ONTARIO
SUPERIOR COURT OF JUSTICE
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SEYED ABOULGASM RABI and SHOHREH SHAFIEI
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THE TORONTO DOMINION BANK
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Morris Cooper, for the Applicants Reeva M. Finkel, for the Respondent, The Toronto Dominion Bank; No one appearing for Ion Rosu |
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HEARD: September 5, 2006 JUDGMENT: October 31, 2006 |
ECHLIN J.:
reasons FOR DECISION
I. INTRODUCTION AND OVERVIEW
[1] Eighteenth century English poet and essayist Dr. Samuel Johnson (1709-1784), once observed, “Fraud and falsehood only dread examination. Truth invites it.”
[2] Ontario is currently experiencing a serious mortgage fraud plague. This action involves one such fraud.
[3] Seyed Aboulgasm Rabi and Shohreh Shafiei are the innocent victims of identity theft involving mortgage and title fraud. Unknown individuals posed as the purported vendors and as Ion Rosu, a purported purchaser and mortgage applicant of the condominium unit in question. These individuals completed a fraudulent transfer of the condominium from the names of Rabi and Shafiei into Rosu’s name and then obtained a mortgage loan from the Toronto Dominion Bank. The individuals who orchestrated this fraud have disappeared with the proceeds of the mortgage.
[4] On this application Rabi and Shafiei sought to have title to the condominium unit restored to their names. They also sought to set aside the fraudulent mortgage which the bank has registered against their home. The bank has acknowledged that Rabi and Shafiei are “victims of a sophisticated fraud” and did not object to the restoration of title back into their names, but argued that the mortgage remains a valid charge against the condominium property.
II. THE FACTS
[5] Rabi and Shafiei purchased a condominium unit at 28 Hollywood Avenue in north Toronto on May 3, 2001. They have resided there with their children since that time. As of May 9, 2004, there were no mortgages or encumbrances on the property.
[6] In May of 2004, individuals posing as Rabi and Shafiei, purported to sell the property to a person posing as Rosu. The fraudsters enlisted the services of Mercy Dadepo, a real estate lawyer practicing in Toronto. They presented identification documents, driver’s licences and Social Insurance Number cards, which appeared to be genuine. The fraudsters presented an executed Agreement of Purchase and Sale that appeared to sell the condominium to Rosu for a sale price of $270,000.00. Dadepo agreed to represent the person posing as Rosu in the transaction as well as the fraudsters. The person posing as Rosu also presented identification which appeared to be genuine.
[7] Dadepo took the necessary steps to close the transaction including arranging for a mortgage from the bank transferring title to the property to Rosu’s name, and registering a charge against the property in favour of the bank. On May 18, 2004, the day the fraudulent transaction closed, the person posing as Rosu granted a mortgage to the bank in the amount of $247,860.00, which was registered on title as Instrument No. AT488760. Notably, a sum of $30,000.00 was paid to the mortgage broker as part of this transaction.
[8] During all this time Rabi and Shafiei retained possession of the property. They only became aware of the fraudulent sale in August of 2005. Around that time, Rabi and Shafiei discovered that a City of Toronto tax bill showed the assessed owner of the property as Rosu. On August 11, 2005, Home Alone Property Management contacted Rabi and Shafiei to perform an occupancy check of the premises for a mortgage company.
[9] The mortgage on the property is insured by the bank’s title insurer, First Canadian Title.
III. THE PARTIES’ POSITIONS
[10] Both Rabi and Shafiei and the bank agreed that the fraudulent transfer of the property is invalid and that Rabi and Shafiei are entitled to a declaration that they are the registered owners. They disagreed, however, on the issue of the mortgage, which the bank argued is a valid charge on the property.
[11] Rabi and Shafiei urged that a fraudulent and invalid mortgage did not suddenly become valid merely upon registration under the Land Titles Act, R.S.O. 1990, c. L.5 .
[12] The bank argued that the effect of section 78(4) of the Act is that registration confers effective title and that section 155 subjects the common law to the provisions of the Act. Therefore, while forged or fraudulent documents are deemed to be null and void under the common law, the bank argued that section 155 of the Act overrides the common law, making registration effective to confer title.
