Coined by courts as “Equity’s Darling”, the law of
Equity is said to have a special affinity for the bona fide
purchaser for value (“BFP”). The BFP defence is the
exception to the common law rule of nemo dat quod non
habet, which translates to “no one gives what they
don’t have”. While one cannot generally transfer more
property rights than one has to a third party (such as a fraudster
trying to sell property they do not own), the BFP can actually
obtain good title to one’s property despite a prior fraudulent
transaction in the conveyancing chain. Although this is beneficial
to the innocent BFP acting in good faith, what about the innocent
original owner now deprived of title to their property? In legal
priority conflicts of multiple innocent competing parties, why has
Equity chosen to protect the BFP at the expense of all others?
The BFP defence’s full name is “bona fide purchaser for
value without notice of a pre-existing equitable interest”, as
briefly noted in April in Toronto-Dominion Bank v Canada,
2020 FCA 80. In that case, it was held that secured creditors could
not utilize the BFP defence to avoid paying a borrower’s
$67,854 GST debt, as it would “eviscerate” deemed trust
provisions in the Crown’s favour. Such statutorily-mandated
provisions are meant to protect the government’s tax revenues,
and the court noted the Excise Tax Act did not mention the
BFP defence here while discussing creditor priority. If the BFP
defence had been available, and operating because the property had
been purchased for value (i.e. it was paid for and not just
gifted), its effect would have been to strip away the Crown’s
pre-existing equitable interest in the unremitted GST deemed
trust.
To illustrate how the BFP defence applies when non-government
parties are involved in real estate priority conflicts, consider
the following fact pattern. Say two fraudsters pretend to be the
registered owners of a property with a fair market value of
$400,000, after learning the retired true owners will be out of the
country for several months. The property is subject to a $50,000
private mortgage for which pre-authorized payments have been set
up. Hoping to cash in quickly, the fraudsters sign an agreement to
sell the property for $350,000 to a third party in the business of
renovating homes. Unaware of the fraudster’s scheme, the third
party just sees a good deal, wants to spruce up the property
quickly, and then flip it to a new buyer for a profit.
The fraudsters then a forge a mortgage discharge statement and
use it to close the sale transaction. After a Transfer/Deed is
registered, the private mortgage is fraudulently discharged. Title
appears clear. The lender is unaware of its lost security.
Renovations are then done, the property is re-listed for $450,000,
and a second Transfer/Deed is registered after the property is
innocently bought by a single working mother of two children. In
order to pay for it, the single mother takes out a $350,000
mortgage with the Toronto-Dominion Bank (“TD”) and a
$50,000 second private mortgage. When the original owners return to
Canada, they are surprised to see strangers living in their
now-modified home.
Who has priority? Is it the original owners? On balance, are
they not quite innocent? Their only crime appears to be travelling
during retirement, which has now lost them a $350,000 property
interest. However, what crime has the single mother committed? She
only bought a renovated home, unaware of its sordid history. What
about TD and the two private lenders? Like the single mother and
the original owners, none of these parties dealt directly with the
fraudsters. Accordingly, how could they have become aware of the
fraud? All of them are very innocent.
Nonetheless, Equity still saves the BFP single mother first. The
new private lender’s and TD’s mortgages are also valid with
second and first priority on title, respectively. The original
owners and the first private lender are not so lucky. Pursuant to
s.78 of the Land Titles Act (the
“Act“), even though the first Transfer/Deed is
void as it conveyed a fraudulently acquired property interest, the
second Transfer/Deed is not, as nothing invalidates
“instruments registered subsequent to such a fraudulent
instrument”. Thus, the single mother actually has good title
to the property at the expense of the retired original owners.
S.78 of the Act establishes a scheme of deferred
indefeasibility with respect to such fraudulent instruments. As
explained in CIBC Mortgages Inc v Computershare Trust Co of
Canada, 2015 ONSC 543, this scheme involves three types of
owners: an original owner, an intermediate owner (like the home
renovator who dealt directly with the fraudster), and a deferred
owner (like the single mother who acquired her property interests
as a BFP from the intermediate owner). While an intermediate owner
has an opportunity to investigate the transaction and avoid the
fraud, a deferred owner does not as they are further removed from
the fraudster and are thus somewhat “more innocent”.
Accordingly, deferred owners are afforded protections by the
Act that accord with Equity’s Darling.
In CIBC Mortgages Inc, a pre-existing mortgage had also
been fraudulently discharged and concealed from title. However, as
neither of the two new mortgagees had actual notice of the
pre-existing mortgage that originally had first priority, the court
held that they were entitled to rely on two principles underlying
the Act – the mirror principle and the curtain
principle. The former principle holds that the land’s parcel
register is a “perfect mirror” of the state of title
overall, while the latter principle states that purchasers need not
investigate the land’s past dealings to see if there is
fraudulent conveyance in the chain (partially because this would
lead to soaring due diligence costs). Instead, prospective
purchasers or encumbrancers are entitled to rely on the parcel
register to provide “actual notice”, and need not search
behind it.
Technically, as the court mentioned on similar facts, the
original private lender’s mortgage interest would have third
priority behind TD and the new second mortgage. Afterwards, any
remaining funds would seemingly first go to the single mother to
make her whole and then to the retired original owners. If the
property perhaps later doubled in value, all innocent parties may
be able to recoup their losses. Accordingly, while it may be fun to
imagine Equity as a white knight saving his BFP damsel in distress,
“Equity’s Darling” is mostly just a memorable
metaphor that involves a shorter name for the BFP defence. In
reality, Equity has simply chosen to favour the BFP amongst
multiple innocent parties competing for priority, while perhaps
benignly neglecting original owners with pre-existing
interests.
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.
