2013 ONSC 1986, 2013 ONSC 1986

CITATION : Canada Mortgage and Housing Corporation v. Evan Gray, 2013 ONSC 1986 COURT FILE NO.: 31-1594404 DATE: 2013-04-30 SUPERIOR COURT OF JUSTICE – ONTARIO IN THE MATTER OF THE BANKRUPTCY OF EVAN PETER GRAY OF THE CITY OF TORONTO IN THE PROVINCE OF ONTARIO RE: Canada Mortgage and Housing Corporation, Creditor - v. - Evan Gray, Debtor BEFORE: Mr. Justice H.J. Wilton-Siegel COUNSEL: Matthew Diskin , for the Creditor Trung S. Nguyen , for the Debtor HEARD: April 4, 2013 ENDORSEMENT [ 1 ] On this application, Canada Mortgage and Housing Corporation (“CMHC”) seeks (1) a declaration, pursuant to

section 178 of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3 (the “BIA”), declaring that the outstanding amount of the Debt (as defined below) due to CMHC from Evan Gray (“Gray”) will not be released by an order of discharge made in respect of Gray’s bankruptcy; and (2) an order lifting the stay of proceedings to permit CMHC to take steps to enforce the Judgment (as defined below) by taking any proceedings CMHC may deem appropriate. Background [ 2 ] The moving party, CMHC, is a corporation pursuant to the Canada Mortgage and Housing Corporation Act , R.S.C. 1985, c. C-7, as amended.

CMHC carries on business as an insurer of mortgages for approved lenders. [ 3 ] The responding party, Gray, is an individual residing in the City of Toronto. Gray graduated from high school in 1999 and spent two years in a community college before entering the workforce, initially working for a collection agency. Since February 2005, Gray has worked for the Royal Bank of Canada (“RBC”). From February 2005 to March 2011, Gray was employed as a collections officer. Since March 2011, Gray has been employed as a commercial client service representative.

In addition, Gray has had a second, part-time job as a disc jockey in Toronto area nightclubs. [ 4 ] Gray says that he was introduced to a John Roberts (“Roberts”) in the fall of 2005 through a common acquaintance. Gray says he first met Roberts at a Toronto nightclub. Shortly after he met Roberts, in the spring of 2006, Roberts asked Gray if he would be willing to co-sign a mortgage to assist someone whom Roberts said was a new immigrant to Canada. [ 5 ] Gray says that Roberts told him the following regarding the mortgage transaction: 1.

The mortgage was for a new immigrant to Canada who was unable to obtain a mortgage because he or she lacked sufficient credit history; 2. This person would occupy the property and would sign a written agreement to confirm that he or she would be responsible for making all mortgage payments; 3. After a year, this person would assume the mortgage and take title to the property; 4. There was no risk to Gray because, even if the occupant defaulted, the property could be sold easily in the event of default and, given the robust real estate market in 2006, a profit was assured; and 5.

This person would pay Gray $2,500 to co-sign the mortgage. Roberts also advised Gray that he would not be doing this if he thought there was any risk. [ 6 ] When Gray agreed, Roberts introduced Gray to an individual who introduced himself as Mike (“Mike”) and held himself out to be a mortgage broker.

At Mike’s request, Gray completed a form that he understood allowed Mike to check his credit history. [ 7 ] Soon after this meeting, Mike and Roberts asked Gray to attend at a Century 21 office to sign an agreement of purchase and sale regarding the purchase by Roberts and Gray of a property known municipally as 100 Monteith Crescent, Vaughan, Ontario (the “Property”). While Gray was signing the documentation, a woman walked into the room and introduced herself as Kavita Naik (“Naik”). Naik told Gray that she was one of the two owners of the Property and the vendor in the transaction.

This was the first time that Gray had ever met Naik. Gray recalls Naik telling him at that time something to the effect of “thank you for helping me”.

