Legal Blog

INNOCENCE (2)

We have long maintained that, in any litigation, if a client’s position does not pass the smell test, the result will be unfavourable. An example of this adage is found in Tarion Warranty Corporation  v. Castle Times Homes, a 2013 Ontario Superior Court of Justice decision. Another example is set out in Isaacs v. Royal Bank of Canada, a 2010 decision of the Ontario Superior Court of Justice.

Guarantee

Tarion upholds warranties arising out of the Ontario New Home Warranty Plan. It registers homebuilders, usually corporate builders; it obtains performance guarantees from them and, often, their principals. In essence, if there is a problem with a house, Tarion wants to have recourse against the homebuilder and the people who run it.

Tarion registered a builder, which later requested Tarion to renew its registration. Tarion obtained guarantees from the principal of the builder and four investors. The builder defaulted on its warranties to homeowners and Tarion had to satisfy its obligations. Tarion then looked to the investors for indemnification on their guarantees because the principal was bankrupt.

The guarantors alleged, and the judge accepted, that the principal had slipped the signing page of the guarantees, page 9, into another group of documents to be signed, which dealt with another project. The principal then added pages 1 to 8 to the signed page 9 and gave that document to Tarion. In effect, the principal fraudulently obtained the guarantees.

Who should suffer the loss: the defrauded, but negligent, guarantors or Tarion?

Careless

As a basic principle, people who sign a document carelessly cannot then claim that the document does not bind them. The investors were certainly careless in signing the signature page of the guarantee. Not only did they fail to notice the Tarion words at the bottom of the page, they also failed to notice that the document they thought they were signing referenced a non-existent corporate name.

Conversely, Tarion had a policy of dealing only with one representative of a builder, in this case the principal. It never contacted any of the investors when problems arose. It had its own form for net worth statements, but allowed the principal to provide copies of statements of net worth for the investors on a different form. This allowed the principal to perpetrate the fraud more easily. Accordingly, the judge decided that neither Tarion nor the investors were “innocent.”

The judge held that his task was not to answer the question as to who was more careless; rather, he had to determine whether, but for Tarion’s carelessness, the principal would have been unable to perpetrate his fraud.

The judge held that the principal offered up the investors as guarantors without Tarion insisting on them and that Tarion would have granted a continued registration to the homebuilder regardless of the guarantees. The guarantees were just icing on the cake.

The judge therefore dismissed the action against the guarantors.

Isaacs

Tarion relied in part on Isaacs. We discussed this case in our October 2010 newsletter and summarised the facts as follows:

The victim was sitting in a Tim Horton’s chatting with her now ex-husband about the dismal state of their finances. A man sitting next to them overheard, told them he could help, and gave them his phone number. Husband took the bait and called the fraudster. The fraudster told him a story of someone who wanted to buy a house, but had trouble because of a poor credit rating. The prospective purchaser would pay $4,000 (later $6,000) to the person who would merely co-sign his mortgage, which would only be for 6 months. This seemed like easy money and the victim, not her husband, decided to sign as guarantor.

A mortgage broker called the victim and sent her to the bank. There, she signed some bank forms, including a mortgage application noting that she was to be an owner of the property along with the fraudster. The victim did not read the documents or tell the mortgage officer about the money she was to be paid.

The mortgage broker then sent the victim to a lawyer’s office. There, she signed more documents, which she did not read. 

Based on all the documents, the bank approved the mortgage and the transaction was completed. The victim was now the proud owner of a 50% interest in the property and fully liable on the mortgage. The fraudster somehow made off with the proceeds and the bank sought to recover its losses from the victim. The victim argued that the bank ought to have caught the fraud and should absorb the loss. The trial judge disagreed, noting that the victim was, because of her greed, the author of her own misfortune.

Appeal

The victim appealed the decision. The Court of Appeal dismissed the appeal. It held that this was not a case of two equally innocent parties.

The victim agreed to serve as an accommodation mortgagor for a stranger, for compensation, without disclosure to the Bank of the nature of the transaction…

The Bank’s conduct, at its highest, was careless. But the appellant’s conduct was more than careless. It involved affirmative action on her part that facilitated the fraud. This is a significant distinction between the nature of the parties’ conduct”.

The victim lost in Isaacs because she failed the smell test. The investors in Tarion were careless, but passed the smell test.

Bankruptcy

The victim had no intention of paying the judgment and, after taking the bank through to the Court of Appeal, assigned into bankruptcy. The bank assigned the mortgage to CMHC; we assume that CMHC had insured it.

CMHC brought a motion to have the judgment debt declared to have been incurred through false pretences and, therefore, not released by the bankruptcy. The judge decided that it would be difficult to make findings of fact and credibility relating to allegations of fraud and improper conduct based solely on the written record. He therefore ordered that the matter be determined by way of a trial

The saga continues.