Overview

The vast majority of properties in Ontario are governed by the Land Titles Act, R.S.O. 1990 ("LTA"), the purpose of which "is to provide the public with security of title and facility of transfer."

In 2006, the LTA was amended in an attempt to ensure that fraudulent instruments would not be given effect in the title register addressing a valid concern that a property owner might lose their property or become responsible for a fraudulent mortgage because of a fraudulent instrument.

A recent decision from the Court of Appeal of Ontario, considered whether a mortgage obtained through fraudulently misappropriated corporate authority was a "fraudulent instrument" under the LTA.

Facts

In Froom v Lafontaine, 2023 ONCA 519, a Toronto property (the "Property") was purchased in 2003 by 1285310 Ontario Limited ("128 Ontario"). The sole registered director and officer, holding all issued shares of 128 was Arthur Froom ("Froom"). Froom lived in the Property until 2008.

In 2011, Froom's former spouse, Sonia Lafontaine ("Lafontaine"), arranged for a change notice to be registered with the Ministry of Government Services naming Lafontaine the sole officer and director of 128 Ontario. Lafontaine also took over 128 Ontario's bank accounts. The parties dispute whether Lafontaine had the authority to do this.

In August 2014, Lafontaine, on behalf of 128 Ontario, entered into a mortgage loan agreement with a private lender (the "Lender") in the amount of $100,000 (later increased to $300,000). Lafontaine signed the security documents as an officer and director of 128 Ontario and personally guaranteed the mortgage. Lafontaine made the required payments until defaulting in March 2019.

Summary Judgement

In 2021, the Lender brought a motion for summary judgement against 128 Ontario and Lafontaine, seeking to enforce the mortgage and guarantee. 128 Ontario opposed the motion for summary judgement on the basis that the mortgage was void because it was a "fraudulent instrument" under the LTA.

128 Ontario alleged that Lafontaine was a "fraudulent person" under the LTA because she fraudulently held herself out to the Lender as an officer and director of 128 Ontario. 128 alleged that Froom was its sole shareholder, officer, and director when the mortgage was granted, and that Lafontaine had no authority to act for the corporation.

The Lender's motion for summary judgement was granted. 128 Ontario and Lafontaine were ordered to pay the Lender, and a writ of possession was issued for the Property.

Appeal

At the Court of Appeal, 128 Ontario argued that the motion judge erred in finding that the mortgage was not a "fraudulent instrument" under the LTA. However, the LTA has very well defined meanings for "fraudulent person" and "fraudulent instrument".

Section 1 defines a "fraudulent instrument" as an instrument,

  1. under which a fraudulent person purports to receive or transfer an estate or interest in land,
  2. that is given under the purported authority of a power of attorney that is forged,
  3. that is a transfer of a charge where the charge is given by a fraudulent person, or
  4. that perpetrates a fraud as prescribed with respect to the estate or interest in land affected by the instrument.

A "fraudulent person" is defined as a person who executes or purports to execute an instrument if,

  1. the person forged the instrument,
  2. the person is a fictitious person, or
  3. the person holds oneself out in the instrument to be, but knows that the person is not, the registered owner of the estate or interest in land affected by the instrument.

Although the court held that the definition of "fraudulent person" can include a corporation, 128 Ontario did not meet the definition for fraudulent person under the LTA.

There was no forgery because Lafontaine was authorized to act for 128 Ontario even if Lafontaine obtained control through fraudulent means. The court agreed with a previous decision that found forgery was an issue of "authenticity, not truth"1. Because there was no question as to the authenticity of the documents Lafontaine executed, including her signature on the acknowledgment and direction authorizing the registration of the mortgage, the court found the mortgage was authentic.

The court also rejected the argument that "fictious person" should be broadly interpreted. The court found that 128 Ontario and Lafontaine were not fabricated or otherwise non-existent persons, and to find otherwise would be inconsistent with the plain and ordinary meaning of the word "fictitious" and the purpose of the LTA. Additionally, a finding that 128 Ontario or Lafontaine are "fictious" would undermine the indoor management rule by placing an onus on those conducting business with a corporation to look behind the apparent authority of a person held out by the corporation to conduct such business, even in the absence of any indication of irregularity.

Finally, the court found that 128 Ontario did not hold itself out to be the owner knowing it was not. There was no dispute that 128 Ontario was the registered owner of the Property. The court found that a person cannot falsely hold itself out as something that it actually is. Lafontaine never held herself out to be the registered owner of the Property and instead, she purported to act for the registered owner, 128 Ontario. In the court's view, the concept of "holding out" did not capture an individual who had apparent authority to act for the registered owner and did not assist 128 Ontario.

The court concluded that the mortgage was not a "fraudulent instrument," rendering it enforceable and dismissing 128 Ontario's appeal.

Key Takeaways

Although the LTA provides that a registered mortgage deemed fraudulent is void and can be deleted from title, in the case of a corporate borrower, determining whether corporate authority was misappropriated through fraud may pose a greater challenge. This decision shifts the responsibility for potential fraud concerning the authorization of individuals acting on behalf of a corporate mortgagor from lenders to the corporate borrower and its principals. While in the present case, 128 Ontario and Froom likely have a claim against Lafontaine, it is unclear (and perhaps unlikely) that a claim against Lafontaine would bear fruit. Interestingly, the court allowed the lender to rely on the public records and did not hold the failure to obtain a corporate opinion from borrower's counsel against the lender instead allowing the lender to rely on the indoor management rule. While best (and common) practice when acting for a lender is to obtain a corporate opinion from borrower's counsel, this decision raises the question of whether or not the opinion is necessary given the time and expense that are often spent negotiating them.

Footnote

1. 1168760 Ontario Inc. v 6706037 Canada Inc., 2019 ONSC 4702 at para 42.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.