[ 8 ] Shortly thereafter, Mike asked Gray to attend at an RBC branch to sign a mortgage application. Mike and Gray met with Don Economakis (“Economakis”), whom Gray understood to be an RBC mortgage representative. Roberts was not in attendance. Economakis provided Gray with documents to sign, which Gray understood to be the mortgage application. Gray says nothing was explained to him regarding the mortgage application. Economakis also emailed Gray a few days after the meeting to request his most recent pay statement, which Gray believes he faxed to him.

Gray was not provided with a copy of the document that he signed at the meeting and there is no evidence that he ever received a copy. Similarly, there is no evidence that he received a copy of the Standard Charge Terms of RBC (the “Standard Charge Terms”) forming part of the Mortgage (defined below). [ 9 ] Roberts and Mike next asked Gray to attend at the office of William Ash (“Ash”), counsel to both the vendors and purchasers in the transaction. Ash provided Roberts and Gray with documents to sign, and explained that they were documents to finalize the purchase of the Property.

Ash explained that, upon closing, $5,000 was to be paid to the mortgage broker, Mortgage Intelligence. Ash subsequently provided Gray with a copy of the closing documents in respect of the purchase of the Property. [ 10 ] A few days later, Mike asked Gray to attend with him at Ash’s office, where Gray was given a lawyer’s trust cheque, which Gray recalls was in the amount of approximately $5,000 and was made payable to Gray.

Mike told Gray that it was common for people to request additional financing on their mortgage loans above and beyond the value of the property in order to fund expenses such as renovations on the property and that the funds were being used for this purpose. Mike then drove Gray to the RBC branch at Steeles Avenue and Lauraleaf in North York where, at Mike’s request, Gray cashed the cheque and gave all of the funds to Mike.

It is unclear whether this event occurred before or after the closing of the transaction, although Gray says Ash had explained to him at the meeting in Ash’s office that such a cheque would be delivered at closing. [ 11 ] The transaction closed on April 6, 2006. On that day, Roberts and Gray purchased the Property as tenants in common and RBC extended a mortgage loan in the principal amount of $516,370.13 (the “Mortgage”) to Gray and Roberts in respect of the Property. Title to the Property shows a transfer of the Property on that date from Naik and a John Webber (“Webber”) to Roberts and Gray.

The Mortgage was insured by CMHC. [ 12 ] About two months later, Gray received a call from RBC advising that the first mortgage payment was late. Gray immediately called Roberts and Mike, who he says were both extremely apologetic. Mike offered to pick Gray up in his car and go directly to an RBC branch to make the payment. Gray agreed to Mike’s suggestion because he says that he believed that this was the only way that he could be sure Mike would make the payment. [ 13 ] The next day Mike picked Gray up as agreed.

Gray says that, when he entered the car, he was surprised to see the previous owner of the Property, Naik, in the car with Mike. Naik apologized to Gray for the late payment. Gray says that this was the first time that he became aware that the former owner of the Property, Naik, was still residing there and was the one making payments on the Mortgage. [ 14 ] The mortgage payments over the next few months were made in a similar fashion. Mike and Naik would pick Gray up, take him to an RBC branch, and give him cash with which to make the monthly mortgage payment.

Gray acknowledges that he thought this was somewhat unusual, but he went along with it to ensure that the payment was being made. [ 15 ] On July 27, 2006, Gray received an email from Bill Sykes (“Sykes”) at RBC Corporate Investigation Services (“RBC CIS”) requesting that Gray attend a meeting to discuss the purchase of the Property. On the same date, Gray immediate contacted and met with Sykes and another RBC investigator, Sheila Wilson (“Wilson”). Both questioned Gray for 2-3 hours regarding the purchase of the Property.

