Fraud in Real Estate Transactions: The Effects and the Remedies
| Author | Sidney H. Twister |
| Profession | Torkin Manes Cohen Arbus LLP |
| Pages | 529-604 |
Fraud
in
Real Estate
Transactions:
The
Effects
and the
Remedies
I.
INTRODUCTION
Real
estate
fraud
is not a new
phenomenon.
An
examination
of
recent
incidents
in
Canada
reveals,
however,
that
fraudulent
transactions
in
real estate
are
more sophisticated, more
daring,
and
more
difficult
to
detect than ever
before.
The
purpose
of
this paper
is to
examine
the
current state
of the law
as it
relates
to
real estate
fraud
in
Ontario.
In
section
II, the
paper exam-
ines
the
effect
of a
forged
document under
the
common
law
and, more
specifically,
the
validity
of a
forged
instrument that
has
been registered
in
the
land registry system.
The
paper then considers
the
remedies that
may
be
available
to an
innocent party that
has
lost
an
interest
in
land
under
the
land registry system
due to a
forged
instrument. Section
III
discusses
the
land titles system
and the
narrow exception created
under
this system
to the
general principle that
a
forged
instrument conveys
no
title.
An
assessment
is
then provided
of the
availability
of
statutory
compensation
for
victims
of
fraud
in the
land titles system. Section
IV
considers
a
solicitor's
standard
of
care
in
real estate transactions
and the
extent
of a
solicitor's duty
to
prevent
fraud.
Section
V
examines legal
issues
raised
by
real estate
fraud
that remain unanswered.
Of
Torkin
Manes Cohen Arbus
LLP.
This paper
was
prepared with
the
assis-
tance
of
Ikka
Delamer,
law
student.
529
Sidney
H.
Troister
530
Sidney
H.
Troister
By
way of
introduction
to the
subject
of
real estate
fraud,
two
hypo-
thetical
real estate
fraud
cases
are set out
below.
1)
Scenario
1
A is the
registered owner
of a
house with
a
mortgage
in
favour
of
Bank
I.
A
forges
a
discharge
of
this mortgage
and
registers
the
discharge.
A
then
obtains
a new
mortgage
in
favour
of
Bank
II,
which
is
registered
on
title.
A
vanishes with
the
money. Ultimately, both mortgages
go
into
default.
Which
bank will
be
entitled
to
enforce
its
mortgage? Although
Bank
I
was
first
to
give
a
mortgage
to
A,
its
mortgage
has
been discharged,
albeit
with
a
forged
discharge.
Bank
IFs
mortgage
was
subsequent
to
Bank
Fs
mortgage; however,
Bank
II had no
notice that there
was an
existing
mortgage
on A's
house,
and
reasonable
due
diligence would
not
have revealed that
the
discharge
of
Bank
I's
mortgage
was a
forgery.
2)
Scenario
2
Mr.
and
Mrs.
A
jointly
own
their home. Unbeknownst
to Mr. A,
Mrs.
A
is
seeing
Mr. B. One
day, Mrs.
A and Mr. B,
posing
as
husband
and
wife,
obtain
a
mortgage
on the
house owned
by Mr. and
Mrs.
A.
They execute
the
mortgage
as Mr. and
Mrs.
A and the
Bank
registers this mortgage.
Mrs.
A and Mr. B
receive
the
proceeds
of the
mortgage; they abscond
with
the
money.
The
mortgage goes into default
and the
Bank makes
a
demand upon
Mr. A.
Will
Mr. A be
required
to pay a
mortgage that
he
didn't
sign?
Alternatively,
will
the
Bank
be
forced
to
absorb
the
loss
of
mortgage
proceeds advanced
to a
couple that reasonable
due
diligence indicated
was Mr. and
Mrs.
A?
In
both
of the
above scenarios,
as in
most real estate
fraud
cases,
there
is
more than
one
innocent party.
A
decision
in
favour
of one
inno-
cent
party will likely result
in an
unfair
loss
to the
other.
In
situations
where
the
equities
are
equal between parties,
the law
must
prevail.1
How
does
the law
decide between innocent parties
in
real estate
fraud
cases?
In
Ontario,
the
answer
to
this
question
may
depend
on
whether
the
property
is
registered under
the
land registry system
or the
land
titles system.
1
Manulife
Bank
of
Canada
v.
Catramados,
[1994]
O.J.
No. 386
(S.C.)
at
para.
12.
Fraud
in
Real
Estate
Transactions:
The
Effects
and the
Remedies
531
H.
THE
EFFECT
OF
FRAUD
GENERALLY
1)
Forgeries
and the
Common
Law
It
is a
well-accepted principle
of law
that
forgeries
are
ineffectual.2
In
general,
a
document that
is
found
to be
forged
will
be
declared
a
nulli-
ty by the
court. This principle
has
been applied
in
numerous cases
involving real estate
fraud.
In
Toderan
v.
Bacchus,3
for
example,
the
defendant,
Earl
Sheehan
arranged
for
several mortgages
to be
placed
on
property owned
by the
plaintiff,
William
Toderan,
who
happened
to be
Sheehan's
son-in-law. Sheehan obtained these mortgages
by
imperson-
ating Toderan
and
signing Toderan's name
to the
mortgage documents.
The
court declared
the
mortgages
to be
nullities
and
ordered them
to be
expunged
from
the
register.
In
arriving
at
this
decision,
the
court
stated
that
"[t]he
law is
clear that
if a
mortgage
is a
forgery,
it is a
nullity
and
no
title
passes
to the
mortgagee."4
The
court quoted
from
the
judgment
in the
English case
of Re
Cooper
v.
Vesey5
in
support
of
this state
ment:
[i]f
A.
personating
B.
executes
a
deed
in the
name
of B.
purporting
to
convey
B.'s
property,
no
right
or
interest
can
possibly pass
by
such
an
instrument.
It is not a
deed.
It
makes
no
difference
in law
that
A. had
the
same name
as B. if the
false
personation
is
established; still
the
instrument
is not a
deed,
and
that plea would
be a
complete answer
by
B.,
or any one
claiming through
him.6
In
situations where there
is a
mortgage
on a
matrimonial home
owned
jointly
by
both
spouses,
the
courts have held that
the
mortgage
is
a
nullity where
one
spouse's signature
is
valid
and the
other's
has
been
forged.
In
Shute
v.
Premier
Trust
Co.7
the
court cited with approval
the
following
finding
in
767645
Ontario
Ltd.
v.
Engel:s
[n]o
argument
was
addressed
to me
dealing with
the
legal
effect
of a
mortgage
of
property, held
in
joint tenancy, executed
by
only
one of the
joint
tenants.
I am not at all
sure
that
any
technique known
to the law
2
R.
Edwards,
"Immediate
Indefeasibility
and
Forgery" (August 1993)
67 L.
Inste
J. 730 at
732.
3
[1979] O.J.
No.
1223 (S.C.) [hereinafter
Toderan].
4
Ibid,
at
para.
27.
5
(1882),
20
Ch.D 611.
6
Ibid,
at
623.
7
(1993),
35
R.P.R.
(2d)
141
[hereinafter
Shute].
8
(1993),
46
R.EL. (3d) 382.
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