The recent decision of CIBC Mortgages Inc. (c.o.b. Firstline
Mortgages) v. Computershare Trust Co. of Canada,  ONSC
543 provides a fact scenario that sounds like it was dreamt up by a
law school professor, but for the three innocent lenders involved,
the situation was a nightmare. A homeowner granted a first mortgage
to Computershare which was later fraudulently discharged from
title. After the Computershare mortgage was discharged from title,
the homeowner granted further mortgages to Firstline and Secure
Capital. Firstline and Secure Capital had no knowledge of the
fraudulently discharged Computershare mortgage, so based on their
review of title of the property, their loans were intended to be
first and second mortgages, respectively. Monthly payments were
made under all three mortgages for some time until the homeowner
stopped making payments, at which point all three mortgages went
into default. The property was sold pursuant to a court order and
the three mortgagees brought the matter before court to determine
who had priority to the sale proceeds which were insufficient to
satisfy all three claims.
Firstline and Secure Capital claimed that they should be
entitled to rely on the register at the time they advanced their
loans and that they should have first and second priority while
Computershare's fraudulently discharged mortgage should rank
third. Their argument was supported by two of the main principles
of a land titles system, firstly the "mirror principle"
which provides that the register is to be a perfect mirror of the
state of title and secondly, the "curtain principle"
which provides that a purchaser (or a mortgagee in this case) need
not investigate behind what is shown on title. In response, the
court pointed out that Firstline and Secure Capital were not the
only parties that should be entitled to rely on the register;
Computershare should also be entitled to rely on the registration
of its mortgage as forming a valid first mortgage notwithstanding
that it may be later fraudulently discharged by no fault of its
own. So the court was faced with the difficult task of deciding
which innocent lender should have priority and which lender's
reliance on the register should take precedence.
The court looked to the more familiar scenario where an innocent
purchaser for value purchases a property from a fraudster and the
court is later called upon to determine if the true owner or the
innocent purchaser should have title to the land. In that scenario,
the theory of "deferred indefeasibility" as embodied in
the Land Titles Act governs and holds that the true owner
takes title over the innocent purchaser as the purchaser, who would
have dealt directly with the fraudster, had the best opportunity to
avoid the fraud. Under the theory of deferred indefeasibility,
although the true owner takes title over the innocent purchaser, an
innocent subsequent purchaser from the first innocent
purchaser would actually take title over the true owner because the
subsequent purchaser is one transaction removed from the fraud and
has no opportunity to avoid the fraud. Applying the theory of
deferred indefeasibility to this case, the court held that
Firstline and Secure Capital acquired their interest in title
directly from a fraudster and had some opportunity to investigate
the fraud and avoid it. As such, the discharge of Computershare
mortgage was determined to be void and Computershare was held to
retain its first priority with Firstline and Secure Capital ranking
second and third, respectively.
Thankfully, for Firstline and Secure Capital, in addition to the
"mirror" and "curtain" principle, another major
principle of a land title system is the "insurance"
principle and although it was not mentioned in the case, these
lenders may have a claim against the Land Title Assurance fund.
Furthermore, depending on whether or not the loans were title
insured, they may also be able to look to their title insurer for
coverage for the losses they suffered.
Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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