Toronto Dominion Bank v Whitford, 2020 ABQB 802

Court of Queen’s Bench of Alberta Citation: Toronto Dominion Bank v Whitford, 2020 ABQB 802 Date: 20201230 Docket: 0901 06163 Registry: Calgary Between: The Toronto Dominion Bank Plaintiff - and - Joshua Whitford Defendant _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C. Dario _______________________________________________________ I. Introduction [ 1 ] The Defendant, Joshua Whitford, was used as a straw man in a mortgage fraud. The two principal fraudsters, a former acquaintance and a realtor, persuaded him to take

part in a residential home purchase, telling him it would offer him a number of benefits. Instead, through their deceit, as well as failings on the part of the bank representative and the questionable handling by the solicitor involved, he now stands alone to answer to a $583,733 deficiency that the Plaintiff, The Toronto Dominion Bank (“ TD ”), seeks to recover. [ 2 ] The mortgage obtained in November 2007 was for the full purchase price of the property municipally described as 88 Arbour Ridge Park NW, Calgary Alberta. As a high-ratio mortgage, it was insured by Canada Mortgage and Housing Corporation (“ CMHC ”).

The mortgage was in the amount of $637,775, which included $615,000 for the property with the balance being the mortgage insurance premium and taxes for CMHC. TD filed its claim in April 2009. The property was ordered to be sold in 2011, and was sold in 2012 for $370,000, resulting in a sizable deficiency. This deficiency has further grown by the per diem interest charge applied over the many years it has taken the matter to come to trial. As of the first day of trial, TD claims a deficiency of $583,733 plus solicitor client costs. Mr.

Whitford advises that he will be obligated to declare bankruptcy to satisfy this debt. In such event, the balance of the deficiency will be borne by CMHC. [ 3 ] Mr. Whitford disputes TD’s claim and, although not formally pleading all of them, his submissions and pleadings raise several defences: participation in the fraud by the bank’s representative; negligence on the part of the bank representative; and the doctrine of ex turpi causa . Another typical defence that is considered in these cases and suggested by Mr.

Whitford’s submissions is the defence of non est factum . [ 4 ] In many regards, this case follows the same pattern as the typical straw buyer scenario, wherein the strawman (Mr. Whitford) was duped into obtaining a mortgage by the fraudster’s promise of improving his credit rating and earning $5,000 by assuming a mortgage for one year, at which point the property would be purchased back from him. Mr. Whitford states he only realized he was involved in a mortgage fraud scheme after the mortgage went into default. [ 5 ] Unlike many other straw buyer cases, Mr.

Whitford is the only defendant, and thus liability cannot flow through him to other culpable parties. TD did not add as co-defendants the two principal people who Mr. Whitford claims are the fraudsters, Janine Kaddoura (also referred to as the “ Real Estate Agent ”) and Ali Farhat. Nor did Mr. Whitford counterclaim against these third parties, stating he could not find Ms. Kaddoura, and had personal security issues with respect to Mr. Farhat, a professional wrestler. Initially, TD added as a co-defendant Bruce Blumell, the lawyer who represented both TD and Mr. Whitford in the mortgage transaction.

In January 2015, after the expiry of limitations period for a claim by Mr. Whitford against Mr. Blumell, TD discontinued its claim against Mr. Blumell. This was after Mr.

Whitford could no longer afford legal counsel and had commenced representing himself. [ 6 ] The role of TD’s employee, Hanan Hussein (also referred to as the “ Bank Representative ”) in the handling of the mortgage application in this case obligates this court to reconsider the allocation of responsibility in cases of this nature, and to re-examine how the case law on strawman buyers has developed. [ 7 ] Finally, the issue of delay in bringing this matter to trial and the late disclosure by TD of an internal report regarding the conduct of the Bank Representative are also addressed. II.

Issues [ 8 ] The issues that arise are as follows: 1. Whether TD has proven its claim for deficiency. 2. Whether TD can recover from Mr. Whitford on the mortgage deficiency: a. whether the doctrine of ex turpi causa applies; b. whether TD was negligent; c. whether there was a fraudulent misrepresentation which induced Mr. Whitford into the mortgage contract; and d. whether the defence of non est factum applies. III. Facts [ 9 ] This matter has taken a decade to come to trial, with the relevant events occurring a few years before that.

All of the witnesses struggled to remember details of this matter, with the exception of the lawyer, Mr. Blumell, who was remarkably able to remember specific details, right down to questions asked and answers provided in conversation some 11 years prior, particularly as they favored his position. The rest of the witnesses relied on the produced documents to assist in piecing together some of the fact pattern. The Fraud [ 10 ] Mr. Whitford testified that in 2007, Mr. Farhat, for whom he was hired to make promotional videos, had over time convinced him to participate in a property purchase. He states that Mr.

Farhat told him this would increase his credit rating and make some money by assuming a mortgage for one year, at which point the property would be purchased back from him. He was led to believe that Mr. Farhat would cover all the costs associated with the property, and Mr. Whitford would (and did) receive $5000 for his participation. Mr. Whitford, who was 25 at the time, was inexperienced and did not ask many (if any) material questions on how this deal was to work. [ 11 ] At the time, Mr. Whitford was working in the basement suite of Mr. Farhat’s residence. Mr. Whitford claims that Mr.

Farhat had Janine Kaddoura (the Real Estate Agent) attend Mr. Farhat’s residence to sign a stack of documents. The meeting with Ms. Kaddoura lasted 30-60 minutes, during which Mr. Whitford was provided the relevant documentation to sign. Mr. Whitford claims he did not read or thus understand what was provided and did not receive much of an explanation by Ms. Kaddoura, nor was he provided copies of what he signed. There may have been one or two further meetings among Ms. Kaddoura, Mr. Farhat and Mr. Whitford. At one of those meetings, Mr.

Whitford provided some of his bank account information to the Real Estate Agent. He thought this information might be provided to the bank for the purpose of the mortgage but did not really understand what a mortgage was.

[ 12 ] At trial, Mr. Whitford acknowledged certain documents bore his signature, however, he could not confirm whether the pages attached to the pages bearing his signature in the documents submitted in evidence were in fact the documents he saw in 2007. With respect to the financial information submitted in his application to the bank, he swears that it was altered by someone other than him. [ 13 ] The evidence supports that Ms. Kaddoura altered Mr. Whitford’s income and asset amounts without his knowledge after he signed the documents, specifically on his credit application. Mr.

Whitford states that he signed but did not date the documents, and that he likely only signed documents on one or maybe two occasions. In contrast, the normal process would require the documents to be generated and signed on three separate occasions. Some of the documents are not even dated in an internally consistent manner. For example, the mortgage commitment letter (which is issued after the application is approved) is signed on page six by Mr.

Whitford and dated November 23, 2007, yet the date on first page of the form (generated by the bank) is November 26, 2007 – created three days after the date he purportedly signed the document. [ 14 ] Given Mr. Whitford’s other admissions, I accept his testimony that he did not see the false income and asset information at the time of signing, and would not have signed the document had he seen it. This finding does not appear to be disputed by the Plaintiff, nor is the fact that Mr. Whitford was unaware at that time that the value of the property was artificially inflated. [ 15 ] Although Mr.

Whitford was unaware of these details at the time, in early November 2007, the Real Estate Agent made a request to the Bank Representative, Ms. Hussein, to apply for a mortgage and to open an account on his behalf. In doing so, the Bank Representative received Mr. Whitford’s 2005 and 2006 notices of assessment (“ NOA ”) information from the Real Estate Agent, which – other than his name and social insurance number - turned out to be completely false.

For example, the NOA provided by the Real Estate Agent indicated the defendant earned $145,780 in 2005 when his actual income was $12,943, and $149,358 in 2006 when his actual income was $18,440. Notably, these income amounts were not at all reflected in Mr. Whitford’s bank account statements from another banking institution – which were also provided to the Bank Representative. [ 16 ] Around this time, the Real Estate Agent had been referring clients, including Mr. Whitford, to the Bank Representative.

Despite the bank confidentiality policies and the “know your client” (“ KYC ”) requirements that the Bank Representative was supposed to follow, she received instruction to apply for mortgages and associated documentation directly from the Real Estate Agent on behalf of third parties. The Bank Representative did not actually meet these clients. The Bank Representative would receive client information, including proof of income (such as NOAs) and identification information from the Real Estate Agent, and even allowed the Real Estate Agent to obtain the client’s signatures on the credit application.