IV. THE LAND TITLES ACT
[13] Subsection 78 (4) of the Act sets out the effect of registering an instrument:
Effect of Registration
When registered, an instrument shall be deemed to be embodied in the register and to be 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. (emphasis added)
[14] Section 155 of the Act discusses the interrelationship between the Act and fraudulent dispositions:
Fraudulent Dispositions
Subject to the provisions of this Act, with respect to registered dispositions for valuable consideration, any disposition of land or of a charge on land that, if unregistered, would be fraudulent and void is, despite registration, fraudulent and void in like manner. (emphasis added)
V. ANALYSIS OF THE LAW
[15] In 1885, Ontario adopted a land registration system through the enactment of the Land Titles Act. It was modelled not on the Torrens system which was originated by Sir Robert Torrens in South Australia in 1857, but rather on the English Land Transfer Act of 1875. It is currently known as the Land Titles Act, R.S.O. 1990, c. L.5 . The basis of the system is that the state establishes title by setting up a register and guaranteeing that the person named as owner in the Register has title subject only to registered encumbrances and statutory exceptions. (See: Marcia Neave, “Indefeasibility of Title in the Canadian Context” (1976) 26 U.T.L.J. 173).
[16] In 1976, the Supreme Court of Canada addressed various provisions of the Ontario Act and the system of land registration in general in United Trust Co. v. Dominion Stores Ltd., [1977] 2 S.C.R. 915. The Supreme Court of Canada considered the effect of section 85 (5) (now section 78 (5)), which deals with priorities. A majority of the Court concluded that principles of the common law were not abolished by the Act. In writing for the majority, Spence J. stated that the doctrine of actual notice (a long-held and cardinal principle of property law), “cannot be considered to have been abrogated [by the Act] unless the legislative enactment is in the clearest and most unequivocal of terms.” (at p. 952).
[17] It is a well-established principle of property law that a fraudulent instrument cannot create a valid interest in land. As stated in United Trust, the Act does not revoke or abolish the common law. The Supreme Court clearly stated that common law principles could not be altered absent clear and unequivocal legislative intent. I am not satisfied that section 155 of the Act when combined with the provisions of s. 78(4) represents sufficient and specific intent of the Legislature to totally override the common law with respect to fraudulent documents creating a valid interest in land upon registration.
[18] Rather, it is my view that section 155 represents a commitment of the Legislature to the common law principles of property law, and in particular that fraudulent dispositions are void and of no effect, save in limited circumstances
[19] The Ontario Court of Appeal in Household Realty Corp. v. Liu, (2005), 261 D.L.R. (4 th) 679 (Ont.C.A.), held that two mortgages given on the authority of a fraudulent power of attorney were effective and enforceable. The Court stated that although the mortgages were void at common law, they were valid once registered under the Act due to the effect of section 78 (4) (at pp. 690-691).
[20] In Household Realty, the Court of Appeal was faced with a situation where one of the registered owners of the property, using a fraudulent power of attorney prepared in her husband’s name, arranged for two mortgages on her jointly-owned and registered property. In the present application, neither of the registered owners, Rabi and Shafiei, had any knowledge of or involvement in the fraudulent transfer. It is my view that the facts in this application are distinguishable from the situation in Household Realty and that the result in that case is not applicable to the present case.
[21] There are two competing interests in this application: those of Rabi and Shafiei and those of the bank. Rabi and Shafiei did nothing in any way to bring this nightmare upon themselves. Unlike Household Realty, neither was in any way involved in the mortgage transaction, a fact that could have been readily discovered by the bank’s appraisers, had they appeared at the door of the premises in question and spoken to either Rabi or Shafiei.
[22] Instead, the bank acted pursuant to its “usual procedures” and advanced money to a fraudster in the absence of an interior inspection of the premises to be mortgaged (which would likely have averted the fraud), having chosen to delegate the due diligence to a mortgage broker. It is also extremely curious that the condominium unit in question at 28 Hollywood Avenue was listed as having a locker and two parking units, and yet the fraudulent sale did not refer to these nor did it offer any explanation for the absence of such transfers. Finally, it was odd that there was no deposit. All of these red flags should have raised questions for the lender.
VI. THE ISSUES
(a) Should the fraudulent conveyance be deleted from the Register?
[23] There are only two claims in this application. The first is uncontested and straightforward. Rabi and Shafiei sought an order that they are the registered owners of Condominium Unit SPH108, at 28 Hollywood Avenue, Toronto and that the transfer contained an Instrument No. AT488759, should be deleted.
