2022 QCCA 337, 2022 QCCA 337

Unofficial English Translation of the Judgment of the Court Stamir Investments Inc. c. Kurstak 2022 QCCA 337 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-028902-203 (500-17-098802-179) DATE: March 11, 2022 CORAM: THE HONOURABLE MARIE-JOSÉE HOGUE, J.A. LUCIE FOURNIER, J.A. BENOÎT MOORE, J.A. STAMIR INVESTMENTS INC. 9026-5430 QUÉBEC INC. APPELLANTS - Impleaded parties v.

CHRISTINE GORSKA KURSTAK RESPONDENT – Plaintiff and STAMATIS ELEFTHERIOU OFFICIER DE LA PUBLICITÉ DES DROITS DE LA CIRCONSCRIPTION FONCIÈRE DE MONTRÉAL IMPLEADED PARTIES – Impleaded parties and GERACIMOS NICOLAIDIS IMPLEADED PARTY – Defendant JUDGMENT [ 1 ] The appellants appeal from a judgment declaring null and void a hypothec and ordering that it be cancelled along with a prior notice of the exercise of a hypothecary right against the respondent’s immovable. [ 2 ] For the reasons of Moore, J.A., with which Hogue and Fournier, JJ.A. agree, THE COURT: [ 3 ] DISMISSES the appeal, with legal costs.

MARIE-JOSÉE HOGUE, J.A. LUCIE FOURNIER, J.A. BENOÎT MOORE, J.A. Mtre Carmine Mercadante MSBA AVOCATS For the appellants

Mtre François Richard Mtre Manuel Videira VIDEIRA, RICHARD, AVOCATS For the respondent Mtre Mireille Brosseau COLAS MOREIRA KAZANDJIAN ZIKOVSKY For the impleaded party Stamatis Eleftheriou Date of hearing: October 27, 2021 REASONS OF MOORE, J.A. [ 4 ] The appellants appeal from a judgment of the Superior Court, District of Montreal, rendered on March 25, 2020, by the Honourable David R. Collier [1] declaring null and void a hypothec and ordering that it be cancelled along with a prior notice of the exercise of a hypothecary right against the respondent’s immovable.

I- BACKGROUND [ 5 ] This case stems from a real estate fraud that resulted in several criminal convictions. [ 6 ] On May 2, 2017, the impleaded party Geracimos Nicolaidis (“Nicolaidis”) purchased the immovable located at ..., Outremont.

This transaction was conducted without the knowledge of the respondent, Christine Gorska Kurstak, the true owner of the immovable, whose identity as well as that of her late husband had been stolen. [ 7 ] On April 21, 2017, prior to the sale, the appellants Stamir Investments Inc. and 9026-5430 Québec Inc. granted Nicolaidis a loan of $600,000, which was secured by a first ranking hypothec published in the Land Register on April 24, 2017.

The impleaded party Mtre Stamatis Eleftheriou (“Elftheriou”) is the notary who executed these acts. [ 8 ] The respondent discovered the fraud after the land surveyor who had come to take some readings left a note on the immovable’s door. On May 23, 2017, the respondent instituted legal proceedings to have the deeds of sale and hypothec annulled. On January 23, 2018, judgment was rendered declaring the deed of sale null and void and ordering the cancellation of its entry in the Land Register. That judgment is now res judicata .

This dispute concerns solely the hypothec. [ 9 ] On June 5, 2018, the appellants in turn instituted, in a separate file, an action against the fraudsters and in civil liability against notary Elftheriou. That action is still pending before the Superior Court. [ 10 ] In anticipation of the hearing before the Superior Court, the parties filed a joint list of admissions. While the case was under advisement, the appellants served the respondent with prior notice of the exercise of a hypothecary right to have the immovable sold under judicial authority. They published the notice in the Land Register.

They then undertook not to exercise the right until final judgment.

Due to that prior notice, the respondent amended her pleadings to ask that it be cancelled. [ 11 ] While still under advisement, the trial judge contacted the parties to ask for particulars on the following two admissions: [ translation ] Admission 1 It is generally admitted that the sale of the immovable at 1334 St-Viateur in Montreal was part of a real estate fraud orchestrated by several individuals, the whole unbeknownst to the plaintiff, who was the only true owner of the immovable because her husband Édouard Kurstak was deceased as at the date of the fraudulent sale, even though the fraudsters made it look as if he was a signatory to the fraudulent sale.

