Registration validates mortgage procured through fraudulent power of attorney, Spring 2006

Can one defeat recovery of a secured loan obtained through fraudulent means? No, was the answer of the Ontario Court of Appeal in a recent decision which highlighted the importance of registration of security.

The case at hand was Household Realty Corp Ltd. v. Liu [2005] O.J. No. 5001. Mr. Liu and his wife, Ms. Chan, Hong Kong natives, immigrated to Canada and purchased a house as joint tenants. Mr. Liu’s employment, however, kept him in Hong Kong for most of the time. During his absence, Ms. Chan developed a gambling habit and found herself deeply in debt. Unknown to Mr. Liu, Ms. Chan forged her husband’s signature on a Power of Attorney and had it registered on title. Using the Power of Attorney Ms. Chan procured a $150,000.00 line of credit from TD Bank against the security of a mortgage registered against their home. Using the money from the line of credit, Ms. Chan paid $80,000.00 of her debts but continued to gamble.

By August, 2002, Ms. Chan’s gambling debts amounted to $150,000.00. Using the fraudulently executed Power of Attorney once again, she secured yet another line of credit in the amount of $260,000.00 from CIBC with their house as collateral. Ms. Chan paid off and discharged the TD Bank line of credit from the CIBC mortgage funds. Despite the $260,000.00 line of credit from CIBC, Ms. Chan was unable to satisfy all of her debt. She then approached Household Realty Corp. Ltd. for a loan of $96,250.67, to be secured against their home as a second mortgage. Once again, the Household loan was procured using the fraudulent Power of Attorney.

In 2003, Ms. Chan defaulted on both the CIBC and the Household mortgages. Both mortgagees initiated proceedings against both Mr. Liu and Ms. Chan who counterclaimed against both mortgagees on the ground that the mortgages were void. Mr. Liu and Ms. Chan also sought injunctions restraining the mortgagees from selling their house.

At trial, the judge upheld the validity of both mortgages and concluded that the mortgages were valid upon registration despite the fact that they were obtained through fraudulent means. The basis of his decision rested on the policy underlying the Land Titles system of registration which upholds the validity of an instrument once registered in favour of a party that deals with the property in good faith for valuable consideration. In the instant case mortgagees had acquired an interest in the house by virtue of moneys advanced in good faith and without notice of the fraudulent Power of Attorney. That being said, mortgages once registered became effective and capable of being enforced by both mortgagees upon default by Mr. Liu and his wife, Ms. Chan.

Liu appealed on the ground that the mortgagees, in failing to ascertain whether the Power of Attorney was duly executed, were negligent and could not, under the guise of registration of the mortgage security, recover what was obtained through fraudulent means. Dismissing the appeal of Mr. Liu and reiterating the finding of the trial judge, Justice Armstrong of the Appeal Court emphasized the importance of registered instruments under the system of Land Titles. According to him registration of the mortgages was the crucial component that determined their enforceability. The Power of Attorney was merely the means used by Ms. Chan to obtain the mortgage money. Both mortgagees had no knowledge of the fraudulent execution of the Power of Attorney and were therefore dealing bona fide without notice of the fraud.

The judgment serves to emphasize the paramountcy and importance of registration, especially where the parties dealing with the property have no notice of the fraud. This case serves to reinforce the policy behind the land titles system of registration which guarantees the accuracy of the property register and compensates innocent parties who suffer a loss as a result of any inaccuracy. It entitles bona fide parties for value and without notice of fraud to rely on the property register and the registrations on title.

Registration enforces the rights of such bona fide claimants. Ms. Chan could not benefit from her own fraudulent acts.