New Issues in Mortgage Enforcement - CIBC Mortgages Inc. v. Computershare: Shattering the Mirror and Peeking Behind the Curtain

Thank goodness that diligent real estate counsel can sleep well at night knowing that they can rely on the land titles registry.  Thank goodness that, once reviewed, a partial register affords counsel ultimate confidence as to the state of title.  And thank goodness that you can remain confident that your first ranking mortgage is truly a first ranking mortgage.

That confidence is, of course, completely mislaid.  In fact, a recent decision has illustrated the fact then a priority registration is not always as it may appear.

In CIBC Mortgage Inc v. Computershare Trust Co. of Canada, 2015 ONSC 543 (“Computershare”) [1] the since-retired Justice Murray held that a mortgagee cannot rely on a previously registered discharge to satisfy itself that a prior ranking mortgage has in fact been legitimately discharged.  Put simply, Computershare stands for the proposition that you cannot rely on a certified discharge of charge.

The facts of the case are straightforward. The homeowner obtained a mortgage in November 2008 from Computershare. Unbeknownst to Computershare, that mortgage was discharged from title in 2009.  Computershare did not know about the registration of the discharge for the simple fact that the homeowners continue to pay the mortgage for the next 4 1/2 years.

In March 2011, the homeowners granted a new first mortgage to a private lender securing the principal amount of $87,500.  Notwithstanding the registration of the new private mortgage, the homeowners continued to make the regular payments on the Computershare mortgage. In fact, there was ongoing contact between the homeowners and Computershare’s representatives throughout this timeframe dealing with various administrative issues.

Subsequently, the homeowners applied to the CIBC for new first mortgage financing. In their application for the new mortgage, the homeowners did not disclose the existence of the (discharged) Computershare mortgage, despite the fact that they were continuing to service the Computershare debt on a monthly basis.

From CIBC's perspective, the only registered encumbrance revealed by the parcel register was the private mortgage for $87,500. A search of title disclosed no other encumbrances. Instead, the title showed the registration of the Computershare mortgage in 2008, and showed the subsequent discharge of that mortgage in 2009.

CIBC advanced a new mortgage the principal sum of $252,000 secured by first ranking charge against the property.  The homeowners subsequently granted a new second ranking mortgage in December 2012 securing the sum of $32,000 in favor of Secure Capital.

The homeowners stopped making payments on the Computershare mortgage in January 2013. Both the CIBC mortgage and the Secure Capital mortgage fell into default on February 1, 2013.  The homeowners promptly went bankrupt and walked away from the property.

Upon default, Computershare learned of the discharge of its mortgage, and took steps to address the fraud.[2]   At the same time, CIBC took steps to enforce the mortgage it believed ranked in first priority. Ultimately, the property was sold by CIBC with the proceeds of sale held in trust pending the resolution of the priority dispute between Computershare and CIBC. Of course, the proceeds of the sale of the property are woefully insufficient to satisfy all of the mortgagees. The principal value of all three mortgages roughly approximates $560,000. The proceeds of sale from the property are limited to $297,754.00.

The court was left with the familiar quandary: how to apportion losses between innocent parties.  There was no suggestion that either Computershare or CIBC or Secure Capital were party to the fraudulent discharge of the Computershare mortgage. To the contrary, years elapsed between the registration of the fraudulent discharge and the involvement of CIBC and Secure Capital.  The court was obliged to determine which of these innocent parties was to bear the loss.

The court ultimately concluded that Computershare was entitled to the first ranking mortgage which it had bargained for. As a consequence, the CIBC mortgage was to be effectively subordinated, and would rank in second priority.  Secure Capital would bring up the rear in third place.  The basis for the court’s conclusion was that the Lawrence v. Maple Trust [3] (“Maple Trust”) case had affirmed the doctrine of deferred indefeasibility in the province of Ontario.  According to this doctrine, a fraudster can never give a good title to an innocent party.  Rather, the innocent party is always subject to an overriding claim from the true owner.  The innocent party’s title is defeasible by the true owner.  Thus, the innocent party’s claim to a defeasible interest is deferred.  However, an innocent party that obtained title from a fraudster can, by virtue of the doctrine of deferred indefeasibility, provide good title to a subsequent purchaser.  The defeasible root of title obtained from the fraudster can be cured and the second order purchaser may defeat a claim by the true owner.