It is also generally admitted that the fraudsters usurped the plaintiff’s identity, presented themselves at the notary’s office as the sellers by identifying themselves as Christine Gorska Kurstak and her husband Édouard Kurstak, and providing false identifications to the notary executing the sale (Exhibit P-17). The presence of Christine Gorska Kurstak’s fake husband (already dead on the day of the fraudulent sale - Exhibit P-6) was orchestrated by the fraudsters. The defendant in this case, Geracimos Nicolaidis, is the buyer appearing on the deed of sale, Exhibit P-5, and he never filed an answer in this case.

After purchasing the immovable from the fake Christine Gorska Kurstak and the fake Édouard Kurstak (intervenor in the deed of sale), Mr. Nicolaidis granted the impleaded parties Stamir Investments Inc. and 9026-5430 Québec Inc. a first ranking hypothec over the immovable of the plaintiff, the only true owner.

Admission 14 For the purposes of this hearing, the plaintiff has no evidence to adduce of bad faith by the impleaded parties Stamir Investments Inc. and 9026-5430 Québec Inc. or by notary Mtre Stanlatis Eleftheriou. It is admitted that the hypothec, Exhibit P-4, was based on a notarized deed of sale that had every appearance of being valid because it had been published in the Land Register and was certified by a notary, Mtre Stamatis Eleftheriou. Said deed of sale was later revealed to be a forgery and an integral part of the real estate fraud. [Emphasis added.] II- JUDGMENT UNDER APPEAL [ 12 ] The trial judge concluded that

article 1707 of the Civil Code of Québec , whose purpose is to protect third persons of good faith (here, the appellants) from the effects of

an act’s nullity, applies to this case. This means that the appellants’ hypothec, to the extent they are in good faith, may be set up against the respondent, even though this same hypothec was granted by a person who, in reality, did not have the capacity to do so. [ 13 ] For the judge, under

article 1707 C.C.Q. it was up to the appellants to establish their good faith, which means that not only were they ignorant of the fraud or the fact that the grantor did not own the property, but also that they behaved diligently. [ 14 ] Applying these principles to the facts of the case, the judge found that the appellants had not been diligent and did not take reasonable steps to confirm the validity of the rights they were acquiring.

In support of this conclusion, he noted the following facts. [ 15 ] First, the appellants’ representative, Claudio Stabile (“Stabile”) essentially relied on the hypothecary broker, Nick Tzaferis, whom he did not know, other than that he had been at school with his son. He also did not know the buyer, whose identity changed a few days before the hypothecary deed was signed, without any reasonable explanation. [ 16 ] The sale process also raised doubts in the judge’s mind.

The offer to purchase was clearly incomplete and the terms and conditions for payment of the sale price, in particular the balance of $390,000 payable to the seller over three years, were inconsistent with the reasons alleged for purchasing the immovable, which was to flip it in the short term. Furthermore, the hypothecary broker insisted on using his own notary, whom the appellants did not know. Stabile was alone when the hypothecary documents were signed, he never met the buyer Nicolaidis, and the certificate of localization required in the promise to purchase was established only after the sale.

Last, the appellants transferred the money without the title insurance certificate, despite having insisted on receiving it – and for good reason – since it was refused. [ 17 ] For these reasons, the judge concluded that the appellants were negligent and, in the circumstances, could not be characterized as “a third person in good faith” pursuant to

article 1707 C.C.Q. Consequently, the hypothec was null. [ 18 ] The judge then dealt with admissions (1) and (14) made by the parties. He found that the first admission was contrary to the facts because, according to that admission, the appellants obtained the hypothecary right in the immovable after it was purchased by Nicolaidis, which is false. The judge therefore declared that he was not bound by that admission. [ 19 ] The judge then found that admission (14), stating that the hypothecary deed was based on a notarized deed of sale in every appearance valid, was ambiguous.