All of these steps were supposed to be conducted between the Bank Representative and the client. This occurred on potentially nine or more occasions, including the present case.

Anthony Yu, the TD branch manager, explained that these actions were contrary to both TD’s standard practice and the code of conduct in which meeting the customer to obtain this information is the first step in the mortgage process. [ 17 ] As occurred in the present case and contrary to TD’s stated policies, the Bank Representative used the NOA and other financial information provided by the Real Estate Agent to complete a mortgage application (including rent, gross monthly salary, etc.), and then let the Real Estate Agent sign it with the client rather than meet with the client herself. [ 18 ] The Bank Representative also interacted with CMHC to process the mortgage application, as CMHC’s authorization and insurance was required to borrow more than the conventional mortgage rules allow.

Mr. Whitford was required to pay a premium to CMHC for this insurance, which ultimately protects the bank in case of default by the borrower. The Bank Representative was responsible for processing the CMHC application, and in doing so she again relied entirely on the information she received from the Real Estate Agent, without independent confirmation. Yet her representations to CMHC suggested that she had in fact personally obtained this information. Ms. Hussein wrote to CMHC: PLEASE REVIEW THIS APPLICATION CLIENT IS LOOKING TO PURCHASE A HOUSE WITH 100% FINANCING. CLIENT HAS EXCELLENT JOB STABILITY AND INCOME.

I HAVE CONFIRMED INCOME WITH AN AVERAGE 05/06 NOA AS HE IS ON A SALARY AND COMISSION BASIS. I HAVE ALSO OBTAINED A LETTER FROM THE EMPLOYER CONFIRMING THAT HE IS STILL EMPLOYED WITH THEM. CLIENT CURRENTLY PAYS 2400.00 IN RENT FOR A FULLY FURNISHED APARTMENT SUITE AND IS LOOKING TO BETTER HIMSELF BY INVESTING IN THE PURCHASE OF A HOME. PLEASE REVIEW AND ADVISE THANKS HANAN. [ 19 ] Notably, none of these statements regarding Mr. Whitford were true, except perhaps the fact of continued employment (though he was likely a contractor). [ 20 ] The Bank Representative, Ms. Hussein, testified at trial.

In defence of her non-compliant practices, Ms. Hussein stated that while she would allow the Real Estate Agent to deal directly with the client to sign the credit application and provide all of the supporting documentation, she typically would meet the client in person to sign the actual mortgage authorization. She could not confirm, however, if she ever deviated from this practice. Further, she admitted at trial that during the client meetings, it was not her practice to confirm the client’s identity or any of the other information that had been provided by the Real Estate Agent regarding the client.

In so doing, she was fully reliant on the Real Estate Agent in ensuring the right person was signing the documents and that the financial information provided was that of the client. Ms. Hussein also acknowledged at trial that she could not recall ever meeting Mr. Whitford. Mr. Whitford testified he never met Ms. Hussein and never attended the branch until after becoming aware of the default on the mortgage. [ 21 ] I accept Mr. Whitford’s testimony and find that Ms.

Hussein never met with him to sign the mortgage authorization, or at all prior to the present legal proceedings. [ 22 ] As part of the banking transactions, Ms. Hussein opened a chequing account in Mr. Whitford’s name. To complete the signature card, Ms. Hussein testified that she believed two employees of the bank were required to initial the account holder’s signature. This testimony was supported by the testimony of Mr. Yu, the branch manager. Thus, even if Ms.

Hussein had accepted other documents signed without her meeting the client, the signature card typically would be signed in the branch with another TD employee present. Mr. Whitford, testified, and I accept, that he did not sign a signature card, which is a smaller (card-like) form, when signing the other

documents in front of the Real Estate Agent, and that he did not meet with Ms. Hussein at all, including to sign the signature card. I therefore find that Mr. Whitford did not sign a signature card for the bank account. [ 23 ] TD could not find the signature card for production at trial to confirm whether anyone signed it or if that signature was witnessed by two branch employees. Ms.

Hussein testified that the card would have to be present until just before the mortgage payments stopped and the property went into foreclosure, as otherwise if not present for cross-reference, the account would have been flagged and possibly frozen. Given this, it appears someone other than Mr. Whitford signed that card. The Bank Representative, as well as many other TD employees, had access to the cabinet that contained the signed signature cards.

The missing signature card raises the question of whether it was removed on purpose, however there was no evidence at trial to substantiate such a finding. [ 24 ] According to Mr. Whitford and consistent with cancelled cheques in evidence, during the period of the mortgage prior to foreclosure, all deposits to his newly created TD account were being made by Mr. Farhat (through his wrestling company, Ultimate Wrestling Nation Inc.) or by Mr. Farhat’s relations, to cover the mortgage. The testimony of Ms.

Hussein at trial is that the client would enter a personal identifier number on a machine at the bank as part of the account opening process. If Mr. Whitford’s statements are true, then Mr. Farhat or someone on his behalf would have had to attend at the branch to enter the PIN number to complete the account opening process and access the account. [ 25 ] I accept Mr. Whitford’s testimony. I find that a bank account was opened under Mr. Whitford’s name at the TD branch, to be used by a third party (likely Mr. Farhat), and that Ms. Hussein was involved indirectly or directly in that process.

She either provided the bank card to Ms. Kaddoura, who provided it to the third party, or she provided the card to the third party herself. Either way, at the very least Ms. Hussein was again remiss in following important bank protocols. Internal Investigation [ 26 ] After the mortgage was funded, but before the mortgage went into default, irregularities in the Bank Representative’s files were identified and an internal review by TD’s Credit Quality & Fraud Group (“ CQFG ”) followed. The CQFG review suggested that Ms. Hussein’s files contained fraudulent documentation on at least nine mortgages.

All of the mortgage applications in question had been referred to her by the Real Estate Agent, at the time a realtor with Century 21. The evidence on the file suggested to CQFG the recruiting of individuals to act as straw buyers, and the similarities in the fraudulent documentation suggested staff complicity. [ 27 ] Anthony Yu, the branch manager, was made aware of issues with respect to the Bank Representative. He interviewed her and became aware that she was relying on a third party to obtain client information, in contravention of the KYC and other bank policies.

He advised Human Resources. [ 28 ] The matter was referred on to TD Corporate Security & Investigations, which issued a final report in April of 2008 (the 2008 Report ). The report author was senior investigator, Kevin Flood, who also testified at trial. The report included a review of nine mortgages handled by Ms. Hussein, all referred to her by the Real Estate Agent, and the following recorded admissions of Ms. Hussein:

i) to receiving all the source documentation indirectly from the Real Estate Agent instead of from the client; ii) only meeting the clients at the final signing of the mortgage documents, and iii) to not really reading the code of conduct even though having signed her annual attestation of the same. Ms. Hussein admitted to these facts at trial and acknowledged that she did not follow bank protocol. [ 29 ] The 2008 Report notes similarities in documentation among the nine mortgage files.

These similarities were identified at trial as common employment letters and down payment documentation, all of which were fraudulent. I note the Defendant’s employment letter came from a wrestling organization with a very distinctive logo on it. If common to the other files in question, this would be notable. Receiving nine such letters in a period of six to seven months (being how long the Bank Representative worked at the branch) all through Ms. Kaddoura would be notable. The report is silent on the false Notices of Assessment and when questioned on this, Mr. Flood could not comment.

His report was also silent on the missing signature card. Counsel for the Plaintiff admits that the scope of the investigation was very narrow, limited to a review of some documents (such as down-payment documents, employment letters, and possibly the offer to purchase), an internal review of Ms. Hussein’s TD bank accounts, and a discussion with her. [ 30 ] The report concluded that while the evidence did not prove Ms. Hussein was involved or complicit in a mortgage fraud scheme, the investigation showed that she had accepted mortgage referrals from the Real Estate Agent. Ms.

Hussein admitted she did not follow the proper procedures in completing the mortgage applications, including the “Know Your Client Policy” but trusted her referral source for that information. The report found that this resulted in the bank being exposed to a mortgage fraud scheme. The “control weakness” identified was “Employee Negligence” and the outcome was acceptance of her resignation. Despite concluding employee negligence, the report concurrently states that there was no evidence of a lack of due diligence being performed, which in light of the foregoing statements is baffling.

