In an unusual trial decision a decade in the making, the court has denied a bank – and ultimately, its default insurer – recovery against a fraudulent straw buyer, on the basis that the bank had participated in the fraud.
TD Bank v. Whitford (2020 ABQB 802) was the decision after a trial wherein the bank sought judgment for the shortfall after the sale of a property. The mortgage loan was made in 2007, went into default in 2009, and was sold in 2012. By the time the case finally went to trial in 2020, the bank’s deficiency had grown to over half a million dollars with accrued interest.
The borrower, Whitford, testified that an acquaintance, Farhat, convinced him to participate in a scheme whereby Whitford would purchase obtain and mortgage and purchase a property and would have the mortgage in his name for one year, after which time the property would be purchased from him.
Whitford was 25 years old at the time, and was told having the mortgage would improve his credit score. He also received $5,000 for signing. He then met with a real estate agent, provided some financial information and signed some documents, but at trial said that the documents he provided had been altered after he submitted them.
The real estate agent then used Whitford’s documents as well as falsified documents, including false income tax and bank account documents, to apply for a mortgage. Contrary to the bank’s policies, a bank employee, who was the real estate agent’s friend and sister-in-law, processed the mortgage application based on the information provided by the real estate agent, without meeting with Whitford directly.
An investigation by the bank found that the bank employee had been involved in nine mortgage files with fraudulent documents, all referred by the same real estate agent.
Further enabling the fraud, the bank’s legal counsel did not meet with Whitford as was required by the bank’s client identification policies. Rather, the lawyer allowed the real estate agent to handle meeting with Whitford to sign the mortgage documents.
This made it clear at trial that Whitford could not have received advice from the lawyer as to the consequences of signing a mortgage. The lawyer further failed to report to the bank, as he was expressly required to do by the bank’s instructions, as to indicators of potential fraud such as recent sales of the same property at lower value or disbursements to unusual parties, both of which were present in this case.
The trial judge, Justice Dario, found that Whitford was “careless and naïve” rather than outright dishonest, noting that he admitted his mistakes in entering into the mortgage fraud, including facts such as accepting $5,000 that did not appear on any documents and were known only through his admitting them. Of the bank employee, the trial judge noted “either her credibility or her common sense is suspect”, and “showed a total disregard for the policies and requirements of her job”. The judge found in other bank employees a “lackadaisical adherence to security protocols and fraud prevention measures”.
In reviewing the law, Justice Dario noted that defenses to mortgage fraud by straw buyers do not often succeed. However, participation in the fraud by the lender makes the scenario far more complicated. Justice Dario applied the doctrine of ex turpi causa– that a party cannot benefit from their own improper act – finding that the bank employee was at the least, willfully blind to the indicators of fraud. Justice Dario then further found the bank liable for the actions of the employee. She concluded that the bank was precluded from recovering the deficiency against Whitford; but ordered him to repay the $5,000 that he received for participating in the scheme, and to pay $15,000 toward the bank’s legal and investigation costs.
The significant events of this case took place 13 years before the court decision, and lenders are now much more aware of the hallmarks of mortgage fraud and the need to not only have policies in place, but to ensure they are followed.