Fraudman and Conwoman spend the money or disappear.
Mr. Rightful Owner finds out about the fraud, and sues to get the title to his house back. He also sues the Bank of Innocence to have the mortgage declared invalid.
With these facts, there is no doubt in British Columbia that Mr. Rightful Owner is entitled to get the title back into his own name.
The more difficult issue is whether Mr. Rightful Owner is stuck with the mortgage. If the mortgage is declared invalid, the Bank of Innocence is out the money. If the mortgage is valid, then Mr. Rightful Owner must payout the Bank to have the mortgage discharged from his title, although he will likely be entitled to compensation from the Land Title and Survey Authority of British Columbia.
There are competing legal principles. On the one hand, in British Columbia our Torrens land title system is designed to protect innocent people who rely on the state of the title. The idea is that if you are buying land, you should not have to do an extensive investigation of the title to the land to buy the land without worrying that someone will later claim your title is invalid. You should be able to rely on a title search.
On the other hand, we have the Latin maxim, nemo dat quod non habit, which roughly means “you can’t give what you ain’t got.” If Conwoman doesn’t have a valid interest in the land, then how can the Bank take a valid interest through her title?
The British Columbia considered this issue in two cases that were released together on April 6, 2009. They are Gill v. Bucholtz, 2009 BCCA 137, and Re Oehlerking Estate, 2009 BCCA 138. Both were appeals by the Land Title and Survey Authority of British Columbia. In both cases, the Supreme Court of British Columbia held that the mortgages were valid. The lower court found that the lenders were not aware of the fraud and that they were entitled to rely on the state of the title when lending money. I wrote about the Supreme Court of British Columbia decision in Re Oehlerking Estate here.
The British Columbia Court of Appeal held in both cases that the mortgages were not valid. Madam Justice Newbury in Gill relied on the wording of the Land Title Act. She held that s. 23, which says that the title, “as long as it remains in force and unconcealed, is conclusive evidence at law and in equity, as against the Crown and all other persons, that the person named in the title as registered owner is indefeasibly entitled to an estate in fee simple to the land…” subject to certain exceptions, did not afford the same level of protection to the holder of a charge, such as a mortgagee, as to an owner. If the true owner can prove that his signature was forged, which is one of the listed exceptions, then an innocent lender claiming a mortgage through someone who was a party to the fraud, does not have a valid charge.
Madam Justice Newbury wrote at paragraph 27 of the Gill decision:
It may be that in a perfect Torrens system, any person lending money bona fide on the security of a mortgage granted by the registered owner, would have a valid charge. But there are sound policy arguments on both sides of the question. The Legislature of British Columbia would appear to have adopted the policy that the cost of frauds perpetrated against mortgagees and other chargeholders should be borne not by the public (as the funders of the Assurance Fund) but by lenders and other chargeholders themselves. Whether this policy choice is a good one or not is not for us to decide. We must give effect to the language of the statute in its ordinary and grammatical meaning.It is implicit in the decision that if a buyer of the house with no knowledge of the fraud paid the fraudulent title holder for the title, the buyer would be entitled to keep the title. The innocent buyer could then grant a valid mortgage. But someone who lends money to a person who fraudulently obtains title will not be afforded the same protection.