Sykes advised Gray that he believed that the Property had been purchased using a fraudulent mortgage application and that the Property was worth much less than the purchase price of $529,000. [ 16 ] Sykes suggested that Gray obtain legal advice and prepare himself for the inevitable default, foreclosure and power of sale. The investigators also suggested that Gray view the Property for himself to determine if anyone was living there. On or about August 6, 2006, Gray visited the Property with his father, which up until that point he had not seen.

Gray advised Wilson that it appeared to him that someone was living on the Property. Wilson advised Gray to remain in contact with Roberts and Mike but asked Gray not to do anything to raise a suspicion that he had met with RBC CIS. At that time, the mortgage payments were up to date. Gray heard nothing further from either Sykes or Wilson. [ 17 ] Gray continued to meet with Mike each month to satisfy himself that the mortgage payments were being made. Each time Gray met with Mike, he was with Naik.

Roberts later advised Gray that Mike was in a relationship with Naik and that he believed that Mike’s legal name was Mohamad Akhlaki (“Akhlaki”). The parcel register for the Property shows Naik and Akhlaki as the owners of the Property from July 27, 2002 to January 31, 2005, when it was transferred into the name of Naik and Webber. [ 18 ] In or about June 2007, Mike stopped making mortgage payments and both Roberts and Mike stopped returning Gray’s telephone calls.

The Mortgage subsequently went into default in 2007. [ 19 ] On November 30, 2007, RBC commenced an action against Gray and Roberts for payment of $524,577.34 (the amount due under the Mortgage) and possession of the Property. RBC did not allege fraud in its statement of claim. [ 20 ] On January 16, 2008, RBC obtained default judgment (the “Judgment”) against Gray and Roberts wherein they were ordered: (1) to pay to RBC the sum of $524,577.34, plus interest at a rate of 6.025% per year (the “Debt”); and (2) to deliver possession of the Property to RBC. Shortly thereafter, RBC took possession of the Property.

RBC subsequently sold the Property for $390,000 and applied the net proceeds of $331,875.03 against the Debt. [ 21 ] The Judgment was assigned from RBC to CMHC by an assignment dated August 12, 2008. On August 19, 2009, CMHC obtained an order to continue RBC’s action against Gray and Roberts. [ 22 ] From April 2009 to February 2012, CMHC garnished Gray’s wages in the amount of $17,169.39. Gray’s income at the time was approximately $37,900.00 per year. On January 8, 2012, Mr. Gray and his wife had their first child. On February 23, 2012, as a

result of the garnishment of his income and his inability to support his family, Gray made an assignment in bankruptcy. Gray remainedan undischarged bankrupt at the date of the hearing of this proceeding. This Proceeding [23] On April 11, 2012, CMHC served its motion record in this proceeding seeking a declaration that the outstanding amount ofthe Debt not be released by operation of sections 178 (

d) and (

e) of the BIA. On September 12, 2012, by order of Morawetz J., themotion was converted into a trial of an issue. [24] It has been established that the Mortgage arose out of a fraudulent scheme perpetrated by Roberts and others (the “Scheme”). Under the Scheme, as mentioned, Gray and Roberts took title to the Property, and applied for the Mortgage, in their names. It isestablished that Roberts misrepresented his employment status and his income in his mortgage application.

In order to induce RBC toadvance mortgage funds well in excess of the fair market value of the Property, Roberts also provided an inflated valuation of theProperty (the false valuation and Roberts’ misrepresentations in his mortgage application are collectively referred to as the“Misrepresentations”).

The proceeds received in excess of the value of the Property represented the proceeds of the fraud, which wereappropriated by the other participants in the Scheme. [25] Gray says that he had no knowledge of the Misrepresentations when he signed his mortgage application, and that he did notbecome aware of the Misrepresentations until he was served with CMHC’s motion materials for this motion on April 11, 2012. [26] The principal CMHC claim is asserted under section 178(1)(

e) of the BIA.