The report indicates that because Ms. Hussein completed the checklist and her manager also reviewed it, this was compliant in terms of the due diligence, even though much of the relevant information being relied up on in those checklists was obtained in a manner that contravened the bank’s policies, and the checklist was falsely marked with respect to meeting Mr. Whitford. This

interpretation was confirmed by Mr. Flood at trial. In other words, in the context of a CHMC insured mortgage, TD confirmed the loan documentation as acceptable due diligence despite it being aware that this documentation and the manner in which it was obtained fell below its stated standards, and notwithstanding the potential exposure to the risk of fraud. [ 31 ] At trial, Ms. Hussein revealed that she was not only a long-time family friend of the Real Estate Agent, but also a sister-in-law through marriage of their respective siblings.

She stated that this personal familial relationship with the Real Estate Agent was part of the reason why she had accepted direct referrals and documents from the Real Estate Agent in contravention of TD’s policies. Despite interviewing the Bank Representative, the TD Corporate Security investigator, Mr. Flood, was unaware of this familial connection during his investigation, and appeared to first be informed of it during the trial. It is not clear whether any questions of this nature were asked by the investigator to the Bank Representative in the course of the investigation.

Even under a narrow review, it is surprising this

fact was unknown to the investigator. Mr. Flood acknowledged in questioning that had he been aware of this relationship, it may have made him more suspicious, but he did not see a money trail. He admitted however, that had cash payments been made to Ms. Hussein, he would have no way to prove it. I note that he would also not have been aware of if funds were being deposited into non-TD accounts held by Ms. Hussein. [ 32 ] Prior to TD completing its investigation, imposing sanctions or taking further measures, the Bank Representative resigned, according to her, to take a position with another bank.

TD took no further action and treated her resignation as the conclusion of the matter. [ 33 ] Sometime after April 2008, when the 2008 Report was issued, TD sent the responsible lawyer, Mr. Blumell, instruction to confirm Mr. Whitford’s identification. Mr. Blumell contacted Mr. Whitford to confirm his identity in August 2008. As will be described later, this was the first time the lawyer met with Mr. Whitford, long after the mortgage documents were signed and mortgage proceeds were advanced. [ 34 ] As time passed in summer/fall 2008, Mr. Whitford’s relationship with Mr. Farhat began to unwind, and Mr.

Whitford began to become suspicious. After the mortgage went into default in early 2009, Mr. Whitford contacted the Calgary Police Fraud Unit, hired a private investigator, and met with the branch manager, Anthony Yu. Through Mr. Yu, he was introduced to Jack Busst, the Regional Security Manager for TD, and was then informed that the branch had an account open in his name. Mr. Whitford states Mr. Busst showed him images of Mr. Farhat and his wife accessing this account through an ATM. Mr. Whitford testified he did not make any transactions or access that account at all, nor did he have a client card to do so.

Neither Mr. Busst nor the private investigator testified at trial. [ 35 ] With the assistance of Mr. Busst and his own private investigator, Mr. Whitford discovered Ms. Kaddoura’s role in the mortgage scheme. Correspondence tendered at trial indicates that the inquiries of Mr. Whitford’s private investigator prompted an investigation by the Real Estate Council of Alberta (RECA). This led to a voluntary lifetime ban from the real estate industry for Ms.

Kaddoura because, according to RECA, she failed “to act honestly, participated in fraudulent or unlawful activities in connection with the provision of services or in any dealings, and failed to ensure that all trades in real estate and the relevant documentation meet legislative requirements”. [1] As a result of her voluntary lifetime ban, RECA ended any further conduct proceedings or disciplinary hearings. Legal Counsel [ 36 ] In addition to Mr. Whitford’s failure to read the documents and the compliance gaps of Ms.

Hussein, the lawyer’s handling of the mortgage documents completed the problematic chain of events. [ 37 ] Mr. Blumell acted on behalf of both the plaintiff and defendant, however, he did not meet with the Defendant at the time of the mortgage signing, notwithstanding that it was an express requirement in the Solicitor/Notary Instructions from TD. Mr. Blumell was required to confirm the mortgagor’s identity in accordance with the guidelines, which included that the mortgagor be physically present when presenting personal identification.

He instead entrusted all of the documents to the Real Estate Agent - who was not an employee of his – to obtain the required signatures and presumably explain the documents. Mr. Blumell’s explanation for doing so was not compelling. Although he said it was his practice to always meet with his clients, he stated he made an exception in this case because the Real Estate Agent she said it was an “urgent” situation, that Mr. Whitford worked out of town and would only be in town for a short time, and that he could not attend to sign the documents. This explanation runs counter to Mr.

Blumell’s own testimony that he was highly flexible in meeting clients – willing to meet day or night. Mr. Blumell’s hearsay statements regarding the Real Estate Agent’s explanation (accepted only to understand his state of mind) were contradicted by Mr. Whitford who confirmed that in 2007 he was not traveling out of town extensively for work or otherwise. [ 38 ] It is also clear from Mr. Blumell’s testimony that he did not understand his obligation as solicitor for TD was to meet with the client. Mr.

Blumell instead believed his obligation was only to “cause these documents to be signed, to sign them or cause them to be signed.” [ 39 ] As Mr. Blumell did not meet the defendant at the time of signing the mortgage, he clearly also provided the defendant no explanation as to any of the documents, including the consequences of the CMHC mortgage, or about the mortgage at all. When asked if the Real Estate Agent was qualified to explain the 28-page mortgage and associated documents, Mr. Blumell stated “Well, it doesn't take -- if a person looks at it and reads it, it is pretty obvious …”. Mr.

Blumell testified that he “never, ever, ever, ever” met one person in his whole legal career that did not understand (without him explaining it to them) that, if they signed a CMHC backed mortgage, they would be responsible for the default amount. This comment was made with some reference to a one-page document contained within the mortgage package confirming obligations of the borrower on default, which the borrower had to sign. I find Mr. Blumell’s statements difficult to accept. [ 40 ] Mr. Blumell acknowledged that he left it to the Real Estate Agent to act on behalf of his law firm with the client. Mr.

Blumell’s justification for his handling of this matter was to say that the clients could read the documents and if they had questions, they could call him (even though Mr. Whitford had never met him). Yet Mr. Blumell could not even be bothered to call Mr. Whitford to see if they could coordinate a time to meet before handing off the documents to the Real Estate Agent. He also stated that he sent the finalized documents to the purchased property, and if there were no issues, he assumed everything went fine.

It is unclear how he would correct an error if then notified since the mortgage would already be funded. [ 41 ] Another obligation of the solicitor, as specified in the Solicitor/Notary Instruction from TD, is that Mr. Blumell advise of unusual circumstances that may indicate of potential fraud, such as recent sales (e.g. within 3 to 6 months) of the same property at substantially lower values, or disbursements to parties other than the usual payees. Both of those circumstances existed in this case.

First, addressing a recent sale at substantially lower values, five or six months prior, there had been a prior sale of the property for $95,000 less, reflecting an increase in the home value of 18.3% in 5 or 6 months (more than 36% annually). [ 42 ] Second, regarding disbursements to non-typical third parties, the closing of this transaction conducted by Mr. Blumell

involved a payout from the proceeds to Mrs. S Farhat (believed to be Ali Farhat’s wife) of $56,000. Mrs. Farhat was not a vendor or purchaser or guarantor in this transaction – she was not a party at all, nor is there any indication she performed any services in respect of the payment. Submitted in evidence is an affidavit of execution (presumably attached to the vendor’s affidavit) sworn by the Real Estate Agent. In addition to the typical provisions contained in an affidavit of execution, Ms. Kaddoura attests in her affidavit of execution that the vendor told her that $56,000 was to be paid to Ms. S.

Farhat (Mr. Farhat’s wife). Mr. Blumell did nothing to warn TD about this unusual circumstance. [ 43 ] Mr. Whitford stated that he was not aware until much later that Mr. Blumell was his lawyer. While Mr. Blumell’s name appears on at least one of the many documents Mr. Whitford signed, Mr. Whitford states he did not receive copies of these documents until the legal proceedings commenced. As mentioned, Mr. Whitford first met Mr. Blumell in August 2008 (when TD required Mr. Blumell to confirm Mr. Whitford’s identification), and Mr. Whitford states he was still unclear as to Mr. Blumell’s role or who he represented.

He acknowledges he did not ask any questions of Mr. Blumell at that time, even though he was growing suspicious of what this transaction was all about, but that he did not get a good ‘vibe’ from Mr. Blumell or at this point the Real Estate Agent, who set up the meeting. During that August 2008 meeting, the Defendant did confirm his identity to Mr. Blumell, who recorded three pieces of identification to provide to the bank, two of which the Real Estate Agent had already previously provided to him. [ 44 ] At trial, Mr. Blumell testified he clearly remembered specific questions he asked and the answers Mr.