[24] It is conceded by all that the transfer in question is fraudulent. A fraudulent transfer can have no legal effect upon the lands (Household Realty Corp. v. Liu (2005), 261 D.L.R. (4 th) 679 (Ont.C.A.) at p. 686 [para. 28]).
[25] Accordingly it is ordered that the fraudulent transfer registered against title in Instrument No. AT488759, shall be deleted and Rabi and Shafiei shall be shown as the registered owners of Condominium Unit SPH108, at 28 Hollywood Avenue, Toronto.
(b) Should the fraudulent mortgage be deleted from the Register?
[26] The second and more vexing question involved the claim by Rabi and Shafiei that the fraudulent mortgage be declared void and unenforceable and deleted from title.
[27] It has been suggested that in this instance there are two innocent victims of the real estate fraud: Rabi and Shafiei and the bank.
[28] Clearly, Rabi and Shafiei are innocent. English jurist Sir Edward Coke (1552-1634) was quoted as saying: “et domus sua cuique est tutissimum refugium” (“one’s home is one’s castle”). In most instances, a person’s home is their largest single lifetime investment. Not to be understated, a homeowner’s rights ought to be at least equal to the rights of commercial lenders in the face of the increasing prevalence of identity thefts.
[29] Ought the bank to be viewed in a similar light? Arguably, the bank could have exercised greater due diligence before advancing a sizeable sum at the request of a mortgagor with whom it had never before had dealings. It delegated dealings to a mortgage broker who had no authority to bind the bank. Important telltale signs of the fraud were missed including the highly unusual failure to convey parking and storage spaces; payment of $30,000.00 to mortgage brokers for a standard mortgage; and the absence of a deposit being paid. If any of these simple matters had been noticed, the fraud might have come to light. The appraisal exercise failed to even send an appraiser into the unit. A simple interior house inspection could have thwarted a mortgage fraud attempt such as occurred in this instance. Where the lender is granted an interior inspection, a fraudulent mortgagor would be less likely to be able to pull off its scam.
[30] In this day and age of impersonalized mortgage lending and borrowing in which banks download the appraisal process to a mortgage broker who, in turn, does as little as possible to maximize profit, such frauds can and will occur. I cannot help but observe that there ought to have been more care taken in advancing a sum in excess of one quarter of a million dollars.
[31] As previously mentioned, the bank has argued that the combined effect of Section 78(4) and Section 155 of the Act, as considered in Household Realty and Belobaba J., in Lawrence v. Wright, [2006] O.J. 2907 (S.C.) require that I give effect to the mortgage interests of the bank.
[32] A review of Sections 68(1), 86(1) and 93(1) of the Act, make it clear that no one other than the registered owner can transfer or charge freehold land by a registered disposition. As previously indicated, I distinguish the result in Household Realty from the present case on the basis that Household Realty involved the actions of a registered owner. I find that the fraudulently registered owner in the present case acted to create a fraudulent mortgage. Because the transfer was void, the fraudulent owner (who obtained title in the fraudulent transfer) did not have any title to charge. Therefore, the fraudulent charge in the present case was also void. I am not persuaded by the determination found in Lawrence v. Wright, and I am not convinced that it is applicable in this instance, as it was founded upon the distinguished result in Household Realty.
VII. APPLICATION OF THE CASELAW AND LEGISLATION
[33] A careful review of section 78, which was enacted in 1960, does not lead to the conclusion that the Legislature intended to overturn the basic foundation of the Ontario property regime. Rather, title to all property continues to derive from the original Crown grant, and thereafter only from each lawful successor in title.
[34] I understand the provisions contained in Section 78 to be minor administrative “punch clock” changes. They cannot be viewed as intended to substantially alter the basic foundation of real estate law existing in Ontario since 1875. In so finding, I distinguish the determination made in R.A. and J. Family Investment Corp. v. Orzech(1999), 44 O.R. (3 rd) 358 (C.A.) as that case involved competing registrations. This was not the case with respect to Condominium Unit SPH108 at 28 Hollywood Avenue.
VIII. The Issue of Immediate Indefeasibility vs. Deferred Indefeasibility
[35] The issue of indefeasibility has been the subject of considerable commentary and debate. To date, there has been no definitive decision on whether, in the land titles system of land registration established in Ontario, the doctrine of deferred indefeasibility of title or the doctrine of immediate indefeasibility of title applies.
