Real estate financing transactions are once again facing scrutiny due to a recent fraud case involving a lender, its customers (the borrowers) and the purported discharge of the borrower’s existing mortgage (Lin v. CIBC Mortgages Inc. – December 18, 2015).
Background
In 2013, the borrowers retained notary Agatha Chung to assist with the refinance of their home. CIBC, the new lender, retained notary Timothy Ko to act on its behalf.
Ko sent the new mortgage proceeds to Chung, who undertook to pay out the existing mortgage from Scotiabank, with the balance of the proceeds to be paid to the borrowers. After the payout and discharge of the Scotiabank mortgage, CIBC would then be shown as first mortgagee on title to the borrowers’ home.
Chung advised the borrowers that she had paid out the Scotiabank mortgage, and she forwarded the remainder of the money to the borrowers. In reality, however, it was later discovered that not only had Scotiabank not been paid out, but Chung had vanished with more than $8 million from 41 other clients.
Lawsuit
A legal battle then ensued to determine who should bear the loss of the missing funds – the borrowers, or their lender, CIBC? In the meantime, the borrowers paid monthly mortgage payments on two mortgages – the prior Scotiabank mortgage and the new CIBC mortgage.
In what was a surprising decision for many lawyers, the BC Court of Appeal agreed with the lower court’s decision and held that CIBC was responsible for the loss. The court based its decision on property law (ie. it was a matter of determining who owned the money at the time it disappeared to establish the loss) as opposed to agency law (ie. whether the borrowers were liable for the actions of their notary).
Decision
The Court held that CIBC mortgage monies were never advanced to the point where the borrowers had the right to call upon the funds for their own benefit, since the borrowers’ notary was on an undertaking to use the funds to payout the Scotiabank mortgage. Therefore, the funds remained the property of CIBC.
Even though the borrowers ultimately received a portion of the funds, the entire amount had been advanced in escrow, and the condition for the release of the funds to the borrowers had not been met. So, until the condition of payout was satisfied, the funds could not have been considered to have been “advanced” — CIBC still owned the money and the CIBC mortgage was void.
Implications
Completion of real estate transactions by way of undertakings is the way in which BC lawyers have operated for years. The lender’s lawyer sends money to the borrower’s lawyer on the latter’s undertaking to forward sufficient funds to the existing lender to pay out the existing mortgage and obtain and register a discharge of that mortgage. In a purchase/sale transaction, there would be one more layer and the undertaking to pay out would appear at the last stage – the borrower/buyer’s lawyer would forward the funds to the seller’s lawyer on the undertaking to pay out.
Real estate and lending lawyers argue that the decision could have wider repercussions if they cannot rely on the undertakings that professionals make to one another. Furthermore, this could mean that lenders are not secured until the old mortgage has been discharged (which may take several weeks to process), which could impact the opinions that lawyers are required to render to their lender & borrower clients on closing.
It is still too early to determine whether lawyers will amend their practice of closing on undertakings or whether additional steps ought to be taken. The case could also have implications on whom clients retain to assist with their closings (notaries? Only lawyers from reputable law firms?). It could also be a boon to the Title Insurance industry. Only time will tell.