Whitford provided from this conversation roughly 11 years prior. His memory of events largely replicates verbatim the contents of the aforementioned 2009 letter sent in response to a request for documents from the defendant’s then counsel. Specifically, Mr. Blumell testified that during that meeting, Mr. Whitford stated he was living in the house and enjoying it, and that the mortgage payments were being met. The Defendant states he recalls confirming the mortgage payments were being made (which at the time, they were), but cannot recall making the other comments, and believed he had no reason to lie to Mr.

Blumell about living in the home. [ 45 ] TD initially added Mr. Blumell as a defendant. In January 2015, it entered discontinuance against him. Mr. Blumell did not pay any settlement amount. IV. Credibility [ 46 ] Before turning to the legal analysis, I comment on the credibility and reliability of the witnesses’ testimony as it is highly relevant to the fact findings in this case. [ 47 ] I found Mr. Whitford to be both credible and reliable. Elements tending to diminish Mr.

Whitford’s credibility include that in 2007, he signed certain mortgage documents, such as the one-page statutory declaration which included a statement that the property will be owner occupied, which – had he read – he would know was untrue. I note there was also a one-page acknowledgement which set out the responsibility of the mortgagor if the mortgage went into default. While Mr. Blumell commented on not expecting clients to read a 20 plus page mortgage document, he noted these two single-page documents at least were more easily worded. Yet it is doubtful that these pages were pointed out to Mr.

Whitford amongst the numerous other documents he signed. I acknowledge that Mr. Whitford stated he was provided a stack of documents by the Real Estate agent without the benefit of any explanation of legal obligations or legal advice. He admits to not having carefully reviewed any of the documents before signing them, relying instead on the general statements of Ms. Kaddoura and Mr. Farhat. He states this was a mistake he has regretted for the last decade. On balance, however, I find that Mr. Whitford was more careless and naïve than dishonest. [ 48 ] Elements assisting Mr.

Whitford’s credibility include that, other than his admission that it was his signature on any of the documents, no other witness testifying at trial could attest to him signing anything. The entirety of the Plaintiff’s case rests on Mr. Whitford’s admission. He was honest about this to his own detriment. He also admits to having received $5,000 to sign these documents, which - other than his admission - was not in evidence, as well as other facts not complimentary to his position, and accepts his role in this foolish decision. He provided details arising from his conversations from Mr.

Busst (such as an understanding of the software system of home valuations used for CMHC mortgage approvals, and about how he knew who was accessing the bank account that was opened in his name), which were corroborated by either Mr. Yu or Mr. Flood. He also provided email documentation and other evidence in support of his version of events, all lending to his credibility. Further, once he realized something was amiss, Mr. Whitford hired a private investigator, contacted the police and the bank manager, and subsequently met with the TD internal investigator. These are not the actions of someone “in on it”.

While Mr. Whitford indicated he needed to be talked into the transaction over a period of time, he adamantly denied knowledge of the fraud. I found his testimony to be credible, and I largely accept his version of events. Specifically, I find that he had no fraudulent intent when he entered into the mortgage transaction. [ 49 ] With respect to reliability, although Mr. Whitford’s memory was not always clear - as these events occurred over a decade ago, he advised when he could not recall and accepted the possibility of other facts when he could not specifically remember.

I find the facts he did remember to be generally reliable. [ 50 ] Ms. Hussein presented as fairly forthright, however, either her credibility or her common sense is suspect. In her favor is that she was honest about fact she did not ask for identification from mortgage applicants brought to her by Ms. Kaddoura when she ultimately met them, that she could not recall meeting Mr. Whitford, and that she had not read the corporate policies.

Weighing against her credibility is the fact that she previously signed off on bank documents, including the annual attestation of the policy review, as well as the credit application checklist confirming she had met with Mr. Whitford when she did not, and even included in the CMHC application details suggesting personal knowledge of Mr. Whitford’s circumstances. Even at trial, Ms.

Hussein appeared to still be unaware of the magnitude of her missteps, and seemed content that trusting a third party was a satisfactory reason to accept the fraudulent documents and otherwise fail to comply with the expected practices, significantly downplaying the consequence of such actions. Further, several of her key answers were led by counsel. Like most of the other witnesses, she had difficulty remembering events from that long ago, impacting the reliability of her testimony. [ 51 ] It is possible that Ms. Hussein was foolish and also got duped by Ms.

Kaddoura, and consequently failed to comply with office policies (which are there for the very purpose of fraud prevention). On the other hand, I am troubled that the TD internal investigator,

after formally interviewing Ms. Hussein, was unaware of Ms. Hussein’s personal relationship with Ms. Kaddoura, and that she did not disclose this fact. I am further troubled by the missing account signature card, which raises suspicions regarding how this account was opened by Ms. Hussein. I note that the discrepancy in the documentation (such as the dates not aligning and Mr. Whitford’s proposed bank account information being inconsistent with the stated income) also raise questions as to what Ms. Hussein could reasonably trust about the documents Ms. Kaddoura provided her. Even if Ms. Hussein was tricked by Ms.

Kaddoura, she showed a total disregard for the policies and requirements of her job. These requirements are in place so that the bank can decide whether or not to lend large sums of money to people such as Mr. Whitford. [ 52 ] Finally, I note that Ms. Hussein did not seem to be very upset with Ms. Kaddoura, which I found surprising. When asked if she felt that Ms. Kaddoura had manipulated her, she replied she was not sure but felt Ms. Kaddoura had lied to her and betrayed her trust. [ 53 ] The testimony of Mr. Yu and Mr.

Flood were credible; like the other witnesses, their testimony was as reliable as one could expect from events occurring over a decade ago. That said, their evidence did not assist the bank, as it suggested a lackadaisical adherence to security protocols and fraud prevention measures that went beyond the sole domain of Ms. Hussein. [ 54 ] It is regrettable that in a trial involving fraud, the least compelling testimony is that of the lawyer involved. I find Mr. Blumell’s testimony was mostly self-serving.

He was ready with an answer before the party questioning him even finished the question, often answering something different than what was asked. He at times appeared to be evading the question – addressing something different, avoiding any acknowledgment of how he may have fallen short in his obligations in this case. He clearly was intent on protecting himself from appearing to have made a misstep in his responsibilities, and in doing so, further provided evidence of how poorly he understood his obligations as counsel in this case. [ 55 ] I also found significant inconsistencies in Mr. Blumell’s statements.

In addition to those already mentioned earlier in this decision, when speaking to his willingness to rely on Ms. Kaddoura, at trial, Mr. Blumell stated that Ms. Kaddoura only did a few mortgages through his firm, then that he could not recall any such real estate deals he did with her; rather, Mr. Blumell thought she was trustworthy because she was a Commissioner for Oaths. Yet in a letter to Mr. Whitford’s counsel dated June 2009, early on in the legal proceedings, he wrote that both he and his assistant knew Ms.

Kaddoura quite well and that he entrusted her with the documents based on his past experience with her. I also find his ability to remember with certainty specific questions and answers from his first conversation with Mr. Whitford that occurred over a decade prior do not ring true. At no point did he suggest he was relying on the 2009 letter to refresh his memory, rather he stated that he clearly remembered this conversation. In short, I find Blummel’s testimony to be unconvincing. At any point where his evidence conflicts with that of Mr. Whitford’s, I prefer the latter’s.

I do not find that Blummel’s evidence is of a quality that it could satisfy this Court of any fact without corroboration. V. Analysis Debt Claim [ 56 ] The Plaintiff notes that it is basing its claim in contract and not in fraud. The Plaintiff states it need only establish that there was a contract, the contract was breached and damages resulted in order to make its breach of contract claim against the Defendant. The burden then shifts to the Defendant to prove that there is a reason that the agreement should not be enforced, or another defence applies.

The Plaintiff points to the mortgage documentation, which the Defendant has admitted to signing, pursuant to which $637,775 was advanced. The default in the payment of the mortgage led to the property’s foreclosure with a principal amount owing as of January 13, 2009 of $634,383.49, which accrued interest and other charges to the date of sale on February 6, 2012. Net of the sale proceeds, this left a shortfall of approximately $414,790.