According to the judge, it was difficult to interpret what the parties wanted to say because the hypothecary deed was prior to the deed of sale. What is certain, he wrote, is that “...the admission does not state that Mr Stabile relied upon Mr Nicolidis' apparent title in the land register when agreeing to a mortgage loan”. [2] III - PARTIES’ ARGUMENTS [ 20 ] The appellants first argue that the judge contravened

article 2852 C.C.Q. by modifying the judicial admissions agreed to by the parties. They claim that because these admissions are clear, unambiguous, and unequivocal, the judge had to assume that all the parties had been defrauded. Next, the appellants argue that the judge ruled ultra petita by determining the issue of their good faith in the absence of evidence in the record. Last, they submit that the judge erred in law on the application of

article 1707 C.C.Q. because it was up to the respondent to establish that the appellants were not in good faith. Not only did she fail to do so but, on the contrary, she admitted the appellants’ good faith. [ 21 ] The respondent argues that the judge did not modify the admissions, but merely did not feel bound by them insofar as they were contrary to the chronology of facts. She also submits that she never admitted that the appellants were in good faith and that the judge’s analysis of the criterion of objective good faith is free of error. Last, the respondent reiterated that, even though she was successful under

article 1707 C.C.Q., that provision should not have applied in this case. Because the sale was annulled, the buyer never owned the property and the hypothec should be cancelled under articles 2661 and 2681 C.C.Q. At the Court’s invitation, she also asserted that

article 2670 C.C.Q., which applies in this case, leads to the same outcome. [ 22 ] The impleaded party Eleftheriou essentially raises the same arguments as the respondent.

IV - ANALYSIS [ 23 ] The question raised in this appeal is well defined: What happens to a hypothec granted when the grantor’s “title” was acquired from someone who stole the identity of the true owner, the respondent in this case? The issue is to determine who should bear the cost of this fraud: the true owner whose property was encumbered by a hypothec without her knowledge, or the hypothecary creditor, who may have relied, in good faith, on the work of the officiating notary?

Although the question may appear simple, it is relatively unexplored and the answer will affect certain types of hypothecary financing. [ 24 ] There are essentially two possible approaches to solving this problem. The first is to consider that the hypothec exists and to submit its survival to the rules on the restitution of prestations, more specifically

article 1707 C.C.Q., as the trial judge did. Under this approach, either the owner or the hypothecary creditor, depending on whether the latter was in good faith or not, will bear the loss arising from the fraud. The second approach is to decide that the hypothec, which was granted over property that the grantor never owned, is without effect, could never encumber the property, and must therefore be cancelled. [ 25 ] For the reasons below, I find that the second approach applies in this case. Here is why. [ 26 ] First, I reject the respondent’s argument that the doctrine of accessory right and

article 2661 C.C.Q. apply here: because the sale was null, the hypothec was equally null. Even though it is true that the hypothec was granted as part of the sale of the immovable, it is not an accessory to the sale of the immovable but to the loan granted by the appellants to Nicolaidis. [3] [ 27 ] The solution is found instead in the principles governing the hypothec on the property of another. [ 28 ]

Article 2681 C.C.Q. states that a conventional hypothec may be granted only by a person having the capacity to alienate the property hypothecated. This principle already existed in the former Civil Code [4] and was the basis for annulling a hypothec on the property of another, [5] subject to perfection of the grantor’s title under the former

article 2043 C.C.L.C. [6] [ 29 ] When the Civil Code of Québec was enacted, the doctrine acknowledged that

article 2670 C.C.Q. amended the applicable law by expressly permitting hypothecs on the property of another or on future property and by delaying its effect “until the grantor acquires title to the hypothecated right”. [7] As Louis Payette noted and as this Court stated in Anglo Pacific , [8] a hypothec on the right of another is not null because, [ translation ] “if it were, it would be difficult to explain how it began to affect the property from the day that the grantor acquired it or how it acquires rank on the movable property affected, upon its registration, although it was registered prior to the acquisition (art. 2954 C.C.Q.)”. [9] Except where the grantor subsequently becomes the owner, a hypothec on the property of another can therefore never take effect and does not charge the property, even if published . [10] [ 30 ]

Article 2670 C.C.Q. therefore tempers

article 2681 C.C.Q. – it is not an exception – made necessary by the practical needs of the real estate market, to avoid adverse registrations and ensure that the creditor has the rank granted before the loan amount is disbursed according to the terms of the loan. [ 31 ] This is indeed the scenario in this case because the hypothec was published even before the “sale” of the immovable. On this point, the judge did not err in concluding as such despite the parties’ admission.

