The Ontario Court of Appeal yesterday closed a loophole that had allowed fraudsters to sell homes from under the unsuspecting feet of those who owned them.
In a 5-0 ruling, the court said that banks and other lenders will pay a painful price if they do not diligently research mortgage applications to ensure that they are not being made unwitting parties to a swindle.
The ruling said that the law encourages lenders "to be vigilant when making mortgages, and places the burden of the fraud on the party that has the opportunity to avoid it -- rather than on the innocent homeowner who played no role in the perpetration of the fraud."
The ruling was a triumph for a Toronto homeowner, Susan Lawrence, who found out too late that her residence had been fraudulently sold without her knowledge. She was told that her only recourse was to seek compensation from a provincial fund set up for the purpose.
In her case, the fraudster was able to obtain the mortgage and register the sale using bogus employment documents, a driver's licence and social insurance card in the name of Thomas Wright.
"Ms. Lawrence had no ability to discover that her home was being fraudulently sold and mortgaged," Madam Justice Eileen Gillese wrote yesterday, on behalf of a five-judge panel. "By contrast, Maple Trust made the decision to advance money and had the opportunity to avoid the fraud."
Lawyer Morris Cooper, who represented Ms. Lawrence, said the ruling has solved the problem. "Clearly, this was the goal from the outset," he said.
Mr. Cooper argued during the appeal that Maple Trust had been lax in researching the mortgage application from the fictitious Mr. Wright. "Contrast my client's innocence with Maple Trust, who was ready, willing and extremely happy to lend $250,000 to a non-existent person who had non-existent employment. . . . " he told the judges.
Mr. Cooper also accused the Court of Appeal of creating the very problem that had entrapped his client with a misbegotten ruling in 2005.
He said the Lawrence ruling is a rare acknowledgment by the court that it did, indeed, botch a ruling and thereby open the door to criminals who specialize in selling homes from under their rightful owners.
In that 2005 ruling -- Household Realty v. Liu -- the court said that a fraudulent home sale was nonetheless valid once the land title has been registered. The Liu case involved a woman who sold the family home without the consent or knowledge of her husband.
"All the digging and drilling down to show that the Court of Appeal was incorrect has been borne out," he said. "My client has been fully vindicated."
Mr. Cooper also noted that the Ontario Legislature recently produced a bill limiting the damage to innocent homeowners victimized by such swindles.
However, Mr. Cooper said the court was unwilling to go as far as he had hoped. During arguments late last year, he had advanced the idea that any fraud should undo a sale -- even if it is not discovered until years or decades after the sale is registered.
However, the court said yesterday that that the idea was too extreme and would have the effect of turning land title procedures upside down, forcing lawyers for purchasers to trace and verify numerous transactions going back into the foggy past.