Adding interest charges from that date, the Plaintiff claims a current shortfall in excess of $583,733.19 plus solicitor-client costs. [ 57 ] Although possible defences to enforcement of the contract are still to be addressed, the elements of breach of contract have been established on the facts. Despite this, however, the court considers that it has taken 10 years for the matter to come to trial. The parties had previously agreed to a litigation plan filed December 14, 2012, which would have had the parties applying to set the matter down for trial as early as June 28, 2013.

It is unclear what derailed this plan. There is some communication on file by Mr. Whitford suggesting delay on the part of the Plaintiff. Both parties now allege the other party delayed. TD dismissed Mr. Blumell as a defendant in May 2015 and then made a failed

summary judgment attempt that fall. This Court also notes that TD refused to provide its fraud investigation report originally requested during questioning in 2012, and did not provide Mr. Whitford the 2008 Report until September 2017. The Plaintiff applied for the matter to be then set down for trial, which was ordered in August of 2018. TD has not provided an explanation for the reasons for this length of the delay or the reason for the late disclosure of the 2008 Report. TD has also not explained why it took until 2012 for the property to be sold.

In light of these atypical circumstances (and subject to any other applicable defences), the plaintiff bears the burden of establishing this part of its claim and whether it sufficiently mitigated its losses, and it has not done so. As such, this court is reluctant to grant TD interest charges for the period beyond December 31, 2013.

General Defences to Debt Claim [ 58 ] In the past, straw buyers have typically relied on three main defences in a foreclosure action to escape liability: (1) that the mortgage contract is unenforceable due to illegality (including a defence of ex turpi causa ); (2) that lenders are in a better position to carry out due diligence and prevent fraud; and (3) that the defence of non est factum bars any action against the straw buyer: Jeffrey D Oliver, “Straw Borrower Mortgage Fraud and the BIA”

(2012) Ann Rev Insol L 273 at 276. [ 59 ] These defences have often been unsuccessful and, as TD posits, courts have not found in favor of allowing a straw buyer who participates in the mortgage fraud scheme to escape liability on these bases, citing Tran v Kerr , 2014 ABCA 350 [ Tran ]; see also MCAP Service Corporation v Molina-Tan , 2009 ABQB 472 [ Molina-Tan ]; MCAP Service Corporation v Halbersma , 2013 ABQB 185 ; and Isaacs v Royal Bank of Canada , 2010 ONSC 3527 . [ 60 ] Where, however, there is an indication of participation in the fraud or negligence on the part of the lender, the determination

of who bears the loss will be a complicated question, potentially rendering a mortgage contract unenforceable or otherwise allocatingsome or all of the liability to the lender. For example, in each of Kindrachuk v Belseck, 2012 ABQB 515, Scotia Mortgage Corporationv Aab, 2012 ABQB 464, CIBC Mortgages Inc v Lucas, 2012 ABQB 402, Royal Bank of Canada v Rahmani, 2013 ABQB 565, andFirst National Financial GP Corporation v Kulaga, 2012 ABQB 8, this Court was faced with straw buyer scenarios and in each case,the respective lenders applied for

summary judgment or

summary dismissal. In each of these cases, this Court found that there wassufficient evidence suggesting the negligence and/or possible involvement in the fraud by the lender, or of an employee or agent of thelender, to constitute a triable issue.

Summary judgment or

summary dismissal was denied. It appears that none of the cases ended upproceeding to trial.

Summary judgement in the present case was also denied on the basis that the circumstances suggested deceit on thepart of the bank employee and/or negligence on the part of the bank for a failure to do anything to prevent the fraud. Specifically, theMaster stated “TD argued that, if Ms. Hussein did anything inappropriate, it was outside the course of her employment, and therefore,TD was not responsible. I do not agree.” And he found “TD cannot purport to foist responsibility for the conduct of Ms. Hussein on thecustomer.” (Oral decision of Master Farrington dated September 24, 2015). [61] It is clear from these cases that courts have not granted

summary judgment in circumstances where the conduct of the lender’semployees potentially constitutes negligence or fraud, even in a lender-borrower context. As will be seen from the analysis that follows,the legal theories available in this circumstance may need to flex with the policy purpose to ensure a just result. [62] Before considering the available defences in the present case, I must address a preliminary matter regarding Mr. Whitford’spleadings. A. Pleadings [63] Rules 13.6 and 13.7 of the Alberta Rules of Court, Alta Reg 124/2010 [Rules] set out the requirements for pleadings.

Pursuantto rule 13.6(2), pleadings must state the facts on which a party relies, matters that defeat or raise a defence to a claim of another party,and remedies claimed. Pursuant to rule 13.6(3), a pleading must include a statement of any matter on which a party intends to rely thatmay take another party by surprise, including fraud, and illegality or invalidity of a contract. Further, pursuant to rule 13.7, a pleading hasto set out the particulars of fraud. [64] Here, Mr.

Whitford did not issue a counterclaim, and his statement of defence only partially set out the particulars of fraud,negligence, contribution, or illegality or invalidity of the mortgage contract. These deficiencies would typically prevent Mr. Whitfordfrom raising these defences; however, for the following reasons, I find I can consider at least some of these grounds. [65] A “wide

interpretation” should be given to the contents filed by self-represented litigants, provided the opposing side wassufficiently put on notice: Bruneau v Bruneau, [1993] AJ No 210 at para 14, 39 ACWS (3d). Such

interpretation of the contents mustbe within reason in the circumstances. Although Mr. Whitford had assistance from counsel when he filed his statement of defence in2009, the primary information that would have given rise to Mr. Whitford explicitly pleading fraud, negligence regarding the plaintiff,and/or invalidity of contract only came to light in 2017 upon receipt of the 2008 Report, long after Mr. Whitford became a self-represented litigant in 2015. As such, I am satisfied that I can examine Mr. Whitford’s pleadings and procedural conduct as a self-represented litigant. [66] Mr.

Whitford’s statement of defence broadly denies that he is liable for the mortgage deficiency. Specifically, it states thatMr. Whitford was induced to enter into the “mortgage arrangements” by statements made to him by the fraudsters, Mr. Farhat and Ms.Kaddoura (the Real Estate Agent). Mr. Whitford’s statement of defence also claims that TD had knowledge of the fact that Farhat wasthe true owner of the property from the beginning (presumably through the Bank Representative).

Further, it states that TD “acceptedfalse income information and other false information and documentation without verification or due diligence” and that TD “inconsultation with Farhat and Kaddoura, set up a bank account in the name of the Defendant for the purpose of deposits and makingmortgage payments”, and so “without the knowledge or consent of the Defendant and the Defendant did not conduct any accounttransactions with the Plaintiff”. [67] Applying a wide

interpretation to the contents of the statement of defence, it is clear that these pleadings set out negligence onbehalf of the Plaintiff. The pleadings further strongly infer, although do not explicitly plead, the Plaintiff’s knowledge of andparticipation in the fraud. The statement of defence also suggests invalidity of contract. While these pleadings are proffered as a defencefrom liability, I find that some of these claims, such as negligence are sufficient in the context to constitute a pleading of set-off as adefence in satisfaction of Rule 3.59.

Were they not, or had TD objected to the defence of set off, I would have permitted an amendmentto the pleadings to include set off at trial: R 3.65(4); Royal Bank of Canada v. Klip 'N Kurl Salon (Lynnwood) Ltd., 1 Alta LR (2d) 378, (QB) [Klip 'N Kurl] at para 75. [68] I do not find that this

interpretation of Mr. Whitford’s pleadings is too broad, although special consideration may need to begiven to the allegation of fraud and invalidity or illegality of contract given the rules pertaining to pleadings of this nature: rules 13.6 and13.7. Ultimately, rules 13.6 and 13.7 are in place to ensure fairness to the parties: Carroll v Purcee Industrial Controls Ltd, 2017 ABQB211 at para 62. These rules are also in place to prevent trial by surprise: HSBC Bank Canada v Lourenco, 2012 ABQB 648 at para 43.Based on the contents of Mr. Whitford’s statement of defence, in conjunction with the CQFG’s report, and Master Farrington’s findingson the

summary judgment application, it would not be unfair to TD for this Court to consider negligence. Although neither fraud nor orinvalidity of contract were expressly plead, even those claims are difficult to overlook given the context. As a large and sophisticatedentity, TD could not be surprised by these claims in these circumstances. It was clear by the

summary judgment application in 2015 thatMs. Hussein’s conduct and TD’s potential liability for the same matter were at issue, and by TD’s submissions at trial that the issue ofinvalidity of contract was a contemplated defence. In any event, I provided TD with an opportunity to submit additional writtensubmissions addressing each of the potential grounds. It submitted 46 pages of written argument and 60 additional authorities, all ofwhich I have considered. I find no violation of rules 13.6 or 13.7 and no unfairness to TD.