Rather, the judge accepted the documentary evidence and the dates of publication of the deeds of sale and of hypothec that appeared on the exhibits filed by consent of the parties and the Land Register. [ 32 ] According to the rule under

article 2670 C.C.Q., the Court must therefore determine whether and when Nicolaidis became the owner of the immovable. [ 33 ] In accordance with the civil law tradition, the right of ownership is transferred upon the formation of the contract of sale, that is to say, upon the exchange of consents. [11] When it involves immovable property, the only effect of publishing the sale in the Land Register is that the title transferred may be set up against third parties. [12] The publication of title is not what would have made Nicolaidis the owner, but the contract of sale itself. However, was there a contract? [ 34 ] From the perspective of the rules on the sale of property of another and of

article 1713 C.C.Q., it is possible to a priori argue that there was in fact a contract and that it “may be declared null”. The hypothec would then have taken effect according to

article 2670 C.C.Q., the prestations should be restored, and

article 1707 C.C.Q., which protects third parties in good faith, should be applied, as the trial judge did. [ 35 ] This provision is the application of the theory of appearance and is intended to ensure a certain legal stability by protecting the legitimate trust arising out of a given situation. Although a contract of sale is annulled with retroactive effect according to

article 1422 C.C.Q., and is deemed never to have existed, the law cannot ignore that the sale took place and may have produced effects. For this reason, the law protects those who relied on appearances.

Other examples of this theory include the protection of a debtor who paid an apparent creditor [13] or the regime of simulation, which allows third persons in good faith to choose to avail themselves of the reality or the [ translation ] “false” appearance. [14] The appellants rely on simulation, which is why they raise Saint-Georges . [15] [ 36 ] In Ostiguy , however, the Supreme Court recalled that the theory of appearance and the resultant protection of third persons in good faith is not a general legal principle and exists only within the limited application determined by the legislature. [16] The protection of third persons in good faith therefore varies depending on the circumstances.

That is precisely the case for the sale of property of another, where the legislature provides that the true owner may, based on certain conditions, revendicate the property from the buyer, even if the buyer was in good faith. [17] [ 37 ] Some authors explain the difference of this approach with

article 1707 C.C.Q. by the fact that, in the case of the sale of property of another, the seller’s lack of right does not arise from the contract’s nullity. [18] Professor Pascal Fréchette discusses this idea as follows: [19] [ translation ]

There is, however, another way to explain the distinction between restitution and the sale of property of another aside from retroactivity, whose significance has already been relativized. Restitution involves the ebb and flow of a prestation that may be attached to the transfer of a right of ownership. In the case of property, the right was transferred to the person making restitution. There is an intermediate period during which the person making restitution held the right related to the property until the event that triggered restitution occurred (annulment, resolution, etc.).

Restitution merely reverses the effects of the transfer. With the sale of property of another, the right was never transferred and the seller never held the right of ownership to begin with. There is no intermediate period during which the third person can genuinely claim to be the owner. To protect the third person in this context would amount to denying the earlier right of ownership. In the case of

article 1707 C.C.Q., the right of ownership of the creditor of restitution is not denied per se . The legislature opted to prioritize the title of the third person, which was at least apparent during the intermediate period. [ 38 ] In this context, the issue is whether

article 1707 C.C.Q. applies to the hypothec granted by the buyer of property of another, with regard to the special regime under

article 1714 C.C.Q. It is not necessary, however, to determine this issue because things are different in this case, where there was no contract of sale. Consequently,

article 1707 C.C.Q. cannot apply because the rules on restitution are not triggered and the hypothec itself never had any effect. Here is why. [ 39 ] First, if the sale of property of another can be annulled, which implies that it existed, it is because the seller, the apparent owner of the property, consented to the sale. It is only after the sale that it is revealed, sometimes even to the seller, that the seller was not the true owner at the time of the contract. [ 40 ] It is different in the event of fraud, such as here, where the true owner of the immovable, in appearance, consented to the sale.

