J. to discover the fraudulent discharge. However, a couple of years later, R.A. & J. registered a caution on title and then subsequently assigned its interest in the charge to a trustee.
As a result of default under its charge, Royal Bank sold the property under power of sale but subject to the caution registered by R. A. & J. The purchasers of the property granted a first registered purchase money charge to Hurontario Trust, and a second charge to Scotiabank a year later. However, immediately following the registration of the second charge in favour of Scotiabank, a forged postponement of charge was registered, whereby Hurontario Trust postponed its charge in favour of the Scotiabank charge. Shortly thereafter, the owner of the property received an advance from Canada Trust, which was used to obtain a discharge of the Scotiabank charge. Canada Trust was to receive a first registered charge against the property, but its lawyer failed to obtain and register such a charge.
The end of this saga occurs approximately one year later, when on consent, the property is sold and the net proceeds of sale are paid into court pending the outcome of the litigation.
With respect to the fraudulently discharged R.A. & J. mortgage, Mr. Justice Goudge found as follows:
Even if the owner of the property was complicitous in the registration of the fraudulent cessation (in that it presumably was the only party that may have benefited from the fraudulent registration of the cessation of charge), Royal Bank was granted the charge by the true owner. Further, in that the subsequent mortgagees acquired their interest in the property through the Royal Bank charge, their respective entitlements could not be challenged by R. A. & J. either. Accordingly, it does not appear that the decision in Lawrence would have any material effect on the decision of the Court of Appeal in R. A. & J.
Durrani v. Augier [7]
The impact of the Lawrence decision on this case may have led to a different result had Lawrence been decided before Durrani. The fraudster, Augier fraudulently registered a collateral loan agreement against title to the property of the innocent homeowners and ultimately obtained title to the property pursuant to a fraudulently obtained default foreclosure judgment.
Having obtained title this way, the fraudster took steps to sell the property and ultimately sold the property to a purchaser who the court held had actual notice of the fraudulent title. The purchaser had obtained a purchase money mortgage from Royal Bank of Canada.
The court ultimately held that the innocent homeowners were entitled to have the title to the property transferred back into their names and, notwithstanding that the purchaser had actual knowledge of the fraudulent title, the charge given to Royal Bank was held to be valid.
In finding that Ontario is a jurisdiction in respect of which the doctrine of deferred indefeasibility of title applies, Madam Justice Epstein commented as follows:
“42. The philosophy of a land titles system embodies three principles, the mirror principle, where the register is a perfect mirror of the state of title; the curtain principle, which holds that a purchaser need not investigate the history of past dealings with the land, or search behind the title as depicted on the register; and the insurance principle, where the state guarantees the accuracy of the register and compensates any person who suffers loss as a result of an inaccuracy. These principles form the doctrine of indefeasibility of title and is the essence of the land titles system: Marcia Neave, “Indefeasibility of Title in the Canadian Context” (1976), 26 U.T.L.J. 173 at p. 174…
78. Through the doctrine of deferred indefeasibility of title, the land titles registration system reflects a policy choice to protect the security of title of those who are innocent parties who rely on the title. It follows that there may be those who will be deprived of legitimate interests in the land under the operation of the Act.
79. The innocence principle of a title registration system is recognized in Ontario by the establishment and maintenance of the Land Titles Assurance Fund (the “Fund”) as a means of compensating persons prejudiced by the operation of the Act. Generally, the way the Fund is designed to work is as follows. First, the person wrongfully deprived of an interest in land by reason of an entry on the register is entitled to recover what is just from the party responsible for the wrong. Where the individual wrongfully deprived of land is unable to recover just compensation for the loss by other means, the person is entitled to have the compensation paid out of the Fund. Such a claim must be made to the Director of Titles and the liability of the Fund for compensation and the amount of compensation shall be determined by the Director subject to a right of appeal.”
