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Decision brings home the dangers of relying on powers of attorney, and adds element of fault to legal analysis of who bears costs of mortgage fraud, Spring 2008

88 year old PR owned a residential property.  A “fraudster” acting pursuant to a fictitious Power of Attorney and posing as PR's relative purported to sell the property to PM, who borrowed most of the purchase money from HSBC Bank on the security of a charge on the property. 

Though knowing that the person purporting to sell the property was acting pursuant to a Power of Attorney, the solicitor for PR and the Bank knew nothing about its form, content or validity, and did not take any steps to learn about these issues. The Bank did receive a copy of the Power of Attorney, but the Bank did not examine it.

The underlying action was a motion to have the Bank’s mortgage declared invalid. The Bank, relying on the recent Ontario Court of Appeal decision of Lawrence v. Maple Trust Co., argued that it was a “deferred” owner whose title was “indefeasible”.

"Under this theory [established … in Lawrence v. Maple Trust Co.], the party acquiring an interest in land from the party responsible for the fraud (the "intermediate owner") is vulnerable to a claim from the true owner because the intermediate owner had the opportunity to avoid the fraud.  However, any subsequent purchaser or encumbrancer [viz. Lender] (the “Deferred Owner”) has no such opportunity … and acquires an interest in the property that is good as against all the world". 

The Court recognized that, prima facie under the principles set out in Lawrence v. Maple Trust Co., the Bank would be a deferred owner with indefeasible title. However, the Court felt that the opportunity to avoid the loss should be a factor in determining who would bear the loss in the face of mortgage fraud.

In finding against HSBC Bank, the Court found that the Bank could have avoided this fraud by picking up on the invalidity of the Power of Attorney. “The bank had the opportunity to avoid the fraud … It dealt with the fraudster and, whether through its solicitor or otherwise, it did not take steps to scrutinize the Power of Attorney. The bank chose to put itself in proximity to the unknown fraudster in this transaction by dealing with him, yet it failed to make use of the opportunity to avoid the fraud which that proximity gave it.”

“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.”

The Court then held that the Bank had an opportunity to avoid the loss, which makes the Bank's interest in the property defeasible in favour of the true owner, PR. The Court concluded that its casting the test of who bears the costs of a mortgage fraud in terms of opportunity to avoid the fraud may appear to move it closer to a fault test and that such a move was not without dangers, but felt that the Lawrence decision implicitly supported the move. 

Reviczky v. Meleknia, [2007] O.J. No. 4992, Ont. S.C.J)