CMHC submits that the Mortgage was obtainedbased on the following false pretences and/or fraudulent misrepresentations of Gray, which he made when he executed the applicationfor the Mortgage, knowing that it was a mortgage application and knowing that it was important to be accurate and complete in thatapplication: 1. he did not inform RBC of the true nature of the transaction – that he was providing the use of his credit rating and applying for theMortgage in exchange for which he would be paid; 2. he did not inform RBC that he was not to be the beneficial owner of the Property, which he knew when the application for theMortgage was executed; 3. he did not inform RBC that he did not intend to occupy the Property, which he knew when the application for the Mortgage wasexecuted, and he did not subsequently do so; and 4. he did not inform RBC that he did not intend to personally pay the amounts due under the Mortgage, which he knew when theapplication for the Mortgage was executed. [27] CMHC argues that these circumstances demonstrate that Gray was aware of the Scheme at the time he applied for theMortgage.

Alternatively, it says that they demonstrate that Gray was reckless and/or willfully blind to the Scheme at the time he appliedfor the Mortgage. [28] CMHC also says that each of RBC and CMHC relied upon the information supplied by Gray in his mortgage application indeciding whether to grant and insure the Mortgage respectively.

It says that, if RBC or CMHC had known of the Misrepresentations, theMortgage would not have been granted or insured, and CMHC and RBC would not have suffered any losses in connection therewith. [29] Alternatively, CMHC argues that, since the fraud occurred while Gray was an employee of RBC, subsection 178(

d) of theBIA applies in the circumstances. Applicable Law [30] Section 178(1)(

d) and (

e) of the BIA provide as follows: 178.

(1) An order of discharge does not release the bankrupt from … (

d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, inthe Province of Quebec, as a trustee or administrator of the property of others; (

e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than adebt or liability that arises from an equity claim; [31] In Ste. Rose & District Cattle Feeders Co-op v.

Geisel, 2010 MBCA 52 [Geisel] at paras. 98-100, the Manitoba Court ofAppeal held that false pretences and fraudulent misrepresentations are similar, but not identical concepts, although the essence of each isa deceitful statement: In my view, there is no doubt that the conduct of each of the respondents satisfied at least one of the requirements of subs. (e), asconstituting the obtaining of property by false pretences or fraudulent misrepresentation. While the two concepts are similar, they are notidentical. In the Ontario Court of Appeal decision of Buland Empire Development Inc. v.

Quinto Shoes Imports Ltd. (1999), (ONCA), 11 C.B.R. (4th) 190, the court explained these two concepts (at para. 14):

The New Oxford Dictionary of English (1998) defines the verb "misrepresent" as "give a false or misleading account of the nature of."The noun "pretence" is defined as "an attempt to make something that is not the case appear to be true." It is clear from these

definitionsthat the core content of the phrases "false pretences" and "fraudulent misrepresentation" is deceitful statements. [32] In Geisel, the court held that false pretences extended to false representations made to third parties in aid of a scheme todefraud a creditor with whom the maker of the representations had no contact. This suggests that the relationship between the twoconcepts is related to the relationship of the maker of a deceitful statement to the creditor rather than the nature of the statement made. [33] The elements of the tort of deceit have been summarized by G.H.L.

Fridman, The Law of Torts in Canada, 2d ed., (Toronto:Carswell, 2002) at 747 as follows: The tort of deceit is based on the making of a fraudulent misrepresentation. It entails a deliberate, willful, conscious distortion of thetruth, the making of a false statement with the knowledge that it is untrue, or with reckless disregard for its truth or falsity, and with theintent that the plaintiff should act upon it. For liability to ensue the plaintiffs must act upon it in a manner contemplated or manifestlyprobable and, in consequence of such act, the plaintiff must incur damage.