The only fact which distinguishes Durrani from Lawrence is that the fraudster obtained title to the property himself. Epstein J. held that that transfer could not form the basis of any legitimate claim to title on his part and could not therefore form the root of good title.
However, Madam Justice Epstein found that the purchasers from the fraudster would be protected under section 155 of the Land Titles Act if they obtained title to the property for valuable consideration without notice of any fraud; that is if they were innocent bona fide purchasers for value. Madam Justice Epstein, on the facts before her, found that the purchaser from the fraudster had “actual notice” of the invalidity of the fraudster’s interest in the property and accordingly found that the purchaser was not a bona fide purchaser for value without notice. On that basis, Madam Justice Epstein granted a declaratory order that the transfer from the fraudster to the purchaser was void and amended the register to revest title in the innocent homeowners.
However, on the basis that the purchase money mortgagee was unaware of any irregularities with the title to the property, Epstein J. found that the Bank was a bona fide mortgagee for value without actual notice of any fraud which Her Honour indicated was protected by the provisions of the Act when they relied upon the register as reflecting valid title.
It is submitted that the analysis of the Court of Appeal in Lawrence would lead to a different result in Durrani.
In Lawrence, The Honourable Madam Justice Gillese found as follows:
“55. Deferred indefeasibility is consistent with s. 155, a statutory enshrinement of the common law albeit “subject to the provisions of [the] Act. As previously explained, it is consistent also with an interpretation of s. 68(1) that recognizes the common law principle that a fraudster can never take good title so as to become the owner but also enables Maple Trust to be recognized as the registered owner for the purposes of the deferred owner. As Maple Trust registered its charge and its charge was not obtained by fraud, a bona fide purchaser for value without notice (i.e. a deferred owner) could rely on a combination of ss. 68(1) and 78(4) to take an indefeasible interest from Maple Trust.”
Based on the Court’s analysis, it appears that in order for the Maple Trust mortgage to have been valid, an innocent titled owner would have had to grant the mortgage to Maple Trust. In Lawrence, the titled owner from whom Maple Trust took its mortgage was part of the fraud.
Similarly, the purchaser from the fraudster in Durrani who had actual notice of the invalidity of the fraudster’s title would be unable, on the reasoning of Lawrence, to give a valid charge to Royal Bank.
But, we must query: how would the court deal with a slightly different fact situation whereby the mortgagee, although not having “actual notice” of the fraud, was or ought to have been put on enquiry by documents or information in its possession? Would the mortgage be valid in those circumstances?
The Toronto-Dominion Bank v. Jiang et al.[8]
The decision of Mr. Justice Spence in this case sets forth a fact pattern which is practically identical to that of Lawrence.
The innocent homeowners purchased the property and continued to occupy it for five years before an imposter transferred the property to a fraudster, who mortgaged the property to The Toronto-Dominion Bank which secured a $200,000 line of credit. It was not disputed that the Bank was a bona fide mortgagee for value without notice of the fraud.
Mr. Justice Spence, again relying on the doctrine of deferred indefeasibility and two papers authored by Sydney Troister, rectified the title to the property by declaring the fraudulent transfer void and of no effect but validating the charge registered in favour of The Toronto-Dominion Bank.
It is clear that the decision in Jiang cannot be reconciled with Lawrence, although both decisions base the ultimate result on the application of the doctrine of deferred indefeasibility.
Conclusions
It now appears clear that in order for an interest in title to remain valid, the fraud must be laundered through the transfer of title to an innocent purchaser for value without actual notice of any fraud.
Arguably, the principles underlying the doctrine of deferred indefeasibility have been eviscerated by Lawrence. The mirror may now be cracked, the curtain drawn, and the amendments to the Land Titles Act may be insufficient to improve government-backed insurance sufficiently to assist in preserving the integrity of the land registration system in this province.
Lawyers acting for purchasers and mortgagees may now have to investigate the validity of the title from their client’s vendors. In the highly competitive real estate marketplace the costs and risk exposure to lawyers will likely enure to the benefit of the title insurers.