Justice Murray analogized the position of CIBC to that of the mortgagee in Maple Trust. His Honour concluded that (i) the homeowners were party to the fraudulent discharge; (ii) CIBC had obtained its interest from the homeowners; and (iii) the homeowners were analogous to the fraudster in Maple Trust. As such, his Honour concluded that CIBC's claim to a first ranking mortgage was similarly liable to be defeated by the party truly entitled to a first ranking mortgage; namely, Computershare.

The consequence should be clear and concerning for real estate counsel.  Effectively, this decision means that you cannot rely on the state of title to establish a clear title. Instead, any registered mortgage is liable to be subordinated upon a prior registered (and discharged) lender disputing the registration of the discharge.

One of the fundamental precepts of the land title system is the so-called mirror principal. This principle supposes that the register is an accurate depiction of the state of title at any given time, and that, unlike the registry system, there is no need to look behind any particular registered instrument. The decision in Computershare would seem to offend that principal in its most fundamental way.  Similarly, the curtain principal (which posits that no party need look behind an instrument once registered and certified) is profoundly impacted. 

The Computershare decision is currently under appeal.[4]

There are a number of troubling outcomes as a result of this case. First and foremost is the fact that counsel can no longer provide opinions on title without being satisfied as to the propriety of previously registered discharges.

Secondly, in a troubling comment, Justice Murray indicated that CIBC had an obligation to investigate the Computershare discharge.  His Honour wrote:

In my view, the CIBC is, in accordance with the theory of deferred indefeasibility, an intermediate owner.  CIBC acquired an interest in title from a fraudster, and had an opportunity to investigate the transaction and avoid the fraud. For example, an inquiry as to how the [homeowners] were able to pay off the Computershare mortgage given their financial circumstances might have raised concerns.

The suggestion that CIBC ought to have investigated the borrowers’ ability to discharge the Computershare mortgage several years in the past is a novel and unexpected proposal.  It would be a significant departure from standard practice to expect counsel to investigate all previously registered discharges.  Moreover, it begs the question – how many discharges must be investigated?  The private mortgage that was paid out by CIBC was discharged (appropriately, as it happened), yet Justice Murray’s decision would require a lender to investigate more than one step back in the chain.

Thirdly, as a result of this decision, the doctrine of deferred indefeasibility has arguably been expanded without limitation. Because of the ill-fitting analogy to the Maple Trust case, no mortgage lender that received title from the homeowners could ever obtain an indefeasible charge. For instance, had there been a dozen intervening mortgages, the final registered mortgagee would still remain liable to be subordinated by a wrongfully discharged mortgage 12 transactions ago.

So counsel is confronted with a question: if the parcel register cannot be relied upon, what steps would prudent counsel take to protect themselves? It should be frightfully apparent from the above discussion that title insurance is an absolute must for any lending transaction. In the absence of title insurance, counsel will be asked to provide an opinion on the enforceability of a charge - any such opinion must now be qualified by virtue of this decision. Failure to qualify and opinion on title with respect to pry registered fraudulent discharges could potentially invite a lawsuit from the lender.

It remains to be seen whether the Court of Appeal will uphold Justice Murray’s decision. Unless and until the Court of Appeal sees fit to render a different conclusion, the curtain principal has been drawn back, and the mirror principal has been conclusively shattered.

[1] The author’s firm, Chaitons LLP, acted on behalf of CIBC Mortgages Inc. in this matter.  The author is, therefore, terribly biased, and every comment and opinion contained herein should be disregarded as so many sour grapes.

[2] A keen reader of the decision will note that there was some significant disupte as to when in fact Computershare learned of the discharge of the mortgage.  There was some evidence (ultimately rejected by Justice Murray) that Computershare learned of the discharge in 2011. 

[3] 2007 ONCA 74

[4] The author’s firm is counsel for CIBC on the appeal.  See footnote #1.