by Ksena J. Court and Francis N. J. Taman

Yet another mortgage fraud has raised its ugly head.  This time it involves fraud at the level of the mortgage broker.  In Toronto-Dominion Bank (TD Canada Trust) v. Currie[1], the Alberta Court of Appeal left the first lender holding the bag at the end of the day.[2]

Mr. Currie loaned the Craigs money.  The loan was secured by a mortgage (the “Currie Mortgage”) against two properties owned by the Craigs.  The financing and mortgage were negotiated by a licenced mortgage broker, Fuoco Holdings and Emilio Fuoco (collectively referred to as the “Broker”).  In the mortgage, the mortgagee was described as “Dan Currie c/o Fuoco Holdings”.  The mortgage matured and went into default.  The mortgage was foreclosed off of one of the two properties.  With respect to the second property, the Craigs applied for and were approved refinancing from Toronto-Dominion Bank (“TD”).  This refinancing was to be secured by a mortgage in first position (the “TD Mortgage”).  The lawyer retained to do the refinancing for the Craigs requested a payout statement from the Broker.  The Broker sent a payout statement to Mr. Currie for approximately $250,000 (the “First Payout Statement”) and requested that he sign it.  The Craigs did so.  Subsequently, the Broker sent a payout statement to the lawyer showing that the balance owing on the mortgage was $75,000 (the “Second Payout Statement”) and instructed the lawyer that the refinancing funds were to be made payable to Fuoco Holdings Ltd.  Neither the lawyer nor the Craigs were aware of the First Payout Statement, and Mr. Currie was not aware of the Second Payout Statement.

The lawyer prepared and registered the TD Mortgage and sent the $75,000 to the Broker as directed by the Second Payout Statement in trust for a discharge of the Currie Mortgage.  Unfortunately, the Broker absconded with the payout funds and the requested discharge of the Currie Mortgage was never sent.  The question arose as to whether the Currie Mortgage had priority over the TD Mortgage.  The answer lay in whether the Broker was Mr. Currie’s agent.  Mr. Currie argued that the Broker was not his agent and the Broker had no authority to issue the payout statement or to receive the payout funds.  Because the Broker exceeded his authority, according to Mr. Currie, he was not bound by the Broker’s actions and the Currie Mortgage remained a valid mortgage against the title to the property.

The general rule is that a principal is bound by the fraudulent acts of his or her agent if the agent had actual or ostensible authority to perform the particular actions at issue.  The general principles regarding ostensible authority are:

“(a) Representation about the authority of the agent must come from the principal; an agent cannot clothe himself or herself with authority…

(b)  The onus is on the person who is relying on the act of the agent to prove ostensible authority;

(c)  However, when the agent has actual authority, but that authority is subject to limitations, the onus is on the principal to prove that the limitations were conveyed to the third party who relied on the agent…

(d) These general principles apply to the specific situation where a debtor pays money to the agent, rather than directly to the principal, as happened in this appeal…”[3]

The Court of Appeal found that the Broker had extensive actual authority for a number of reasons:  (1) the Broker negotiated the Currie Mortgage; (2) Mr. Currie never had any direct communication with the Craigs; and most importantly (3) the Broker was referred to as the being the contact person for Mr. Currie on the face of the Currie Mortgage and third parties were entitled to take what is registered at the Land Titles Office at face value.

With respect to this last point, if the Broker was not to be acting on behalf of Mr. Currie, then it was up to Mr. Currie to make this clear to third parties.  It was appropriate for the lawyer to write to the Broker for the payout statement as this was the address that was on the title, and according to the terms of the mortgage the address where mortgage payments were to be made.  Mr. Currie was aware that the Broker was sending payout statements as he signed the First Payout Statement.  If he did not want the Broker acting in this regard, he ought to have admonished the Broker for exceeding his authority.  No such limitations on authority were ever communicated to either the Craigs, their lawyer or TD.  The Court of Appeal stated that at the very least the Broker also had ostensible authority to act as Mr. Currie’s agent.

Given that the Broker had authority to issue the payout statement, the Court of Appeal also found that the Broker had authority to decide what was to go in the payout statement.  In the absence of any circumstances that would put the recipient of the payout statement on notice that something was wrong, the recipient was entitled to rely upon the payout statement provided, and that the Broker was operating his business in accordance with the law.

“In conclusion, Currie has been defrauded by [the Broker], the agent of his own choosing” and ultimately “must bear the loss resulting from [the Broker’s] dishonesty”.[4]

It is unfortunate that the lender in this instance was taken advantage of by his agent.  Individual or smaller occasional lenders should do as much due diligence as possible if they are looking to hire an agent to represent them in negotiating and administering the loan.  There are a number of reputable Alberta based lenders out there that provide such services.  Additionally, if a lender intends to put limits on its agent’s authority, it should clearly state so in all public documents.

[1] 2017 ABCA 45 (Alta. C.A.)

[2] Patty Ko, an associate with our Edmonton office, represented TD in these proceedings.

[3] Supra, at para. 7

[4] Supra, at para. 20