[36] In Household Realty, Armstrong J.A., in speaking for the Court stated, “I am inclined to believe that the continuing discussion of theories of interpretation of the Act is better left to others.” (at para. 42).
[37] Epstein J., in Durrani v. Augier et al. (2000), 50 O.R. (3d) 353 (S.C.) confirmed that the land titles system embodies three principles (the mirror principle, the curtain principle and the insurance principle). These principles form the doctrine of indefeasibility of title (at p. 367). The result in Durrani is distinguishable because it involved a series of transactions including a foreclosure judgment vesting title in Augier, a sale to the real estate agent’s daughter, and then a mortgage to the Royal Bank, unlike in this instance where the fraudsters transferred the property and obtained the mortgage in one transaction.
[38] Generally speaking, the objective of the Land Titles Act is to provide a Register that is a reliable and accurate statement of title. When fraud is involved, it raises the issue of whether the system is governed by the doctrine of immediate indefeasibility or the doctrine of deferred indefeasibility.
[39] If the doctrine of immediate indefeasibility is applied, a fraudulent document becomes effective and indefeasible as soon as it is registered. Innocent injured parties have no remedy, save and except making a time-consuming, expensive, uncertain and tortuous claim again the “last resort” compensation fund, the Land Titles Assurance Fund.
[40] The alternative approach is the doctrine of deferred indefeasibility. Under this doctrine, the risk of fraud is borne by the immediate parties to the fraudulent transaction. Subsequent parties may rely upon the Register. Thus, the indefeasibility of the registered title is postponed and is applied only on a subsequent conveyance to a bona fide purchaser for value.
[41] This approach places the risk of fraud on the party who, by due diligence, has an opportunity to uncover it and possibly prevent it. The result requires a mortgage lender to protect itself to ensure that it is receiving a genuine mortgage before advancing the funds.
[42] The leading case with respect to deferred indefeasibility is Gibbs v. Messer, [1891] A.C. 248 (PC). In that case, Lord Watson commented,
Those who deal, not with the registered proprietor, but with a forger who uses his name, do not transact on the faith of the register; and they cannot by registration of a forged deed acquire a valid title in their own person, although the fact of their being registered will enable them to pass a valid title to third parties who purchased from them in good faith and for owner’s consideration. (at p. 255).
[43] There are three Ontario cases and one case from the Supreme Court of Canada which have considered the Gibbs case: Fawkes v. The Attorney General of Ontario, [1903] 6 O.L.R. 490; 793649 Ontario Ltd. v. Alemeida (unreported, September 20, 1993, (Ont.Ct.(Gen.Div.)); Toderan v. Bacchus et al. (1979), 13 R.P.R. 122 (Ont.H.C.); and CPR and Imperial Oil v. Turta and Sereda Montreal Trust Co. and Turta, [1954] 3 D.L.R. 1 (S.C.C.). All are distinguishable on their facts, but each supports the application of the doctrine of deferred indefeasibility as applying in Ontario.
[44] Perhaps the most persuasive authority is The Attorney-General v. Odell, [1906] 2 Ch. 47 (C.A.). This was a decision under the English Land Transfer Acts of 1875 and 1897, the legislation upon which the Ontario statute was based. This case clearly indicates that the doctrine of deferred indefeasibility applies.
[45] I further note the decision of Deputy Director of Titles, Nancy R. Sills of February 1, 1998, in Re Risman (unreported) which contains a thorough and well-researched analysis of the law. Ms. Sills also concluded that with respect to the Ontario Land Titles Act, it is appropriate to apply the doctrine of deferred indefeasibility rather than immediate indefeasibility.
[46] The decisions of Epstein J. in Durrani v. Augier and Spence J. in Toronto Dominion Bank v. Jiang , (2003), 63 O.R. (3d) 764 (S.C.), while distinguishable on their facts, lend further support for the finding that the doctrine of deferred indefeasibility applies to the Ontario Land Titles Act.
IX. CONCLUSION
[47] Accordingly, while I am persuaded that the doctrine of deferred indefeasibility applies to the Land Titles Act in the circumstances of this case, the mortgagee cannot rely on it. In this instance, as the fraudsters transferred the property and obtained the mortgage from the bank in one transaction, it was incumbent upon the bank to exercise due diligence which might be able to prevent the fraud. Clearly it did not. Its simple failure to ensure that a proper in-person appraisal involving contact with the occupants of the subject premises would have uncovered the fraud. The other aberrations in this transaction previously referenced should also have put the mortgage lender on notice.
