"A forged Power of Attorney is an easy means of stealing a person's identity. Forged Powers of Attorney therefore are an easy means of perpetrating mortgage fraud." said Mr. Justice J. Macdonald of the Ontario Superior Court of Justice in a decision released on December 19th 2007.
Justice Macdonald allowed an innocent home owner’s claim that a mortgage registered by HSBC Bank of Canada on his property was not a valid charge. The home owner, Paul Reviczky, was the victim of fraud whereby his property was sold to an innocent purchaser using a forged Power of Attorney.
Rejecting the bank’s contention that its charge on the property was indefeasible, the court held that the bank through its solicitor, dealt with the fraudster through his solicitor. The bank had the opportunity to avoid the fraud, and therefore, its interest was defeasible in favour of the true owner.
Before I proceed to discuss the facts and findings of the case, it will helpful for the readers to understand the meaning of the following terms:
Deferred indefeasibility: A person who becomes registered owner of land fraudulently does not acquire good title. The title register does not guarantee good title to the fraudster simply by virtue of being named the owner on title. However, with deferred indefeasibility, while the fraudster does not get title simply by being the registered owner, anyone who innocently deals with him as the registered owner, regardless of how the fraudster became the registered owner, and without actual notice of the fraud, will acquire an interest in the land. It is the second person relying on the registered title and not the fraudulent titled owner that gets title. An indefeasible title is deferred to the innocent person dealing with the person registered as owner.
Intermediate owner is the party acquiring an interest in land from the party responsible for the fraud in a fraudulent transfer. An intermediate owner’s interest is defeasible in favour of the true owner.
Deferred owner is any subsequent purchaser or mortgagee who acquires interest in land from the intermediate owner. The deferred owner acquires an interest in the property that is good against the entire world.
The brief facts of the case are that Paul Reviczky owned residential property in the City of Toronto. A fraudster acting pursuant to a fictitious Power of Attorney and posing as Mr. Revickzy's relative sold the property to Pegman Meleknia, an innocent purchaser and another victim of the fraud. HSBC Bank Canada financed the purchase and held a charge on the property as security for the loan.
Upon becoming aware of the fraudulent transfer, Mr. Reviczky brought an Application in the Ontario Superior Court of Justice for a declaratin that the transfer in favour of Mr. Meleknia and the charge given by Mr. Meleknia to HSBC Bank of Canada are invalid.
Mr. Meleknia conceded that his interest was defeasible in favour of Mr. Reviczky. Accordingly the transfer was struck from the parcel register pursuant to a consent order.
The bank however contended that it innocently took its charge from Mr. Meleknia after he took title to the property from the fraudster. Mr. Meleknia was an intermediate owner and it is therefore a deferred owner. The bank therefore took the position that its charge was indefeasible, even against the true owner, Mr. Reviczky.
The broad issue before the court was whether the bank's charge was defeasible or indefeasible, pursuant to the Land Titles Act R.S.O. 1990 c.L.5
Relying on the decision of the Ontario Court of Appeal in Lawrence v. Maple Trust Co. et al, the court held the bank’s interest was defeasible in favour of the true owner. After an analysis of the Lawrence decision, the court concluded that the opportunity to avoid the fraud is now central to the theory of deferred indefeasibility as a rationale for allocating loss amongst competing parties who claim an interest in land under the Land Titles Act.
Justice Macdonald summarized the essence of Lawrence decision as under:
- Evidence that a party dealt with a fraudster establishes that the party had an opportunity to avoid the fraud; and
- Having an opportunity to avoid the fraud makes the party's interest in land defeasible in favour of the true owner.
The court held as under:
"The bank, although technically a subsequent encumbrancer, dealt with the fraudster because the bank through its agent, the solicitor, dealt with the fraudster through his agent, his solicitor. That is sufficient to hold that the bank's charge is defeasible in favour of the true owner.
In addition, the evidence shows that the bank could have avoided this fraud. Powers of Attorney are important legal mechanisms. Powers of Attorney are not standard and invariable in their form. They are infinitely variable in the powers granted and in their duration. They may be revocable or irrevocable, voidable, void, real or forged, or terminated by the death of the grantor. Like any legal mechanisms, a Power of Attorney may be misused.
The bank knew, at all relevant times, that the person purporting to sell the property was acting pursuant to a Power of Attorney. The bank had the means of protecting its interests in this circumstance, whether through the chargor's obligations to it pursuant to its standard Mortgage Loan Agreement or through the solicitor…Having been retained by the bank, it was the solicitor's responsibility to protect the bank's interests. However, the solicitor did nothing to scrutinize the Power of Attorney. As I have held, scrutiny of it would have led to questions which likely would have avoided the fraud. However, none of this was done because of a "business as usual" approach to a transaction which required something more."
As a concluding thought however, Justice Macdonald expressed the opinion that the question of what constitutes an opportunity to avoid the fraud may need to be revisited at some time in the future. In making that comment he was referring to the possibility that if lenders increase their vigilance in mortgage transactions, the risk of defeasibility is increased by that increased vigilance, if fault concepts including causation are not part of the defeasibility test and is based solely on the basis of transactional proximity of the lender to the fraudster.
For full text see: Reviczky v. Meleknia.
- Shashi K. Raina, Toronto