Defences [69] I turn now to whether any of the defences raised by Mr. Whitford bar recovery by TD, or alternatively, whether theyconstitute a basis for set-off, and if so, to what extent. B. The Doctrine of Ex Turpi Causa [70] A defence sometimes argued by straw buyers is that lenders should be barred from recovering on the mortgage under thedoctrine of ex turpi causa due to alleged involvement of the lender’s employee. i. The Parties Positions [71] A defence argument is that the doctrine of ex turpi causa should prevent TD from enforcing the mortgage in this case. Mr.Whitford alleges Ms.

Hussein was involved in the fraudulent scheme through various actions, including opening a bank account for aclient she did not meet, making false representations to her employer about her conduct on the file, making false representations to thebank and CMCH regarding Mr. Whitford, releasing a bank card to someone other than Mr. Whitford for his bank account, andcollaborating with Ms. Kaddoura to defraud the bank. [72] TD asserts that there is no evidence that TD Bank was a willing participant in the mortgage fraud scheme.

TD argues that thebank cannot simultaneously be an intentional participant in a fraudulent scheme and the intended victim. It argues that as Ms. Husseinwas not a directing mind of the corporation, her knowledge cannot be attributed to the corporation for the purposes of fraud. ii. General Principles [73] “The doctrine of ex turpi causa non oritur actio prevents a litigant from advancing a claim which depends, at its core, on anillegal act of the claimant”: Tran at para 27.

Its application in contract law is well established and “provokes little controversy”, Tran atpara 27, citing Hall v Hebert, (SCC), [1993] 2 SCR 159 [Hall]; its use in contract is “to prevent abuse and misuse ofthe judicial process”: Hall at para 8. A court will step in to prevent a plaintiff from recovering damages where the plaintiff was avoluntary participant in “the same unlawful scheme, plan or arrangement” which grounds their action: Canada Cement Lafarge vBritish Columbia Lightweight Aggegate Ltd, (SCC), [1983] 1 SCR 452 at 476.

The onus is on the defendant to provethe plaintiff engaged in the illegal or immoral activity. [74] Ex turpi causa has been raised in cases involving mortgage fraud and straw buyers in the past. As mentioned, the defence hasbeen raised successfully at the

summary judgment stage to prevent a lender from realising on a mortgage, where a court must beconvinced that there is no genuine issue for trial. [75] For example, in Royal Bank of Canada v Lee, 2012 ABQB 320, there was evidence to suggest that a bank employee helpedto perpetuate a mortgage fraud. The straw buyer had been introduced to the bank employee by the main fraudster, Mr. B, during ameeting in Mr. B’s car. It was clear from the circumstances that the bank employee and Mr. B were acquaintances. The straw buyersigned documents to apply for a mortgage in the car.

Later, the bank employee accepted documents for the mortgage application fromMr. B, rather than from the client (the straw buyer). There was also a fraudulent letter of employment on the file that the straw buyer didnot provide to the bank. [76] These facts suggested that the bank employee may have had knowledge of, and acquiesced to, the mortgage fraud. The Courtcited other case law for the proposition that if there is evidence a lender was involved some way in the fraud, the lender may havedifficulty enforcing the contract due to illegality, and that

summary judgment was not appropriate in such cases, at paras 23 – 28. [77] Other cases which similarly considered and rejected applications for

summary judgment against a straw buyer on the groundsof potential knowledge or participation by a bank employee include Scotia Mortgage Corporation v Aab, 2012 ABQB 464; CIBCMortgages Inc v Lucas, 2012 ABQB 402; and First National Financial GP Corp v Kulaga, 2012 ABQB 8. [78] I was not provided with any case law where ex turpi causa was applied at the trial level to absolve a straw buyer of liability.Many of the

summary judgment cases appear not to have proceeded to trial.

Alternatively, there are some cases where the doctrine wasraised at trial, but was rejected when there was no evidence of bank involvement in the fraud: Molina-Tan at para 13. [79] I must therefore look at cases where ex turpi causa has been applied in other contractual situations and determine whether itcould be applicable in the case at hand. [80] An older case from our Court of Appeal that provides helpful commentary on the ex turpi causa doctrine and theunenforceability of a contract is McDonald and McDonald v Fellows, Fellows Doherty Bros Realty Ltd and Wilkinson (1979), 1979ABCA 224 , 17 AR 330, 105 DLR (3d) 434.

The plaintiffs, the McDonalds, were prospective purchasers of a home from thedefendants, the Fellows, through the Fellows’ real estate agents, Doherty Bros Realty. Negotiations took place between the parties overthe weekend, with the offer to purchase signed by the McDonalds and the Fellows on a Sunday. [81] The McDonalds later sought to recover their deposit of $15,000 from the Fellows on the basis that a sale on Sunday was voidand unenforceable under the Lord’s Day Act and the Land Titles Act of the time.

The evidence suggested the reason for the McDonalds’change of heart was that they learned that major construction was to be done on an adjoining road.

[82] The Court examined the facts pertaining to the transaction and found that the agreement was made on a Sunday, and thus wasan illegal contract that neither party was obligated to perform. This was based on the principle that a transaction “that is tainted byillegality in which both parties are equally involved is beyond the pale of the law. No person can claim any right or remedy whatsoeverunder an illegal transaction in which he has participated.

Ex turpi cause nonoritur actio ...”, at para 20. [83] The Court explained that when this principle is applied, the result is generally that the gains or losses resulting from illegaltransactions remain where they have fallen, and there is no recovery of money paid, at paras 24-25. There are however two exceptions tothe rule. The first is where the parties are not “in pari delicto” (equally blameworthy), in which case the court may allow the lessblameworthy to recover what he transferred to the other.

The second exception is where the plaintiff repents before the contract isperformed, at para 25. [84] The Court found the first exception did not apply, as the purchasers and vendors were both in breach of the legislation. Thesecond exception did apply, as the plaintiffs attempted to withdraw from the contract before its completion.

Even though the plaintiffs’reason for withdrawal was not tied to the illegality of the Sunday signing, they were still entitled to rescind because the illegal purposehad not been substantially performed. [85] Another more recent case involving the ex turpi causa defence is Giustini v Workman, 2018 ABQB 1037. The plaintiffs inthe action were homeowners who rented out their home to the defendants, the Workmans. The parties then entered into an agreementwhereby the Workmans agreed to purchase the home in a transaction that would close a year later.

The Workmans could not get thefinancing they needed and did not close the sale. After they moved out, the plaintiffs sought damages from the Workmans for thedelayed sale. In the course of defending the action, the Worksmans discovered suspicious activity relating to the home ownership andtransaction. The Workmans applied for

summary dismissal, and asked the court not to enforce the purchase agreement because it waspart of a mortgage fraud scheme. [86] The Court agreed with the Workmans, finding that the plaintiffs were not the legal the owners of the home, which was ownedby the plaintiff husband’s custom home building company. The evidence showed that the plaintiffs had obtained a large mortgage topurchase the home from the company based on an inaccurate valuation of the home.

The plaintiffs then attempted to have the Workmansassume the existing mortgage by purchasing the home, but the Workmans ran into difficulties as they were told the property value wasless than the mortgage. [87] The Court agreed that the transaction was tainted by mortgage fraud and tax evasion.

The plaintiffs had orchestrated a seriesof transactions to perpetrate a fraud on the lender, who would eventually get paid through the sale to the defendants, all while removingover a million dollars in funds from the husband’s company without a tax consequence. [88] The Court noted that when a transaction is connected “with an illegal transaction in which the plaintiff was a party, and hecannot succeed without relying on the illegal transaction, the action must fail”, at para 50.

In doing so, the Court relied on the followingpassage cited from Alexander v Rayson, [1936] 1 KB 169 in Zimmerman v Letkeman, (SCC), [1978] 1 SCR 1097(1977): [W]here the intention of both or one of the parties is that the object shall be used by the purchaser or hirer for an unlawful purpose. Insuch a case any party to the agreement who had the unlawful intention is precluded from suing upon it.

