Court grants bank equitable mortgage where monies advanced under fraudulent mortgage used to discharge existing mortgage on property, Spring 2008

In 1996, DO and LO purchased a condominium as joint tenants, and in 2004 transferred a 1/3 interest in the property to their daughter, P. At that time, the property was mortgaged to First National for $150,000.

Unbeknownst to DO or LO, in 2005, P retained counsel and transferred the property into her name alone. She told the lawyer that her parents had both left the country, and proffered separate powers of attorney for her parents.  The power of attorney from LO was a forgery.

At the time of the transfer to P, Royal Bank advanced $211,000 under what it thought was a valid first mortgage, which monies were used to pay out the First National mortgage and pay closing costs. Upon default under the mortgage, and without knowledge of the alleged fraud, the Bank commenced realization proceedings. 

LO sought a declaration that the Bank’s charge against the property was void because it was obtained by fraud.  Royal Bank sought a declaration that it held an equitable mortgage over LO’s 1/3 interest in the condominium for: (i) amounts paid to First National, being $149,179.32, (ii) amounts paid for outstanding property taxes, and (iii) condominium fees paid.

The Court, walking a legal tightrope, held that LO was entitled to have the Bank’s mortgage set aside, but then granted the Bank’s application to have an equitable charge against the property in part. ADVANCE \d6

In making its decision, the Court found that there was a common intention on the part of the three owners of the property to charge it in favour of First National. The Court went on to hold that equitable subrogation [being the legal right to step into the place of another person] will arise in the circumstances where the Bank’s mortgage is unenforceable due to a fraud, but the mortgage it replaced was enforceable.  The owners of the property have benefitted from removal of the First National mortgage, and they would be enriched if they are not required to repay the indebtedness associated with that mortgage.

That being said, the Court went on to state that it would not be fair to permit the Bank to enforce the entirety of the First National charge against LO’s 1/3 interest in the property, and then enforce the balance of its claim against the 2/3 interest of P. This would have the effect of imposing the loss occasioned by P’s fraud on LO, rather than on the Bank.

The Court ordered that, upon closing of the sale of the property, proceeds shall be applied firstly to sale costs, second to the Bank in an amount equal to its payments on account of real estate taxes and condominium fees, thirdly to the Bank in an amount paid to discharge the First National mortgage, and the balance to be distributed in accordance with the findings of a Court Reference to determine the entitlement of all interested parties.

O'Brien v. Royal Bank of Canada, [2008] O.J. 653, ON S.C.J.