Toronto-Dominion Bank v. Salekin (“Salekin”)[1] is “yet another case where rogues have taken advantage of a person who was willing to sign legal documents with little care for their meaning.”[2]  In the typical mortgage fraud, the “straw buyer” is induced by one or more individuals who are behind the mortgage fraud scheme (often referred to in the cases as “rogues”) to sign mortgage documents.  The inducement is often the payment of money accompanied with a promise that the straw buyer will only have to hold the property and mortgage in their name for a few months.  Salekin is a recent decision from the Alberta Court of Queen’s Bench that involved such a straw buyer.  However, in this instance, the straw buyer ended up with a mortgage in his name without having to sign any mortgage documents.

Mr. Salekin was approached by an individual (“Mr. D.”) who offered an investment opportunity or joint venture in a property.  Mr. D promised to pay Mr. Salekin a $5,000 “kickback” for participating.  In order to “expedite the process”, Mr. D asked Mr. Salekin to sign a Power of Attorney.  Mr. D promised that the Power of Attorney would only be used if the property came up for sale and Mr. Salekin was out of the province or not available.  The only document that Mr. Salekin signed was the Power of Attorney, but it was this document that allowed the fraud to be perpetrated and which left Mr. Salekin holding the bag at the end of the day.

A Power of Attorney is a document that authorizes another person, called the attorney, to step into your shoes and deal with your property as if it was their own.  A Power of Attorney document can be limited by giving the attorney authorization to deal with only certain property, or it can be very broad and give the attorney unlimited powers to deal with all of your property.  The Power of Attorney that Mr. Salekin signed was a general power of attorney that gave another individual (“Mr. L”) authorization to sign any documents with respect to the property that was being purchased.  It did not contain any statement that it would only be used if Mr. Salekin was unavailable as he alleged was promised by Mr. D.

Unbeknownst to Mr. Salekin, someone had already forged his signature on a purchase contract and a mortgage commitment for the property.  The Power of Attorney was then used to sign further documents respecting the purchase of the property, which included a transfer of the property into Mr. Salekin’s name and a high ratio mortgage in favour of the bank.  As is usually the case, the mortgage payments were not made and the mortgage went into default.  It was at that point in time that Mr. Salekin became aware that he was the registered owner of the property with a mortgage to the bank.

In the foreclosure proceedings, the property was sold to the bank.  Because the balance outstanding under the mortgage was higher than the fair market value of the property, the bank sought a judgment against Mr. Salekin for the difference.  At first instance, the Master denied the bank’s application.  The bank appealed to a Justice of the Court of Queen’s Bench.

The Court held that it was not necessary for the bank to have to prove that Mr. Salekin or someone authorized by him had signed the purchase contract or the mortgage commitment.  The bank had acknowledged that the signatures on these documents were forged.  This was not a sufficient defence for Mr. Salekin as he had signed the Power of Attorney which authorized Mr. L to sign any documents respecting the property for him.  The Court concluded that if the purchase contract and mortgage commitment had not already been signed, Mr. L still would have been able to sign those documents for Mr. Salekin by using the Power of Attorney and so the result would have been the same at the end of the day.

The Power of Attorney enabled the purchasing of the property and the placement of the mortgage against it.  While the Power of Attorney may have been used contrary to the conditions that were promised to Mr. Salekin, and Mr. Salekin may have a claim against Mr. L or Mr. D for breach of their promises, this was not a defence to the bank’s claim against him.  The bank had no notice of any conditions of use placed against the Power of Attorney.

The Court also noted that Mr. Salekin was not a completely innocent party in the transaction.  He was prepared to act as the straw buyer.  While Mr. Salekin did not receive the “kickback” he was promised, by signing the Power of Attorney, he put Mr. D or Mr. L in a position to perpetrate the fraud.  Mr. Salekin therefore did not come to the Court with “clean hands”.[3]

Mr. Salekin also attempted to argue that the bank was negligent in failing to review all of the documentation submitted to it when it granted the mortgage.  His argument was that the bank ought to have known that the Power of Attorney was not legitimate and that the mortgage was not authorized by Mr. Salekin.  This “failure of due diligence” argument was again clearly rejected by the Court as a defence.  The bank “was under no obligation to inquire into the validity of the Power of Attorney.  Further, the Bank’s diligence procedures were for its own protection, not the borrower’s, and it was entitled to follow or waive those procedures as it saw fit.”[4]

What is most interesting about Salekin is that it is a deviation from the standard straw buyer fraud scenario.  With the use of the Power of Attorney document, the straw buyer need only sign one document and does not have to attend a lawyer’s office in order to do so.  This innovation certainly reduces the risk to the “rogues” as the straw buyer no longer attends the lawyer’s office and may therefore not have the opportunity to obtain legal advice regarding the legality of the transaction or their liability under the mortgage.

While the bank was successful in obtaining judgment against the borrower in this case, and clearly does not have any obligation to inquire into whether the Power of Attorney that is presented to it is legitimate, it may be prudent during the underwriting and loan transaction process to do so in any event.  As the inventiveness of the “rogues” involved in mortgage fraud continues to evolve, the banks will clearly need to continually adapt their underwriting practices to reduce the risk of having to deal with these scenarios.

Francis N.J. Taman and Ksena J. Court practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

[1] 2014 ABQB 168 (Alta. Q.B.).

[2] Justice Clark quoting from MCAP Service Corp. v. Halbersma, 2013 ABQB 185 (Alta. Q.B.) at para. 1.  Our blog post regarding this decision was posted May 22, 2013 (see https://albertaforeclosureblog.com/2013/05/22/if-it-sounds-too-good-to-be-true/).

[3] Salekin, at para.39.

[4] Salekin, at para 43.