[48] I read the Act as requiring some evidence of due diligence as an element of deferred indefeasibility. The principle of deferred indefeasibility cannot be relied upon where there is or ought to be notice of a problem. While this approach may introduce some uncertainty about when deferred indefeasibility applies, the right to rely on the Register is not automatic for deferred indefeasibility. Indefeasibility occurs in certain limited circumstances. The bank cannot be heard to say that it was entitled to rely upon a registration of a fraudulent title in this instance. If subsequent innocent parties were to come along later and rely upon the abstract of title and the accuracy of the registrations, they might be found to be entitled to rely upon the Register.
[49] I find that unknown parties not before the Court conspired to transfer the title to the subject property away from the genuine owners, Rabi and Shafiei and then the same parties fraudulently obtained a mortgage from the bank under the fictitious name Rosu.
[50] Having regard for these findings, a consideration of the caselaw and legislation, and the determination that the doctrine of deferred indefeasibility applies, I find that the charge granted by Rosu to the bank and registered on May 18, 2004 as Instrument No. AT488760 (immediately after registration of the transfer of title as Instrument No. AT488759) is void and unenforceable and should be deleted from title. In this instance the mortgagee cannot rely on the Register because it did not even perform rudimentary due diligence and had notice of irregularities. For deferred indefeasibility to assist the bank, it must show that it is entitled to rely upon the Register in all the circumstances.
X. COMPENSATION FOR VICTIMS OF TITLE FRAUD: AN UNRESOLVED PROBLEM
[51] Although it is not possible for the Court to resolve this issue, it is worth mentioning briefly the problems innocent homeowners must deal with when faced with fraud in the Land Titles system. The Ontario Legislature has recently introduced legislation to address existing problems relating to mortgage fraud. Revisions to the Land Titles Assurances Fund, a creation of a Land Titles Act, might also be contemplated. The Fund is not an insurance company, nor is it title insurance. In Ontario, it is a discretionary fund of last resort. This means a claimant must first attempt to recover from all other sources. This can involve years of proceedings and tens of thousands of dollars in legal expense, not to mention heartbreak and aggravation. Victims of the system are essentially re-victimized. The lay person might believe that the government guarantees and stands behind titles registered under the Land Titles Act. However, as Sidney Troister has observed, with reference to George Gershwin’s lyrics from Porgy and Bess, “It ain’t necessarily so...”.
[52] In contrast, certain other Canadian jurisdictions do not treat the fund as a fund of last resort. Notably, New Brunswick treats its fund as one of first resort.
[53] Finally, thought ought to be given to ensuring that all past, present and future victims of fraud under the Land Titles Act are provided with the protection and the assurance they expect from a system run by the government and held out to the public to be a system which can be relied upon.
XI. COSTS
[54] In this matter, costs will follow the event. Mr. Cooper has asked for $2,500.00, inclusive of disbursements and GST. Ms. Finkel, while not seeking costs if successful, did not object to such quantum in the event that the applicants were to be successful. I have carefully considered the costs issue and find that the sum of $2,500.00 is reasonable and fair in the circumstance and shall be awarded and payable within 30 days as costs to the applicants from the respondent bank.
XII. ORDER
[55] It is hereby ordered:
1) that the Land Titles Act Register be rectified pursuant to s. 159 of the Land Titles Act as follows:
a. The transfer registered against title of Condominium Unit SPH108 at 28 Hollywood Avenue, Toronto, Ontario, on May 8, 2004, as Instrument No. AT488759, purporting to transfer the property from Rabi and Shafiei to Rosu be deleted;
b. That the charge granted by Rosu to the Toronto Dominion Bank and registered against title of Condominium Unit SPH108 at 28 Hollywood Avenue, Toronto, Ontario, on May 8, 2004, as Instrument No. AT488760 be deleted.
2) that the charge referred to in para. 1(b) herein is void and unenforceable; and
3) that costs be payable by the Toronto Dominion Bank to Rabi and Shafiei in the amount of $2,500.00 within 30 days of the date of this judgment.
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Echlin J.
Released: October 31, 2006
