Does a Fraudulent Mortgage Discharge Affect Subsequent Lenders’ Priority? Can the Parcel Register No Longer be Relied Upon?

In a recent Ontario case the court was asked to consider the effect of a duly-registered, yet completely fraudulent mortgage discharge on the rights of subsequent mortgagees.

Computershare loaned money to the borrowers in 2008, and secured the loan by way of a first mortgage. About a year later, and unbeknownst to Computershare, the borrowers managed to fraudulently register a mortgage discharge on title. Still, in order to conceal their fraudulent conduct they continued to make regular payments for about 4 ½ years, at which time the mortgage went into default.

Meanwhile, prior to that default, the borrowers proceeded to obtain financing elsewhere. By keeping silent about Computershare’s security and their own fraud, they arranged additional loans from two other lenders: CIBC, which was content to advance $250,000 under what it considered was a new first mortgage; and Secure Capital, which advanced $32,000 under an ostensible second mortgage.

When the borrowers also defaulted on those later mortgages in 2013, both CIBC and Secure Capital commenced power of sale proceedings. At this point, Computershare discovered that the mortgage it thought it held had actually been discharged fraudulently. The borrowers made an assignment in bankruptcy shortly after; the home was sold and proceeds amounted to just under $300,000, which was insufficient to satisfy all three lenders.

The court was essentially asked to prioritize the interests of three innocent lenders, to determine which of them should be prejudiced by the fraudulent discharge of which the lenders were unaware at the time the loans were made.

The court considered each party’s position. CIBC, in seeking to be the “new” first mortgagee, asked for a court order declaring it to have first-ranking charge against the property, in priority to any interest under the Computershare mortgage. Secure Capital also asked to have its mortgage interest declared in second position – effectively relegating Computershare’s rights to third place. In support, both lenders claimed that in deciding whether to advance funds, they should be able to rely on the integrity of the information found in the Land Titles register, regardless of whether (as in this case) the information reflected an underlying fraud.

Not surprisingly, Computershare asked to have the purported discharge declared fraudulent, to be reinstated to first-ranking position, and to have the land titles register rectified to show a valid mortgage in its favor. CIBC and Secure Capital would thus revert to having only second- and third-ranking charges, respectively.

After considering the arguments, the court held in favour of Computershare. First, it found that the borrowers must have been privy to the fraud: they continued to borrow additional funds by offering new lenders first and second mortgagee positions – all the while making mortgage payments on the Computershare mortgage which they knew still existed. In light of their own fraudulent conduct, they were not eligible to obtain clear title in this manner.

Next, the court examined the legal ramifications of having the purported discharge registered on title. Clearly, it was a “fraudulent instrument” within the meaning of the land titles legislation; by extension, this meant that the mortgages subsequently given to CIBC and Secure Capital were likewise fraudulent instruments (though, the court hastened to add, this was not because either of the lenders had acted other than in good faith).

CIBC thus became an “intermediate owner”, and having obtained its interest in title from a fraudster, it was in the best position to avoid the fraud by making inquiries before the fake discharge went on title. As a result, the court concluded that the Computershare mortgage kept its priority as the first charge on the property, and that the CIBC and Secure Capital charges ranked second and third, respectively. The land titles register was rectified accordingly. See CIBC Mortgages Inc. v. Computershare Trust Co. of Canada, 2015 (ONSC).