In our March 2023 newsletter, we covered the decision in Froom v. LaFontaine. It featured the unique situation where a person posing as the officer and director of a property-owning corporation took out a mortgage on its behalf. The complex question for the court was whether the mortgage was a “fraudulent instrument” by a “fraudulent person” under the wording of the Land Titles Act (LTA), and whether it was legally enforceable. Now, the Court of Appeal has had a chance to give its opinion on this important issue.
In 1998, the husband and wife set up a corporation that became the sole titled owner of a purchased condominium. The corporation was later cancelled for failure to file tax returns, but the wife revived it without the husband knowing. She filed a change with the provincial corporations registry to make herself appear to be the sole officer and director. On the strength of those fake credentials, she took out a $300,000 mortgage loan with a lender. When it went into default, the lender took steps to enforce it, but was met with the corporation’s argument that the mortgage was a “fraudulent instrument” by an unauthorized and “fraudulent person” under the LTA, and thus invalid and unenforceable.
The lower court disagreed, and declared that the mortgage was valid. The Ontario Court of Appeal affirmed that conclusion.
The LTA defines a “fraudulent person” to include: (1) a fictitious person; or (2) one who fraudulently holds themselves out in an instrument as the owner of land. Neither the corporation nor the wife met these threshold definitions. It was true the wife had posed as the corporation’s sole officer/director, but she nor the corporation was fictitious – meaning fabricated or imaginary – which is what the LTA’s anti-fraud provisions target. When the wife registered the condominium mortgage, the corporation was subsisting and registered on title; this was unaffected by her improper assumption of corporate control.
The wife and corporation also did not falsely hold themselves out in the mortgage document to be the registered owner of the condominium. The wife merely held herself out as its representative. Plus the corporation could not truly “hold itself out” in any event, since basic corporate law principles dictate that it can only act through its officers and directors. By extension, the mortgage could not be a “fraudulent instrument” under the LTA, since that statute only covers documents “under which a fraudulent person purports to receive or transfer an estate or interest in land”.
In the end, the Appeal Court confirmed the mortgage’s validity, as well as the lender’s right to enforcement and possession. See Froom v. LaFontaine, 2021 ONCA 917; affirming 2022 ONSC 2930, leave to appeal to the Supreme Court of Canada dismissed: 2022 CanLII 78985.