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Introduction

Cases involving two innocent parties involved in litigation after a fraudster has played and deceived them both are especially difficult. Each blameless party is now faced with a win-all or lose-all situation. This blog will look specifically at cases of this sort involving land, and how the doctrine of “deferred indefeasibility” comes into play.

What is “Deferred Indefeasibility”?

Under the doctrine of deferred indefeasibility, an innocent party acquiring an interest in land from a fraudster (the “intermediate owner”) remains subject to a valid claim by the true original owner on the basis that the intermediate owner had an opportunity to avoid the fraud. However, any subsequent purchaser or encumbrancer (the “deferred owner”) has no such opportunity and is therefore protected from such a claim.

Therefore, in accordance with s. 78(4) of the Land Transfer Act (LTA) and the theory of deferred indefeasibility, the deferred owner acquires an interest in the property that is good as against all the world. The interest of an intermediate owner is good against all the world with the exception of the true owner.

The Land Transfer Act Amendments of 2006 Relating to Fraudulent Transfers

  • s.78(4) – When registered, an instrument shall be deemed to be embodied in the register and to be effective according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register.
  • s.78(4.1) and (4.2) were added to the LTA in 2006, creating exceptions to the above clause in cases of a fraudulent transfer.
  • (4.1) States that subsection (4) does not apply to a fraudulent instrument that is registered on or after October 19, 2006.
  •  (4.2) Nothing in subsection (4.1) invalidates the effect of a registered instrument that is not a fraudulent instrument described in that subsection, including instruments registered subsequent to such a fraudulent instrument.
  • “fraudulent instrument” means an instrument,
    • (a) under which a fraudulent person purports to receive or transfer an estate or interest in land,
    • (b) that is given under the purported authority of a power of attorney that is forged,
    • (c) that is a transfer of a charge where the charge is given by a fraudulent person, or
    • (d) that perpetrates a fraud as prescribed with respect to the estate or interest in land affected by the instrument;
  •  “Fraudulent person” is defined as well in s. 1:
    • “fraudulent person” means a person who executes or purports to execute an instrument if,
      • (a) the person forged the instrument,
      • (b) the person is a fictitious person, or
      • (c) 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.

A Recent Case

A recent case decided on appeal by Ontario’s Divisional Court (ONSC) dealt with these issues.

A group of investors known collectively as “116” was the beneficial owner of fifty-five acres of vacant land. One of those investors, “DB”, held the property in trust for the ownership group. DB sold the property for $100,000.00 to a numbered company known as “670”. He did so without the consent of the other owners and without notice to them. He kept all the proceeds for himself. This clearly was a breach of his duty under the trust.

The second problem DB had was that there were outstanding executions registered against him on the title for $366,989.00. He then swore a false affidavit that he was not the one and the same as the debtor DB named in the executions. The affidavit was provided to and relied upon by the purchaser as well as the Director of Titles for the province.

At trial, the 116 group was successful. The judge found that DB was a fraudulent person within the LTA definition. The transfer was therefore void. In determining whether DB was a “fraudulent” or “fictitious” person, the trial judge held that DB’s actions in signing a false statement and affidavit with the intent to deceive 670 (and incidentally the Director of Titles) made him a “fraudulent” person because he forged the instrument and signed the transfer as a “fictitious person”. The trial judge also held that under the doctrine of “deferred indefeasibility,” 670 was not protected from a claim by the true owner 116, because it is an intermediate owner and not a deferred owner.

Appeal Decision

On appeal, the trial judge was found to have erred in holding that DB was a fictitious person under the LTA.

When applying the modern approach to statutory interpretation (as set out in Bell ExpressVu Limited Partnership v. Rex), the first task is to determine the plain meaning of the provision of the statute.  The Oxford English Dictionary (online edition, 2019) defines “fictitious” as “not real or true; imaginary or fabricated”. Thus, applying the ordinary meaning of a “fictitious person,” the term would mean a person who does not exist.  It would apply, for example, where someone has created a false identity in order to transfer the title or interest in the land that he or she purports to convey.  It would not encompass an existing person like DB, who was the true registered owner of the property that he conveyed.

Moreover, interpreting “fictitious person” to mean a person who does not exist is consistent with the purpose of the 2006 amendments, which sought to deal with title fraud committed using fraudulent instruments. When one looks to the cases decided before the amendments, it is evident that a major legislative concern was fraud accomplished by someone who assumed a false identity in order to sell or mortgage property.

In the alternative, the trial judge was found to have erred in holding that DB forged the deed.

As the trial judge observed, “forge” is defined as in the Canadian Oxford Dictionary as “to write a document or signature in order to pass it off as written by another,” while “forgery” is defined as “the act or an instance of forging, counterfeiting, or falsifying a document”.  Case law dealing with the treatment of forged real estate instruments under land titles legislation supports a definition of forgery as an act whereby an impostor signs the name of a person with lawful title in order to cause an instrument to be registered on title.

“Forgery” is an issue of authenticity, not truth. DB did not forge another’s signature or falsely alter the terms of a document. He was the registered owner of the land, and he validly executed the transfer.  Even though he provided an affidavit that contained a false statement, he did not commit forgery in the commonly understood meaning of that term.

The case goes on to analyze other issues including “knowing receipt”, constructive trust, and “bona fide purchaser for value without notice”. The result was that the transfer was found to be valid and enforceable. The recourse going forward was an assessment of damages and the matter was directed back to the trial court to do so.

At Milosevic Fiske LLP, our team of Toronto corporate commercial lawyers regularly represent clients in commercial real estate litigation matters including claims of loss from real estate transactions. Over the years, our team of exceptional litigators has seen it all and has successfully fought for our clients’ rights. Our impressive track record speaks for itself.  Call us at 416-916-1387 or contact us online to schedule a consultation.