Canada: Alberta Court Of Appeal Finds That Innocent Principal Was Bound By The Acts Of A Fraudulent Mortgage Broker

Recently, the Alberta Court of Appeal released its decision in Toronto-Dominion Bank v. Currie. The Court of Appeal considered which innocent party had to bear the loss caused by a fraudulent third party, a licensed mortgage broker. The Court of Appeal reviewed the law on actual and ostensible authority and found that where an agent acted within his or her authority, the principal is bound by the acts of the agent even if those acts are fraudulent.

Background

As background, the appellant, Currie, lent $220,000 to the respondents, the Craigs, which was secured by a mortgage. The initial financing and the mortgage were negotiated by a licensed mortgage broker, Fuoco Holdings and Emilio Fuoco. The mortgage eventually matured and went into default. The mortgage was foreclosed on one of the two properties by a prior mortgagee. The Craigs subsequently approached TD Canada Trust for refinancing and were approved. The lawyer retained to place the new TD Canada Trust mortgage, approached Fuoco requesting a payout statement. Fuoco prepared a payout statement showing a balance of $249,992.55 and sent it to Currie, asking Currie to sign it as indicated. Neither the Craigs nor the lawyer for TD Canada Trust had knowledge of this document. Fuoco subsequently sent a discharge statement to the lawyer showing an outstanding balance of only $75,000 and instructing that the pay–out funds should be made payable to Fuoco Holdings. Currie was not aware of this.

The lawyer for TD Canada Trust prepared and registered the TD Canada Trust mortgage. In due course he sent $75,000 to Fuoco, payable as requested to Fuoco Holdings Ltd. in trust, for a discharge of the mortgage. Fuoco subsequently absconded with the funds and never provided the discharge, despite repeated requests from the lawyer. The issue eventually arose as to whether Currie's mortgage or the TD Canada Trust mortgage had priority on the title and whether Currie was bound by the $75,000 payout amount that had been provided.

The Master in Chambers held that the lawyer had unwisely paid Fuoco Holdings, not the actual creditor Currie. Fuoco had no actual authority to receive the funds on behalf of Currie, and Currie had done nothing to clothe Fuoco with ostensible authority to receive the funds. The Judge in Chambers reversed the Master's decision, holding that on the facts Currie had held Fuoco out as his agent with authority to provide payout statements and to accept payment of the funds. The loss from the agent Fuoco's fraud would accordingly fall on the principal, Currie. This appeal followed.

Decision

On appeal, the Court of Appeal reviewed the law on the authority of an agent and noted that where an agent acted within his or her authority, the principal is bound by the acts of the agent even if they are fraudulent. If the principal alleges that the actor was never an agent or was an agent that had acted outside his or her actual authority, then the issue is whether the agent had ostensible authority. Ostensible authority depended on whether the principal had, by words or deed, held out the agent as having the authority to do the impugned act. Whether the test was met depended on the proper inferences which were to be drawn from the undisputed facts.

In this case, the Court of Appeal noted that it was clear that Fuoco was an agent with considerable actual authority with respect to the mortgage. He had negotiated the original transaction on behalf of Currie and was dealing directly with the Craigs. Further, Currie had placed Fuoco on the mortgage as the appropriate line of communication with respect to the mortgage. This was a representation about Fuoco's authority, which came directly from Currie. The Court of Appeal noted that the onus was on Currie to prove any limitations on Fuoco's authority were conveyed to third parties, such as the Craigs.

The Court of Appeal also noted that the record demonstrated that Fuoco likely had actual authority with respect to the provision of payout statements. A mortgagee was required to provide a mortgage statement on demand, and since Fuoco's address was on the title, and that was the address where payments were to be made, it was appropriate for the lawyer to ask Fuoco for a payout statement. Currie knew that Fuoco was providing payout statements and did nothing to stop him or to advise third parties that he was exceeding his authority. The Court of Appeal concluded that Fuoco had actual authority to issue the payout statements, and at least had ostensible authority to do so. This authority included the authority to provide where and how the payment was to be made. Absent being provided notice, third parties dealing with Fuoco were entitled to rely on the indoor management rule and assume that Fuoco was operating his business as required by law. Currie was defrauded by Fuoco, an agent of his own choosing. The other parties relied on Fuoco's actual or ostensible authority and dealt with the mortgage in good faith.

In conclusion, the Court of Appeal determined that Currie had been defrauded by Fuoco, who was the agent of Currie's own choosing. The other parties relied on Fuoco's actual or ostensible authority, and dealt with the mortgage and payments under it in good faith. Having given Fuoco authority, or having held him out as having authority, Currie had to bear the loss resulting from Fuoco's dishonesty and as such, the appeal was dismissed.

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