Canadian Commercial Real Estate Law Blog

Title Fraud Revisited - Reviczky v. Meleknia

The recent case Reviczky v. Meleknia (2008) 88 O.R. (3d) 699 provides an interesting new slant on fraudulent conveyances before October 20, 2006 that I hope won’t adversely affect the certainty provided by the amended Land Titles Act.

Bill 152, the Ministry of Government Services Consumer Protection and Service Moderation Act, 2006, was introduced on October 19, 2006 and became law on December 20, 2006. It substantially amended the provisions of the Land Titles Act relating to title fraud. The key changes were to Section 78 where subsection 4.1 simply makes fraudulent instruments registered on or after October 19, 2006 void. The amended Land Titles Act goes on and provides for a deferred indefeasibility model by saying in subsection 4.2 that instruments registered subsequent to a fraudulent instrument are not invalidated. Accordingly, under the amended Land Titles Act, the doctrine of deferred indefeasibility applies in connection with fraudulent instruments registered after October 19, 2006.

The Ontario government, in addition to amending the Land Titles Act, also made submissions to the Ontario Court of Appeal in Lawrence v Maple Trust Co. (2007) 84 O.R. (3d) 94 (“Lawrence”). The 2007 decision in the Lawrence case reversed the position previously taken by Ontario courts in respect of title fraud under the old provisions of the Land Titles Act. The court concluded that the doctrine of deferred indefeasibility applied to those earlier registrations as well:

“The theory of deferred indefeasibility accords with the Act and must be taken into consideration in an analysis of Section 155 in its relationship with other provisions under the Act. Under this theory, the party acquiring an interest in land from the party responsible for fraud (the “intermediate owner”) is vulnerable from a claim from the true owner because the intermediate owner had an opportunity to avoid the fraud. However, any subsequent purchaser or encumbrancer (the “deferred owner”) has no such opportunity. Therefore, in accordance with s. 78(4) and the theory of deferred indefeasibility, when the deferred owner acquires an interest in the property that is good against all the world.”

Until I read the recent Ontario case Reviczky v. Meleknia (2008) 88 O.R. (3d) 699 (“Reviczky”), I thought that the amended Land Titles Act and the deferred indefeasibility position in Lawrence meant the same thing: The true owner can defeat a fraudulent conveyance just as the fraudulent instrument is void under the amended Land Titles Act. However a subsequent innocent conveyance is valid, with the true owner’s recourse being against the Land Titles Assurance Fund.

In the Reviczky case the fraudulent person forged a power of attorney from the true owner and used it to convey title to an innocent purchaser, Meleknia, who gave a purchase money mortgage to HSBC Bank Canada (the “Bank”) to pay the purchase price. As is typical, his lawyer acted for the Bank and the mortgage was registered immediately after the fraudulent conveyance. Macdonald, J. focused on the words in the Lawrence decision “had an opportunity to avoid the fraud” and held that both Meleknia and the Bank were the “intermediate owners” because both had retained the same lawyer and had the opportunity to discover the fraud.

MacDonald J. concluded:

“The ratio in Lawrence, supra, distilled to the essence, may be described as follows:

 

(i) Evidence that a party dealt with a fraudster establishes that the party had an opportunity to avoid the fraud; and

 

(ii) Having an opportunity to avoid the fraud makes the party’s interest in land defeasible in favour of the true owner.

 

In the case at bar, these factors are established.  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 mortgage is defeasible in favour of the true owner.”

 

The court held that both the conveyance and the mortgage were invalid and should be deleted from the parcel register. Had that fact situation arisen after October 19, 2006 I think the correct answer under the amended Land Titles Act would be that the conveyance to Meleknia was void under Section 78(4.1) but the mortgage to the Bank was valid under Section 78(4.2).

That discrepancy is unfortunate, because if the Reviczky decision is correct the result is very dependent upon each specific fact situation and is very difficult to predict. It does seem that a purchase money mortgage from an innocent party registered right after a fraudulent conveyance in a transaction using the same lawyer for the lender and the purchaser is void. However, since title isn’t certified on registration, a different lawyer for the Bank should have been examining the power of attorney and dealing with the transferor’s solicitor and should thus have “had an opportunity to avoid the fraud”. One also can wonder if the result should change if the closing was funded by other funds and the mortgage was registered by the same lawyer for the innocent purchaser a week later? It is fortunate that there will be very few cases in the future dealing with registrations in that period before October 20, 2006.

There had been an earlier case that reached a similar factual conclusion to Reviczky called Home Trust Co. v. Zivic (2006) 277 D.L.R (4th) 349. There the fraudulent persons fraudulently conveyed the property to themselves and then fraudulently mortgaged it to Home Trust Co., a fraud which was discovered after registration but before certification in the Land Titles Office. Home Trust Co. tried to argue that their mortgage was valid. Looking at the doctrine of deferred indefeasibility the court held that since the transactions were simultaneous and with the same solicitors, they amounted to a single transaction and ordered that neither be certified and registered.

I was never too troubled by that decision, however, because the conveyances (transfer and mortgage) were carried out by the fraudulent persons and I would argue that they would all correctly have been considered void under the amended Land Titles Act – that a fraudulent person, could not, by the order or structure of the fraudulent steps, validate one of the fraudulent instruments against the true owner. The purpose Section 78(4.2) of the legislation was to protect an innocent subsequent acquirer relying upon the parcel register, not to prefer another victim of the fraud itself over the true owner.

What does concern me about Reviczky is that the courts, motivated by a similar desire to protect an innocent owner rather than a lending institution, may strive to apply the principle established in Lawrence as interpreted by Reviczky in future cases, despite the wording of the amended Land Titles Act, and view two conveyances, the second one by an innocent party, as a single fraudulent instrument. The amended Land Titles Act might not always produce the most equitable result, but any reduction in its certainty would be unfortunate.

Bruce McKenna

Bruce is a partner in our Toronto office and can be reached at 416-307-4112 or [email protected]

May 5, 2008 in Title Fraud | Permalink | Comments (0)