The Priority of Valid Mortgages While Accompanied by a Fraudulent Discharge: The ONSC Decision in CIBC Mortgages Inc. v. Computershare Trust Co. of Canada

Practical Law Canada Legal Update w-007-3124 (Approx. 5 pages)

The Priority of Valid Mortgages While Accompanied by a Fraudulent Discharge: The ONSC Decision in CIBC Mortgages Inc. v. Computershare Trust Co. of Canada

by Practical Law Canada Finance

Key Background Facts

On December 14, 2006, the Lowtans acquired title to the property known as 40 Chipmunk Crescent in Brampton, Ontario (the "Property").
On November 21, 2008, the Lowtans borrowed $280,801 from Computershare Trust Company of Canada ("Computershare") and Computershare registered a mortgage on title to the Property as security for the loan (the "Computershare Mortgage").
On August 26, 2009, a fraudulent discharge was filed by an authorized person directed by the Lowtans of the Computershare Mortgage. Payments continued to be made to Computershare until January of 2013.
In March of 2011, the Lowtans borrowed $87,500 from Maria Giovanni and granted her a private mortgage as security for the loan (the "Private Mortgage").
On July 28, 2011, the Lowtans borrowed $252,800 from CIBC and CIBC registered a mortgage on title to the Property as security for the loan (the "CIBC Mortgage"). When CIBC advanced the loan it only had knowledge of the Private Mortgage and some unsecured debt. A portion of the CIBC funds were used to pay off the Private Mortgage leaving the CIBC Mortgage as a first mortgage and the only security registered on title to the Property.
On December 11, 2012, the Lowtans granted another mortgage as security for a loan by Secure Capital in the amount of $32,000 (the "Secure Capital Mortgage"), on the understanding that the only security registered against the property was the CIBC Mortgage.
In February of 2013, the Lowtans defaulted on the Computershare Mortgage, the CIBC Mortgage and the Secure Capital Mortgage.
In April of 2013, Computershare discovered the registration of the fraudulent discharge of the Computershare Mortgage. The Lowtans made an assignment into bankruptcy.
In the summer of 2013, each of Computershare, Secure Capital and CIBC filed an application to determine the priority of each of their respective security interests in the Property.
In December of 2013, the Property was sold by court order for the amount of $297,764.
The application was heard by the Superior Court. The decision of the Superior Court was then appealed and heard by the Divisional Court in 2016.

The Decision on Appeal to the Divisional Court

The Superior Court arrived at the decision that the Computershare Mortgage had a first charge on the Property and priority over the CIBC Mortgage and the Secure Capital Mortgage. The court held:

The discharge of the Computershare Mortgage was a "fraudulent instrument" registered by a "fraudulent person" (the Lowtans).
The CIBC Mortgage and the Secure Capital Mortgage were "fraudulent instruments" because even though the Lowtans were the registered owners of the Property and able to grant a charge on the Property, the court found that the CIBC Mortgage and the Secure Capital Mortgage were "fraudulent instruments". The court held that the Lowtans, by virtue of the fraudulent discharge, transferred the first priority charge of Computershare to themselves and then subsequently, fraudulently conveyed that same "first charge interest in the land" to CIBC and Secure Capital. Accordingly, the Lowtans were held to be fraudulent persons and the CIBC Mortgage and the Secure Capital Mortgage were "fraudulent instruments" that transferred a charge granted by a fraudulent person.

Ordinarily, the CIBC Mortgage and the Secure Capital Mortgage would be deemed effective according to their nature and intent pursuant to section 78(4) of the Land Titles Act, R.S.O. 1990, c. L.5 (LTA), however, section 78(4.1) invalidates the CIBC Mortgage and the Secure Capital Mortgage on the findings that the mortgages are "fraudulent instruments".

The court followed the findings in Lawrence v. Wright, 2007 CarswellOnt 522 (Ont. C.A.), and the principal of deferred indefeasibility and found that CIBC and Secure Capital were "intermediate owners" that could not receive a valid first charge interest in the Property because it was received by way of a fraudulent transferee or person (the Lowtans) who fraudulently conveyed the interest to themselves by way of a fraudulent discharge who then fraudulently transferred the first charge interest to CIBC and Secure Capital by way of a "fraudulent instrument".

This decision resulted in a movement away from the "mirror" and "curtain" principles that allow one to rely on the register as a perfect mirror of the state of title and that allows a purchaser or transferee to rely on the register as it stands and does not require a purchaser or transferee to look behind the register to determine the state of title.

The decision was then appealed and heard by the Divisional Court. The real question considered on appeal was: "Were the CIBC Mortgage and Secure Capital Mortgage fraudulent instruments?"

Decision: Were the CIBC Mortgage and Secure Capital Mortgage Fraudulent Instruments?

The Divisional Court, when listening and deciding on the appeal focused the grounds of appeal on the question of: Were the CIBC Mortgage and the Secure Capital Mortgage fraudulent instruments?

The Divisional Court held that the CIBC Mortgage and the Secure Capital Mortgage were not "fraudulent instruments" and were perfectly valid mortgages. In deciding the question at hand, the Divisional Court focused on the same provisions of the LTA as the Superior Court, however, its findings differed as well as its application and interpretation of these provisions. The Divisional Court relied on the following in reaching its decision:

The Lowtans were the registered owners of the Property and able to grant a valid first and second charge to CIBC and Secure Capital. The Lowtans were not, in their capacity of granting the CIBC Mortgage and the Secure Capital Mortgage, "fraudulent persons" and therefore the CIBC Mortgage and the Secure Capital Mortgage are not "fraudulent instruments".
Section 78(4) of the LTA is relied upon to determine the effect of registration and provides that once an instrument is registered it is deemed embodied in the register and 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. Accordingly, once the CIBC Mortgage and Secure Capital Mortgage were registered on title to the Property, they were deemed embodied in the register and effective according to their nature and intent to create a valid charge.
Section 78(4.1) and (4.2) only invalidate "fraudulent instruments". Section 78(4.2) is clear that "nothing in subsection 4.1 invalidates the effect of a registered instrument that is not a fraudulent instrument described in that subsection, including instruments registered subsequent to such a fraudulent instrument." The CIBC Mortgage and the Secure Mortgage were found not to be "fraudulent instruments" and are therefore valid mortgages.
The court found the discharge of the Computershare Mortgage to be a fraudulent instrument. Based on the interpretation of section 78(4.1) and (4.2) of the LTA, the discharge was invalid and the Computershare Mortgage was restored but it was subordinate to the CIBC Mortgage and the Secure Capital Mortgage.

In arriving at its decision, the Divisional Court reinforced the mirror and curtain principles distinguishing its findings from the Superior Court that moved away from these principles in its findings. While examining the facts of this case and in arriving at its decision, the Divisional Court held that section 78(4.1) and (4.2) clearly sets out that the principle of deferred indefeasibility applies to "fraudulent instruments". The principle of deferred indefeasibility as it is set out in this decision holds that if you are an innocent party who has relied on the state of the title and registered your interest in the property, you have a valid and enforceable interest, provided you have not received that interest by way of a "fraudulent instrument".

The Priority of Valid Mortgages While Accompanied by a Fraudulent Discharge: The ONSC Decision in CIBC Mortgages Inc. v. Computershare Trust Co. of Canada | Practical Law