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Mortgage Provided By Corporate Borrower Not A “fraudulent Instrument” – Financial Services

The Ontario Land Titles Act (“LTA“) provides that a registered mortgage
that is determined to be a fraudulent instrument is void and may be
deleted from title. This provision is commonly used in
circumstances where an imposter has posed as a mortgagor in order
to secure funds from a lender without the knowledge of the true
owner. Where the borrower is a corporation, however, the issue of
whether the corporation was fraudulently represented may be less
clear. Internal governance issues regarding whether or not the
corporation properly authorized the mortgage do not necessarily
mean that the mortgage was a “fraudulent instrument”
under the LTA.

In Froom v. LaFontaine, 2022 ONSC 2930 (CanLII), a property in Toronto
was purchased in the name of a corporation (“128
Ontario”) in 2003. The individual owner of 128 Ontario
(“AF”), was the sole registered director and officer and
held all the issued shares.

AF lived in the property until 2008, when he was convicted and
incarcerated in the United States in connection with various
healthcare fraud offences. AF did not return to Canada after

In 2011, AF’s former spouse (“SL”)—from whom
he was not divorced—arranged for a change notice to be
registered showing that she was the sole officer and director of
128 Ontario. SL also took steps to take over the corporation’s
bank accounts. A document showing that SL acquired 100 shares of
128 Ontario was allegedly forged.

In 2013, 128 Ontario commenced an application at SL’s behest
for possession of the property, which was occupied by AF’s
girlfriend and their daughter. In response, AF commenced a
proceeding to obtain a divorce from SL and a declaration that he
owned 128 Ontario, along with other relief relating to the
dissolution of the marriage.

In August 2014, 128 Ontario obtained a mortgage from a private
lender. The mortgage was initially for $100,000, but was later
increased to $300,000. SL signed the mortgage documents on behalf
of 128 Ontario and personally guaranteed the mortgage. In the sworn
declaration for the mortgage, SL represented that she was unaware
of any other claim or interest in respect of the property, without
disclosing the ongoing family law proceedings. The mortgage was
renewed and amended several times thereafter.

Default in payment of the mortgage occurred in March 2019, and
the lender commenced enforcement proceedings against 128 Ontario
and SL.

In 2021, the lender brought a motion for summary judgment
against 128 Ontario and SL to enforce the mortgage and guarantee.
SL supported the lender’s motion.

In response, AF and 128 Ontario took the position that the
lenders’ mortgage was void as it was a “fraudulent
instrument” under the LTA. AF argued that the lender was in the best
position to prevent fraud and had failed to exercise due diligence.
In that regard, the lender did not take steps to investigate the
use or occupancy of the property and did not appear to have
obtained an appraisal.

Section 1
of the LTA defines a “fraudulent
instrument” as an instrument,

(a) under which a fraudulent person purports to receive or
transfer an estate or interest in land,

(b) that is given under the purported authority of a power of
attorney that is forged,

(c) that is a transfer of a charge where the charge is given by
a fraudulent person, or

(d) that perpetrates a fraud as prescribed with respect to the
estate or interest in land affected by the instrument.

A “fraudulent person” is defined in
section 1
of the LTA to mean a person who executes or purports
to execute an instrument if,

(a) the person forged the instrument,

(b) the person is a fictitious person, or

(c) the person holds oneself out in the instrument to be, but
knows that the person is not, the registered owner of the estate or
interest in land affected by the instrument.

AF and 128 Ontario took the position that SL was a
“fraudulent person” because she fraudulently held herself
out to the lender to be an officer and director of 128 Ontario.
They submitted that AF was the sole shareholder, officer, and
director of 128 Ontario.

In response, the lender argued that SL was not a
“fraudulent person” as defined in the LTAsince (a) she did not forge the mortgage,
(b) she was not a “fictitious” person, and (c) she did
not hold herself out to be the registered owner of the property
affected by the mortgage. The lender’s position was that even
if SL had fraudulently held herself out as an officer and director
of 128 Ontario, she did not hold herself out to the registered
owner of the property. The lender argued that the alleged fraud
committed by SL was not one of the categories of fraudulent
activity that is captured by the definitions of “fraudulent
person” and “fraudulent instrument”.

In Reasons for Decision granting the lender’s
motion, the court agreed that SL was not a “fictitious
person” even if she had falsely pretended to be an officer and
director of the corporate owner of the property when she signed the

The motion judge referred to the decision of the Divisional
Court in 1168760 Ontario Inc. v. 6706037 Canada Inc., 2019 ONSC 4702
, at paras.
, concluding that a “fictitious person” means a
person who does not exist; e.g. where someone has created a false
identity in order to transfer the title or interest in the land
that he or she purports to convey. It would not encompass an
existing person who was the true registered owner of the property
conveyed. SL exists and is a real person and 128 Ontario owned the

In 6706037
Canada Inc.
, a bare trustee who had transferred property
without the consent of the beneficiaries was determined not to be a
fraudulent person notwithstanding the lack of authority to enter
into the transaction.

128 Ontario and AF argued that the allegations against SL
brought her within clause (c) of the definition of “fraudulent
person” as being “the person holds oneself out in the
instrument to be, but knows that the person is not, the registered
owner of the estate or interest in land affected by the

While clause (c) does not expressly deal with situations where a
corporation owns the land in question, AF and 128 Ontario submitted
that this provision should apply given that a corporation can only
act through its officers and directors. Therefore, they argued, by
claiming she was an officer and director of the Company, SL held
herself out as 128 Ontario and the registered owner of the
property, when, in fact, she was not.

The court noted that the issue appeared to have been addressed
on only one prior occasion, a hearing under
section 57(16)
of the LTA to rectify the registry where a person had
used stolen identification to file corporation information notices
showing that he was the sole officer and director of a company
before he obtained a mortgage on its behalf. In that case, the
Director of Titles determined that a mortgage granted in respect of
land owned by a corporation and executed by an individual that was
not authorized to bind the corporation was a “fraudulent

In the case at hand, however, the motion judge reasoned that a
shareholder, officer or director of a corporation is not the owner
of that corporation’s land. No principle of law was provided by
the parties for the proposition that holding oneself out as an
officer or director of a corporation to obtain a mortgage on its
behalf is equivalent to holding oneself out to be the registered
owner of the corporation’s land.

Given that SL was not the registered owner of the property, the
court found that even if the allegations of 128 Ontario regarding
her conduct were true, 128 Ontario failed to demonstrate that SL
met the test as set out in clause (c) of the definition for a
“fraudulent person” and thus failed to establish that the
mortgage was a “fraudulent instrument” within the meaning
of the LTA.

As a result, the motion for summary judgment was granted and the
lender obtained judgment under the mortgage and a writ of
possession for the property. The matrimonial proceedings between SL
and AF continue.

The case shows that whether a corporate borrower or other person
has the proper authority to enter into a mortgage is distinct from
the issue of whether they were a fraudulent person. There was no
evidence showing that the lender was aware of any issues regarding
the authority of 128 Ontario or SL to enter into the mortgage. 128
Ontario could not avail itself of the provisions of the LTA to avoid liability under the mortgage. A
PDF version is available to download here.

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.

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