CC and CD are French citizens. They reside at La Réunion, an island in the Indian Ocean administered byFrance.
The couple is familiar with Quebec, having spent several vacations here. In 2001, they purchased a condominium property consisting of two (2) units in Old Montreal. They mandated FB and a company entirely controlled by him (CGP) to manage the property for them.
In 2007, CC and CD received a prior notice of foreclosure from a mortgage creditor. It is only then that CC and CD discovered that their two (2) units had been successively mortgaged without their knowledge in order to guarantee various loans purportedly made to them in virtue of a power of attorney that bore their signatures and had been certified by a notary from La Réunion. However, the powers of attorney were
CC and CD applied to Court to have the mortgage loans that were contracted in their names in virtue of the fraudulent power of attorney declared null and void for all legal purposes and that the registration against the title to their units at the Land Register, cancelled. They also claimed damages from FB, CGP as well as the instrumenting notary who received the impeached mortgages.
CC met FB at La Réunion in 1993 or 1994 and knew that FB managed residential properties on behalf of various non‐resident owners. CC and CD purchased their units on May 29, 2001 and mandated FB to sign the notarial deeds of acquisition and a mortgage loan on their behalf in virtue of a special power ofattorney received by a notary on January 3, 2001. In virtue of the same power of attorney, CC and CD
entrusted FB with the management of all of their property, movable as well as immovable, situated in Montreal, with the power to borrow and mortgage the property.
Between 2001 and 2003, the management of the two units went smoothly although CC and CD had to inject an additional $10,000O to cover a rental revenue shortfall.
In order to facilitate the rental of the units, the owners decided to renovate them and combine them into one single unit. It was in this context that on July 1, 2003, CC and CD signed a property management agreement with CGP granting the latter extensive authority to manage the units, including authority to mortgage the units for up to 75% of their fair market value. The agreement was for a duration of eight (8) years with either party having the option to terminate it prematurely upon giving a one (1) year prior written notice at anytime after five (5) years.
For the purpose of the renovations, CC and CD contracted a new mortgage loan on August 11, 2003 in the amount of $210,000 and authorized FB to sign for them in virtue of a power of attorney dated August 4, 2003. The power of attorney is acknowledged as legitimate by all concerned.
Between 2003 and 2007, CC and CD did not receive any accounting updates from CGP. They received no proofs of payment of the mortgage, municipal and school taxes or condo fees. They received no information regarding the rental revenues of the units during this period, nor the vacancy rates. In the absence of any updates, they assumed that everything was in order.
Unknown to CC and CD, FB and CGP commenced to have serious liquidity problems in 2005and 2006 with respect to the management of their own condominium units, as well as those managed on behalf of non‐resident owners. The mortgage lender refused to renew any mortgages secured by units that were possessed or managed by CGP or FB. FB unsuccessfully sought refinancing from a new lender in order to avoid foreclosure.
On December 14, 2005, FB obtained a fraudulent power of attorney purportedly certified by a notary from La Réunion. On the basis of this fraudulent document, FB executed various mortgage deeds on behalf of CC and CD, namely, January 12, 2006 ‐ $120,000.00; January 13, 2006 ‐ $75,000.00; February 16, 2006‐ $50,000.00; March 30, 2006 ‐ $11,000.00; January 19, 2007 ‐ $75,000.00; February 1, 2007 ‐$220,000.0.
All of the foregoing mortgage loans, which were secured against the units belonging to CC and CD, were entered into on the basis of the fraudulent power of attorney purportedly given in favour of FB.
In June 2007, a notice of foreclosure was served upon CC and CD who learned for the first time of the fraud and the theft of their identities. According to the findings of the Court, the lenders were in good faith and had no knowledge that any
fraud was being committed or that the power of attorney was not valid.
The principal issue before the Court was whether the mortgage loans entered into by lenders in good faith were valid and could be set up against the innocent victims of the fraud who never authorized the loans.
The general rules of contract require that a valid consent be given in order to create a legally enforceable contract. However, in the circumstances of this case where the lenders provided the financing in good faith and relied upon a fraudulent power of attorney that appeared to be valid on its face, the law has to make the difficult choice as to which party, the lender or the owner, will suffer the consequences of the fraud. The Court decided that, notwithstanding the general rules of contract, when a lender is in good faith, it is the owner of the property that bears the brunt of the fraud, under reserve of all of his recourses to claim restitution from the perpetrators of the fraud.
The Court relied upon Article 1707 of the Civil Code of Quebec, which provides that in deeds of transfer of title for onerous title, which is defined as including mortgages, by a person that has an obligation to make restitution (the perpetrator of the fraud), the third party in good faith (the lender), is protected and the owner assumes the risk of obtaining restitution from the perpetrators of the fraud. If the perpetrators of the fraud are solvent, there should be no problem. Otherwise, the owner in good faith will bear a very heavy burden indeed.
In the present case, the owners not only sued the perpetrator of the fraud and obtained a judgment in their favour (although the eventual success of collecting the Judgment is unknown), they also sued the notary who received the tainted mortgage deeds claiming that he was negligent in not doing more to verify the authenticity of the fraudulent power of attorney. The owners argued that the notary, with very little effort, such as by contacting the owners directly themselves or the notary who purportedly certified the fraudulent power of attorney, could have easily determined that the power of attorney was a forgery and that by neglecting to do so, the notary incurred liability. The Court rejected this argument and exculpated the notary.
The standard to which a notary is held is that of diligence. One of the circumstances that exculpated the notary is the fact that the owners had previously given valid powers of attorney with extensive authority to the same property manager, including the capacity to mortgage the properties up to 75% of their fair
market value. The Court found that it was reasonable for the notary to rely on the past conduct of the parties in accepting the fraudulent power of attorney. Moreover, the owners were arguably imprudent in blindly relying upon the good faith of their property manager without making independent inquiries with the previous mortgage lenders, the syndicate of co‐owners, or being more forceful in requiring regular accounting updates from the property manager.
A lesson that we can retain from this case is how simple it is for someone to usurp another person's identity and how serious the consequences can be.
A property manager should be given the narrowest authority necessary for discharging his duties. It is certainly not necessary for a property manager to have authority at large to mortgage a property up to 75% of its market value. The owners would have been better served had they followed the adage, "trust but verify".
(Ouellette vs. Coppin et al., 2010 QCCS 6014, G. Mercure, J.S.C.)