The problem is that she never really consented because her identity was stolen. Contrary to the stricto sensu sale of property of another, the person who, officially, intervenes in the contract in her capacity as owner never consented.

Without consent, the contract cannot have been formed and is non-existent according to the teachings of the Supreme Court in Octane . [20] That is also the opinion of Professor Michelle Cumyn, who, in her reference work on nullity of contracts, wrote the following about identity theft: [21] [ translation ] Identity theft is another scenario where one person asserts a contract against another person to which that person never consented. This would be the case where a person fraudulently borrows someone else’s identity to obtain a bank loan.

It goes without saying that no contract binds the bank and the person whose identity was borrowed, even where the bank believed it was dealing with that person. [ 41 ] As a result, Nicolaidis never became owner of the immovable because there was never any transfer of ownership pursuant to

article 1453 C.C.Q. The publication of the fraudulent sale changes nothing because its sole purpose is to make title enforceable against third persons and eventually settle a conflict between two successive buyers, [22] not to create a new real right. In Ostiguy , the Supreme Court recalled that the legislature wanted to grant registered immovables absolute value in the Land Register during the 1994 Reform.

Faced with the inherent difficulties of such a reform, however, it ultimately backtracked and today, registration of a right in the Land Register today still only entails a simple presumption of the existence of that right. [23] [ 42 ] Furthermore, while the respondent, the true owner of the immovable, is indisputably a victim of the fraud – this judgment is proof of that – she was only indirectly so in that its purpose was not really to purchase the immovable, but rather to appropriate the money loaned by the appellants. In fact, the immovable never was and never could have been transferred.

In this sense, as the impleaded party Eleftheriou rightly argues, there is nothing to restore and the only concrete effect of the judgment annulling the sale is the cancellation of the hypothec in the Land Register. [24] There is no conclusion on the restitution of prestations simply because there is nothing to restore. This is an additional reason not to apply

article 1707 C.C.Q. in this case. [25] In reality, the respondent’s application merely sought to cancel a registration in the Land Register effected without right on the basis of a forged deed. [ 43 ] In short, the contract was never formed, title never left the respondent’s patrimony, and the hypothec was registered without right. The respondent could therefore apply to have it cancelled under

article 3063 C.C.Q. [26] [ 44 ] It must not be understood from the foregoing that a hypothecary creditor in good faith cannot rely on

article 1707 C.C.Q. [27] where the grantor’s title is subsequently annulled. [28] In his work, Louis Payette clearly distinguishes between a hypothec over property of another and a hypothec over property where the grantor holds title that is imperfect, conditional, or may be annulled. In the first scenario, as in this case, the hypothec is not null but takes effect only once the grantor becomes the owner. [29] While author Payette refers to certain legislative exceptions, where the lack of title does not deprive the hypothec of any effect, [30] he does not cite

article 1707 C.C.Q. that, he claims, applies only to the second scenario. [ 45 ] To conclude, I note that the application of

article 2670 C.C.Q. and the conclusion that the hypothec in this case never encumbered the property are a rational and fair solution that soundly allocates the economic risks. [ 46 ] First, to give effect to the hypothec in this case solely because

an act was materially formed would be to considerably stretch the legal fiction that a contract, and the resultant transfer of ownership, arose. [ 47 ] Next, in a scenario involving real estate fraud, as here, either the true owner or the hypothecary creditor must bear the loss subject to any recourses against the fraudsters or, if the circumstances so warrant, the officiating notary.

It is reasonable that the hypothecary creditor assume the risk because, contrary to the owner, the creditor was not only the basis of the risk but was above all the one who could have controlled, if not eliminated, the risk of fraud through robust verification procedures and security mechanisms, which it usually does. That party must bear the consequences when these mechanisms prove insufficient. [ 48 ] As a result of these conclusions, there is no need to address the other grounds concerning the judge’s decision on the parties’ admissions and assessment of the appellants’ good faith.

V - CONCLUSIONS [ 49 ] For these reasons, I would dismiss the appeal, with legal costs.

BENOÎT MOORE, J.A.