Ex turpi causa non oritur actio.The action does not lie because the Court will not lend its help to such a plaintiff. [89] It concluded that Zimmerman was the guiding case on the facts and the ex turpi causa doctrine was in play. The Courtgranted

summary judgment and dismissed the plaintiffs’ claim against the Workmans, concluding that a trial judge would exercise his orher discretion not to enforce the contract, at paras 78-79. [90] A final case of interest involved a challenge to the legality of a mortgage itself: Berne Development Ltd v Haviland et al(1983), (ON SC), 40 OR (2d) 238 (Ont HCJ) [“Berne”]. The defendants, the Havilands, purchased their first home byobtaining a first and second mortgage on a townhome in a townhouse development. The first mortgage was obtained by assuming amortgage from the home builder that was granted by Canada Trust.

The second mortgage was obtained from the developer, the plaintiffin the action, who was involved in the townhouse development. At the time of trial, the first mortgage was in good standing but thesecond mortgage was in default. The plaintiff sought payment on the covenant in the second mortgage. [91] The Havilands asserted the court should not assist the plaintiff due to questionable circumstances surrounding the obtaining ofthe mortgage.

They submitted that plaintiff knowingly deceived Canada Trust and CHMC by providing second mortgages to themselvesand others in the townhouse development. [92] The Court accepted evidence that when the Havilands first inquired about the townhome, and expressed concern that theycould not afford it, an agent of the plaintiff offered to provide a second mortgage on the home with no interest payable for two years. TheHavilands decided they could afford the townhome and went ahead with the purchase.

When the parties reached the documentationstate, the agreement of purchase and sale did not refer to the second mortgage, nor did the forms that were sent to the CHMC. The termsof the second mortgage were set out in a separate agreement. The Havilands were told that if they were contacted by Canada Trust, theyshould say that the balance owing after the first mortgage was being paid in cash and not disclose the second mortgage. The Havilandsexpressed that they would not do so.

In the end, no inquiries were made to the Havilands and the transaction proceeded with a first andsecond mortgage. [93] The evidence at trial showed that of the 160 townhomes sold, 149 of the purchasers received second mortgages from theplaintiff. This fact was hidden from Canada Trust and from the forms submitted to CMHC. Further, the second mortgages were notregistered on title until at least a year following the purchase by the owners.

The Court found that these actions were deliberate and weredone to deceive Canada Trust into believing that the equity of the proposed purchasers, including the Havilands, was greater than it was. [94] The Court concluded that this deception fell into the type of circumstance where a court will not assist a party to enforce anillegal contract, at pg 6:

To return to the main stream, I have concluded that the failure to advise Canada Trust of the Berne mortgage was deliberate and done in order to deceive Canada Trust. It is well established that the court will not assist a party to enforce an illegal contract. ... [ 95 ] However, on the facts of the case, the Court found that the obligation to disclose the second mortgage fell on the Havilands as well.

Further, the Court noted that if it did not assist the plaintiff to enforce the mortgage, the Havilands would be unjustly enriched, at pg 7: ...I have come to the conclusion that the court should consider not lending assistance to Berne in enforcing its mortgage against the defendants. The foundation of this conclusion is public policy.

However, if the court refuses to enforce the mortgage and dismisses the action, the parties will be left where they stand and the defendants will be unjustly enriched. [ 96 ] The Court then considered whether an exception to the ex turpi causa defence could apply, but found it did not. It held that the plaintiff’s fault was at least as great, if not greater than that of the Havilands.

Though the Court did not wish to create an additional exception, it noted that case law in recent years has recognized the desirability of balancing the need to protect public policy by not enforcing illegal agreements with the need to avoid unjust enrichment. Balancing these two concepts will depend on each case and the extent of the illegality and the unjust enrichment. [ 97 ] The Court concluded that the appropriate balance in this case could be achieved by having the plaintiff recover the principal amount of the mortgage, but be denied the recovery of interest under the mortgage.

The plaintiff was also not entitled to the costs of its claim. The Court found that the Havilands’ had to accept some responsibility, as they were not entirely blameless, and denied them costs as well. iii. Application [ 98 ] With this background in place, this Court considers whether ex turpi causa should be applied in this case. First, this will involve consideration of whether Ms. Hussein was a participant in the mortgage fraud scheme, and second whether the relative blameworthiness of her conduct is more culpable than that of Mr. Whitford.

If it is, provided her actions can be attributed to TD , the doctrine applies such that the mortgage contract is not enforced by the court; instead, the loss lies where it is. In some cases, however, a court may conduct a further analysis of the competing interests between enforcing an illegal or immoral contract and allowing an unjust enrichment, and in order to avoid inequity, the court may decide that despite the application of the ex turpi causa doctrine, it would be unjust to allow the unjust enrichment, as the court did in Berne . [ 99 ] In looking at Ms.

Hussein’s conduct, the issue is “whether the [person’s] conduct discloses an immoral or illegal act that is sufficient to trigger the ex turpi causa doctrine” Tran at para 31 . The state of mind and moral culpability of each of Ms. Hussein and Mr. Whitford must be considered in order to determine into which of the following four categories they each fall: (

a) she/he was intentionally fraudulent, in that she intended to deceive the bank; (

b) while not intentionally fraudulent, she/he was wilfully blind, in that she/he knew there was something suspicious going on but did not inquire because she/he did not want to know the likely answer. Legally this is the equivalent of fraud; (

c) she/he was negligent, in that the circumstance should have raised concern, and she did not respond to the circumstances as would a reasonable person; (

d) she/he was completely innocent, and was a mere victim or dupe. [The above adopts and paraphrases the criteria in Tran at para 32 as they apply to this case.] [ 100 ] A finding of either fraud or willful blindness on the part of the party seeking to enforce the contract triggers the application of the ex turpi causa doctrine: Tran at para 33 . If Ms. Hussein’s conduct falls into one of these culpable categories, the question is then whether it is at least equally blameworthy to Mr. Whitford’s. [ 101 ] The distinction of whether Ms.

Hussein’s conduct was fraudulent or willfully blind is not material in this case.

The moral equivalent of proof of knowledge of fraud is willful blindness or recklessness: 1169822 Ontario Limited v The Toronto-Dominion Bank , 2018 ONSC 1631 at para 2 ; Village on the Park (Re) , 2009 ABQB 497 at para 56 ; Bartin Pipe & Piling Supply Ltd v Western Environment of Oklahoma , 2004 ABCA 52 at para 28 [ Bartin Pipe ]. [ 102 ] Willful blindness arises “where a person who has become aware of the need for some inquiry declines to make the inquiry because he does not wish to know the truth”: R v Williams , 2003 SCC 41 at para 27 .

This definition of willful blindness was adopted in the civil context in Bartin Pipe . [ 103 ] In Belmont Finance Corp v Williams Furniture Ltd (1977), [1979] 1 All ER 118 (CA) , the Court at 130 stated that if an individual, wilfully shuts his eyes to dishonesty, or wilfully or recklessly fails to make such enquiries as an honest and reasonable man would make, he may be found to have involved himself in the fraudulent character of the design, or at any rate to be disentitled to rely on lack of actual knowledge of the design as a defence. [ 104 ] TD argued that there is no evidence of willful blindness or recklessness because Ms.

Hussein was simply naïve and that her actions were due to her trusting nature. I disagree. [ 105 ] A person’s naivety and trusting nature does not preclude a finding of wilful blindness. This Court cannot ignore the degree to which she varied from stated practices and policies in this case. Nor can it ignore that Ms. Hussein accepted fraudulent documents from

the Real Estate Agent on nine different occasions, without confirming any of it with the prospective borrowers. TD’s own evidence suggested staff complicity and involved an internal (albeit limited) investigation. [ 106 ] The following conduct of Ms. Hussein convinces me that, if not intentionally fraudulent, she falls into the category of a person who was willfully blind: (

a) She received information pertaining to a real estate transaction and mortgage application from the Real Estate Agent, Ms. Kaddoura, rather than meeting and receiving this documentation from her new client, Mr. Whitford; (

b) She did not meet Mr. Whitford at any time, and apparently did not inquire from Ms. Kaddoura as to why such an arrangement was necessary, despite being aware of the “Know Your Client” requirement of the bank; (

c) She allowed Ms. Kaddoura to sign the mortgage application with Mr. Whitford, straying from the regular practice for mortgage applications as per the bank’s policy and Code of Conduct; (

d) She either did not read, or overlooked the fact, that on the financial documentation she received the amounts shown in Mr. Whitford’s Notice of Assessment (which were falsified) appear highly inflated in comparison to his bank account statements (which were not falsified). (

