By Brian Madigan LL.B.
A recent court case dealt with the issue of mortgage fraud. In the case of Royal Bank v. Isaacs (2010)the bank sought summary judgment of its mortgage.
However, the case was not simple and straightforward. Mrs. Isaacs had been persuaded for a fee of $6,000 to act as guarantor on a mortgage. It was only to be for a term of 6 months. There was a fellow who arranged the deal, a mortgage broker and a lawyer involved. In the end, Mrs. Isaacs got her $6,000 and was content with the transaction.
Only one little problem, the arranger, the new homeowner and the mortgage broker, all flew the coop with the mortgage money. They didn’t even make one payment. So, that left Mrs. Isaacs with $6,000 to pay a $280,000 mortgage.
She didn’t want to and claimed she was a victim of fraud. Indeed, she was, but so was the bank. Mrs. Isaacs claimed that the Royal Bank had a legal obligation and duty to protect her (even from her own greed).
The Royal Bank, agreed that she was a victim, but they too were victims. They also claimed that by signing the documents, Mrs. Isaacs was an active participant in the fraud. Any problems that arose, she brought upon herself.
Here are some excerpts from the case:
Introduction
• This is not, however, a run-of-the-mill claim on a mortgage. This mortgage was obtained by fraud and both Ms Isaacs and the Bank were victims of the fraudsters (who have long since vanished). The question is who, as between Ms Isaacs and the Bank, should bear the loss.
• Ms Isaacs argues that the Bank should take the loss because the Bank was in the better position to detect, and therefore avoid, the fraud.
• The Bank argues that Ms Isaacs should be liable for the loss because she actively assisted the fraudsters to carry out the fraud, thereby misleading the Bank, even if unwittingly.
Analysis
Note: some paragraphs omitted
[23] I do not accept the submission by Ms Isaacs’s counsel that the Bank was in the best position to discover the fraud and should therefore bear the financial loss occasioned by it. That argument is based solely on casting the Bank in the role of sophisticated commercial lender and Ms Isaacs as uneducated, unsophisticated victim.
[24] Ms Isaacs is an adult, competent person, and is able to read. If Ms Isaacs had taken the trouble to read the documents she signed, she would have immediately known that the transaction was not what she understood it to be. She not only did not read the documents, she did not ask for them to be explained to her by the mortgage broker or the lawyer, and she did not obtain copies of them. Nobody prevented her from reading the documents. She simply failed to do so.
[25] On the other hand, the documents as presented to the Bank appear on their face to be exactly what they are – normal documents for a standard mortgage transaction. Simply reviewing the documents submitted by or on behalf of Ms Isaacs could not, and did not, reveal any fraud to the Bank.
[26] I therefore conclude that, as between Ms Isaacs and the Bank, Ms Isaacs was in the best position to notice something was amiss.
[37] The root of Ms Isaacs’s problem is that she signed numerous documents without taking any care about their content. She knew that these documents would be relied upon by the Royal Bank in advancing mortgage funding. If she had taken the simple precaution of reading the documents she was signing, she would have realized that she was being lied to and she could have backed out of the deal. She is in the position she is now because she allowed her name to be used without any consideration for what she was actually agreeing to. She was, at the very least, careless and because of that carelessness cannot avoid liability for what she signed. She was in the best position to avoid the fraud and did nothing to protect herself.
[39] There is no fiduciary duty owed by a Bank to a borrower – their relationship is strictly that of debtor and creditor. Here, there was no special relationship between the Bank and Ms Isaacs, no special knowledge held by the Bank, and no exceptional circumstances that would change the nature of that relationship.
[40] Therefore, there was no obligation on the Bank to explain the documents to Ms Isaacs or verify that she knew what she was getting into. The Bank was not required to protect Ms Isaacs from others who were deceiving her without any knowledge of the Bank. It was not the Bank’s role to provide advice to Ms Isaacs or to protect her interests. The Bank made no misrepresentations to Ms Isaacs and Ms Isaacs placed no reliance on the Bank. Theirs was a contractual relationship in which Ms Isaacs sought to borrow money and the Bank agreed to lend it to her.
[41] A lender has no obligation to obtain an appraisal before it extends mortgage financing. If it obtains an appraisal, it does so for its own protection, not for the protection of the borrower.
[48] Ms Isaacs seeks to characterize herself as the completely innocent victim of a fraud. Although there is nothing to suggest that Ms Isaacs was herself privy to the fraud and no reason to disbelieve her assertion that she did not know the true nature of the transaction, it is not completely accurate to portray her as a stranger to the fraud. In truth, she assisted the fraudsters to perpetrate the fraud, even if she did not know the particulars of the transaction. For this reason, her situation is quite different from cases relied upon by her counsel in which negligent lenders were disentitled from relying upon mortgages obtained on property without the knowledge of the owners.
Decision
The Court awarded judgment for the bank for its claim of approximatelty $280,000, plus accrued interest and costs of $13,500.
Comment
While you might ordinarily expect Judges to be sympathetic, particularly to a victim of fraud, the legal system must uphold the rule of law. This is precisely what happened here. No special favours! Yes, there were two victims of fraud, but in this case, the greedy, but foolish good guy had to take the fall. It was not the bank’s fault, and there was no reason to deprive the bank of its legal rights.
Be careful! Exercise caution! Never, ever, ever sign a guarantee for someone you don’t know.
Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888 www.OntarioRealEstateSource.com
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