The deliberate or reckless deception of the plaintiff by thedefendant must have been intended by the latter and must produce the consequence that was itself intended or, at the very least, foreseenas being likely. The tort of deceit involves more than fraud or falsehood. There must be a direct causal link between the untruth and thebehavior of the plaintiff that leads to the detrimental occurrence. Hence, for there to be liability for deceit the following elements mustbe established: (

a) a false statement; (

b) knowledge of its falsity; (

c) an intent to deceive; (

d) reliance by the plaintiff; (

e) damage causedby such reliance. [emphasis added] A similar statement of the law in Ontario was set out by Newbould J. in Fiorello v. Krispy Kreme Doughnuts, Inc. (2009), (ON SC), 98 O.R. (3d) 103 (Ont. S.C.J.) at paras. 66 and 67, referring to Parna v. G & S Properties Inc., (SCC),[1971] S.C.R. 306. [34] Non-disclosure of material facts can amount to fraud if, among other things, the non-disclosure constitutes a fraudulentmisrepresentation. As was observed in Geisel at para. 101, “silence and half-truths can amount to a fraudulent misrepresentation”. Thishas been addressed in Perdue v.

Myers (2005), 35 R.P.R. (4th) 304 (Ont. S.C.J.) at para. 31 as follows: Silence can be taken as fraudulent misrepresentation. The circumstances must establish dishonest conduct on the part of the defendant,who must have intended (

i) to deceive the plaintiff by his/her failure to disclose irrelevant [sic] information, and (ii) to commit afraudulent act by such non disclosure equivalent to that which would prevail had he/she made a false statement knowing it to be false.See: 411397 B.C. Limited v. Granmour Holdings Limited [1996] B.C.J. No. 1310 (S.C.) [Granmour]. [35] To a similar effect is the following statement of the British Columbia Court of Appeal in Granmour: Silence by a party can, in certain circumstances, be taken as fraudulent. However, as pointed out by Mr. Justice Wallace of our Court ofAppeal in Rainbow Indust.

Caterers Ltd. v. C.N.R. (1988), (BC CA), 30 B.C.L.R. (2d) 273 at 313: At the very least the circumstances must establish dishonest conduct on the part of the defendant. He must be found to have intended todeceive the plaintiff by his failure to disclose to the plaintiff the relevant information and, as a result, have intended to commit afraudulent act by such non-disclosure equivalent to that which would prevail had he made a false statement knowing it to be false. [36] Absent other circumstances, however, mere silence does not, by itself, constitute a false misrepresentation.

The jurisprudenceindicates that silence gives rise to a misrepresentation only where the silence or half-truths render an express or implied representationthat has been given false or materially misleading. [37] The requirements of a fraudulent misrepresentation for purposes of section 178(1)(

e) of the BIA were considered in ReBerger, 2010 ONSC 4376 at 28. The decision confirms a fraudulent misrepresentation is defined for such purposes on the basis of theforegoing principles regarding the tort of deceit: The learned authors of The 2009 Annotated Bankruptcy and Insolvency Act, 2009 Thomson Carswell, refer to the decision of Mr. JusticeOsborne, as he then was, in Re Horwitz (1984), 52 C.B.R. (N.S.) 102 (S.C.O.), in which His Lordship refers, at paragraph 23 et seq, tothe findings of Pennell J referred to in Bank of Montreal v. Terbois Ltd. (1982), 41 C.B.R. (N.S.) 55 (Ont.

H.C.) for the followingproposition as to the elements of a fraudulent misrepresentation for the purposes of s. 178 BIA (as it now is): i. the existence of a representation, ii. that the representation was false, iii. that the bankrupt knew the representation was false and intended the creditor to act upon it so as to enable the bankrupt toobtain the credit sought, and iv. iv. that the creditor did rely upon the false representation and extend credit. [38] In addition, the parties agree that wilful blindness can amount to fraudulent misrepresentation for the purposes of section178(1)(e).