e) In the mortgage application, she stated that Mr. Whitford had excellent job stability and income (of in excess of $147,000 per annum), while also stating that he was looking to purchase a house with 100% financing. These statements raise suspicion. (

f) She confirmed to TD and to CMHC through the application checklist that she had met with Mr. Whitford, when she knew she had not. Without ever having met him, Ms. Hussein wrote comments inaccurately suggesting a personal exchange with the borrower in support of the mortgage application, such as that Mr. Whitford lived in a fully furnished apartment and wanted to better his circumstances by buying a house. (

g) She did not meet with Mr. Whitford to sign the mortgage authorization, and if someone other than Mr. Whitford came in the branch to sign, she did not take any steps to confirm that person’s identity; (

h) She processed nine mortgages in a similar fashion, where she accepted information from Ms. Kaddoura rather than through a meeting with a client. The information she received was suspicious as it included common letters of employment and down payment documentation; and (

i) She opened a bank account for Mr. Whitford without meeting him, or requiring his signature on the signature card (or the witnessing of same by two bank employees) and participated in transferring his bank card to a person other than Mr. Whitford, and likely to one of the main fraudsters in the case (Ms. Kaddoura or Mr. Farhat) who entered the personal identification number (PIN) at the branch. [ 107 ] While some may argue the evidence in this case supports a finding that Ms. Hussein was intentionally fraudulent, at the very least, I find that this conduct amounts to willful blindness on Ms.

Hussein’s part to the mortgage fraud scheme. Ms. Hussein’s significant deviations from the expected conduct and standard practices in processing the mortgage application and opening the bank account, as well as other anomalies in the mortgage application documentation, ought to have alerted her to the risk of fraud in this case, but she proceeded with finalizing the mortgage for TD anyway. Ms. Hussein came to TD having previously worked at another bank and was not new or naïve to banking protocols and her role. Although these defects ought to have at least raised her suspicion, I find Ms.

Hussein chose not to ask questions as she did not want to know the answer. I therefore conclude that her conduct discloses an immoral or illegal act that is sufficient to trigger the ex turpi causa doctrine: Tran at para 31 . [ 108 ] I must also consider the conduct of Mr. Whitford to determine whether the “ in pari delicto ” exception applies so that TD could still enforce the contract. Under that exception, the court may allow the less blameworthy party to recover what he transferred to the other. [ 109 ] I do not find that exemption applies in TD’s favor here. Unlike Ms.

Hussein, who was subject to professional responsibilities and familiar with the mortgage process, Mr. Whitford was unfamiliar with the process and inexperienced in financial matters of this nature. His failure to read the legal documents or to have the opportunity to first speak to a lawyer or meet the banker in person should have raised concern, and he did not respond to the circumstances as would a reasonable person. One view of Mr.

Whitford’s conduct could place him in the third “state of mind” category of negligence, much like the straw buyer in Tran , although there are some factual distinctions in these two cases. [ 110 ] Another view, however, is that his conduct goes beyond negligence. Mr. Whitford did not read any of the documents and did not ask any questions.

Given the nature of these agreements, by choosing to sign documents without reading them and instead trusting the representations of the realtor and his employer for an explanation of the contents, his conduct could demonstrate wilful blindness. [ 111 ] I am aware that many people who sign mortgage documents do not read the whole document and instead rely upon their lawyer to summarize and review the documents on their behalf, which conduct would not normally be considered either wilfully blind or negligent. In this case, however, the lawyer did not meet with Mr. Whitford (although Mr.

Blumell was obligated to do so). Instead Mr. Whitford relied on the representations of Mr. Farhat and Ms. Kaddoura. While Mr. Whitford had some uncertainty regarding Mr. Farhat, he was aware that Mr. Farhat had done many real estate deals and believed he was successful at them; he also did not have a reason to be suspicious of Ms. Kaddoura. This was seemingly the same level of “trust” the lawyer Mr. Blumell bestowed upon Ms. Kaddoura in having her, rather than one of his own staff, sign the mortgage documents with the client. [ 112 ] Even had I found that Mr.

Whitford’s conduct amounts to wilful blindness instead of negligence, in light of all of these circumstances, given the professional responsibilities resting on a banker and the extent to which Ms. Hussein turned a blind eye to numerous red flags in the course of carrying out the business of her employer, I nonetheless find Ms. Hussein’s moral conduct was far

more blameworthy than that of Mr. Whitford’s. iv. Vicarious Liability [113] The next step in the analysis is to determine whether TD should be held vicariously liable for Ms. Hussein’s actions. TD arguesthat it should not. [114] The law is that a principal is vicariously liable for the “deceitful conduct of its agent committed during the course of its employment”: Village Park at para 55, citing L Klar, Tort Law, 4th ed (Toronto: Thomson Carswell, 2008) at 677 [Klar] at 673. InSheppard Publishing Co v Press Publishing Co (1905), 10 OLR 243 (CA), the Court at 250-251, citing Barwick v English Joint StockBank,

(1867) LR 2 Ex 259 stated, […] But with respect to the question, whether a principal is answerable for the act of his agent in the course of his master's business, andfor his master's benefit, no sensible distinction can be drawn between the case of fraud and the case of any other wrong. The general ruleis, that the master is answerable for every such wrong of the servant or agent as is committed in the course of the service and for themaster's benefit, though no express command or privity of the master be proved… [I]t may be said, as it was said here, that the masterhas not authorized the act.

It is true, he has not authorized the particular act, but he has put the agent in his place to do the class of acts,and he must be answerable for the manner in which the agent has conducted himself in doing the business which it was the act of hismaster to place him in. [115] An employer may be vicariously liable for the negligent or fraudulent acts committed by its employees, in the course ofemployment: with respect to fraudulent acts see e.g.

Lepine v Sherwood Park Dodge Chrysler Jeep Ltd, 2018 ABPC 12; Tarakanov vMortgage Intelligence Inc, 2015 QCCQ 11713, aff’d 2017 QCCA 726; and Pallotta v Cengarle, Court file CV-16-56337 (February 27,2020, unreported decision from ONSC); and with respect to negligent acts, see e.g.

Goulet v Canadian Northern Ontario Railway(1916), 10 OWN 271 (CA); Sickel Estate v Gordy, 2008 SKCA 100; R v Crown Diamond Paint Co, (FCA), [1983] 1FC 837 (CA) at para 16, citing Canadian Pacific Railway Company v Lockhart, (UK JCPC), [1942] AC 591 (PC) at599-600: “…A master… is liable even for acts which he has not authorized, provided they are so connected with acts which he hasauthorized that they may rightly be regarded as modes — although improper modes — of doing them.

In other words, a master isresponsible not merely for what he authorizes his servant to do, but also for the way in which he does it…”. [116] The Supreme Court of Canada in Bazley v Curry, (SCC), [1999] 2 SCR 534 at 559-560 [Bazley] set out a listof questions to aid courts to determine whether an employer can be found vicariously liable,

(1) Should liability lie against the employer?

(2) Is the wrongful act sufficiently related to the conduct authorized by the employer, or in other words, the risk created by theemployer?

(3) In determining the sufficiency of this connection #2, the court may consider the following factors: (

a) The opportunity that the enterprise afforded the employee to abuse his/her power. (

b) The extent to which the wrongful act may have furthered the employer’s aims. (

c) The extent to which the wrongful act was related to friction, confrontation, or intimacy inherent in the employer’s enterprise. (

d) The extent of power conferred on the employee in relation to the victim. (

e) The vulnerability of potential victims to wrongful exercise of the employee’s power. [117] Applying these considerations, TD has admitted that the Bank Representative was undoubtedly acting in the course of heremployment in receiving and processing the mortgage application, and opening a bank account. It also admitted that her conduct wassufficiently related to the conduct authorized by the employer. [118] TD has also admitted that she was not the person who ultimately approved the mortgage.

This means that TD was exerting anelement of control over her conduct and she was being supervised, although as is evident, the effectiveness of this control is suspect inthe present case, particularly in light of the number of mortgages she processed in this manner, and the ease with which she did so. [119] I find that there was a lack of meaningful oversight to ensure that Ms. Hussein followed bank policies: Pallotta. This affordedMs. Hussein ample opportunity to misuse her power when processing mortgages or opening bank accounts: Tarakanov at para 43; RoyalBank of Canada v Levy, 2011 ABQB 700 at para 14.

She was the only person who received information on Mr. Whitford’s behalf forprocessing his mortgage and bank acc

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