House fraud decision rocks industry
Bank `did not take steps to scrutinize the power of attorney,' judge rules
Jan 05, 2008 04:30 AM
It took the better part of 18 months and more than $30,000 in legal fees, but Paul Reviczky has his property back in his own name, with the $337,500 mortgage in favour of HSBC Bank Canada finally discharged.
As reported last month in the Star, the Ontario Superior Court of Justice ruled Reviczky is not responsible for the mortgage that was taken out on his property after it was sold in 2005 without his knowledge. But Justice John Macdonald's decision has ramifications that extend far beyond the parties involved in the Reviczky litigation, and may well affect many future real estate and mortgage transactions.
In the summer of 2005, Reviczky's rental property on Sheppard Ave. W. was stolen from him. A fraudster used a forged power of attorney in favour of Reviczky's non-existent grandson to sell the house to an innocent third party for $450,000.
In June 2007, after months of legal proceedings at his own expense, Reviczky finally obtained a court order restoring ownership to him, but not discharging the purchaser's mortgage in favour of HSBC. Since both the purchaser and HSBC were unaware of the fraud, the court in June declined to discharge the HSBC mortgage, believing it to be valid.
Reviczky then faced the prospect of losing the house again, this time to the bank. At this point, Reviczky became involved in a messy contest among three insurers: Stewart Title, which insured and paid out the HSBC mortgage; LawPRO, the Law Society's insurer representing the lawyer who acted for the fraudster using the forged power of attorney; and the provincial Land Titles Assurance Fund, which protects the public from fraud in the land titles system.
Stewart Title paid out the HSBC mortgage, but under the Consumer Protection and Service Modernization Act, it was unable to recover its loss from the government assurance fund.
If the mortgage was determined by a court to have been valid, Reviczky would have had to pay off the HSBC loan by making a claim against the assurance fund. Stewart Title would be off the hook to the bank and would recover its payout from the public purse by way of Reviczky's claim. In that case, the title insurer would have found a loophole in the law.
In his ruling last month, Judge Macdonald voided the bank's mortgage because it "did not take steps to scrutinize the power of attorney." The bank "chose to put itself in proximity to the unknown fraudster in this transaction by dealing with him, yet it failed to make use of the opportunity to avoid the fraud, which that proximity gave it."
The judge said the lawyer representing the fraudulent seller sent a copy of the forged power of attorney to the lawyer acting for both the purchaser and the bank. Both lawyers were unaware the document was a fake. At this point, the second lawyer failed to "inform himself about the terms, conditions or validity of the power of attorney." Since HSBC, through its lawyer, had an opportunity to avoid the fraud and did not do so, the court decided it could not succeed in its claim that the mortgage was valid.
"The bank knew ... ," the judge wrote, "the person purporting to sell the property was acting pursuant to a power of attorney. The bank had the means of protecting its interests in this circumstance ... (T)he bank must have known (its) solicitor would be in direct dealings with the person purporting to sell, whether through that person's solicitor or otherwise."
Ultimately, the judge decided the issue was not the actions or inaction of a solicitor, but whether the bank had an opportunity to avoid the fraud. Effective immediately, the Reviczky decision will have an enormous impact on how banks, real estate agents, lawyers, buyers and sellers treat any transaction involving a power of attorney.
In every transaction, those documents are now going to be scrutinized, not only by the lawyer for the seller using the document, but by the lawyer for the buyer and the buyer's bank. If a seller cannot provide satisfactory evidence that the power of attorney is valid and enforceable, a buyer and his or her bank could conceivably refuse to close the transaction.
Just exactly how this will happen – especially where the giver of the power of attorney is at the time mentally or physically incompetent, or overseas, or simply unavailable – remains to be seen.
The vast majority of powers of attorney used in real estate transactions are legitimate documents, but from now on it will be tougher to use them to buy, sell or mortgage real estate in Ontario.
Bob Aaron is a Toronto real estate lawyer whose Title Page column appears Saturdays. He can be reached at firstname.lastname@example.org. Visit his website at aaron.ca.