The Supreme Court of Canada addressed the nature of wilful blindness in R. v. Briscoe, 2010 SCC 13 at para. 21 as follows: The doctrine of wilful blindness imputes knowledge to an accused whose suspicion is aroused to the point where he or she sees the needfor further inquiries, but deliberately chooses not to make those inquiries. See Sansregret v. The Queen, (SCC), [1985] 1S.C.R. 570, and R. v. Jorgensen, (SCC), [1995] 4 S.C.R. 55.

As Sopinka J. succinctly put it in Jorgensen (at para. 103), "[a] finding of wilful blindness involves an affirmative answer to the question: Did the accused shut his eyes because he knew or stronglysuspected that looking would fix him with knowledge?"

Allegation of False Pretences or Fraudulent Misrepresentation for Purposes of Paragraph 178(1)(

e) of the BIA [ 39 ] CMHC’s principal allegation is that the Debt resulted from Gray obtaining property or services by false pretences or fraudulent misrepresentation. In this case, adopting the distinction between false pretences and fraudulent misrepresentations articulated in Geisel , the allegations pertain to false misrepresentations made to RBC to whom CMHC is subrogated. [ 40 ] Although CMHC presented its position in a different manner, I consider that CMHC makes three separate arguments in support of the declaratory relief sought under paragraphs 178(1) (

d) or 178(1) (e): 1. that Gray knew or ought to have known of the Misrepresentations; 2. that Gray made specific fraudulent misrepresentations of his own; and 3. that Gray knew or was wilfully blind to the existence of the Scheme. I will address each in turn. Submission Based on Knowledge of the Misrepresentations [ 41 ] It is not suggested that Gray made any express misrepresentations on his mortgage application regarding his income or otherwise.

However, the evidence demonstrates that Roberts made fraudulent misrepresentations regarding his employment status and income on his mortgage application and regarding the value of the Property, in the form of an inflated valuation, being the Misrepresentations. It is not disputed that the Mortgage was obtained in reliance on these fraudulent misrepresentations of Roberts. Therefore, CMHC would be entitled to an order under section 178(1) (

d) if it could demonstrate that Gray knew, or reasonably ought to have known, of the Misrepresentations. However, in my view there is no evidence that would support such a conclusion. [ 42 ] There is no evidence that Gray was aware of any representations that Roberts made in his mortgage application regarding his employment status or income or regarding the value of the Property, much less that these representations were false. I do not think that this is disputed by CMHC. Accordingly, the issue for the Court is whether, on the evidence, Gray reasonably ought to have known of the Misrepresentations.

I note that this is a different question from the question of whether Gray ought to have known of the Scheme and therefore ought not to have remained silent on several matters described below. [ 43 ] I conclude that there is no basis in the evidence for finding that Gray reasonably ought to have known of the Misrepresentations. In this regard, I note that Roberts did not attend the meeting at the RBC branch at which Gray executed his mortgage application. In addition, he did not visit the Property and apparently had no knowledge of the value of the Property, apart from what he was told by Roberts.

There is no also evidence of any communications between Robert and Gray regarding the content of the mortgage applications of either of them, or more generally of the information to be communicated to RBC. [ 44 ] On a strict reading of section 178(1) (d), this conclusion is sufficient to determine the issue on this application. The Mortgage was obtained by Roberts’ fraudulent misrepresentations that constitute the Misrepresentations.

Gray did not participate in the making of the Misrepresentations and neither knew, nor reasonably ought to have known, of them. [ 45 ] However, CMHC submits that Gray’s actions in withholding certain information from RBC also constitute fraudulent misrepresentations for the purposes of section 178(1) (d). It says that the Mortgage would not have been issued by RBC or guaranteed by CMHC if Gray had communicated this information to RBC. It says that this silence constituted fraudulent misrepresentations of Gray in his own right.

CMHC frames its argument based on this silence in two ways: (1) as specific fraudulent misrepresentations; and (2) as a fraudulent misrepresentation of the legitimacy of the Mortgage transaction when Gray knew or was wilfully blind to the fraudulent nature of the Scheme. I will address these allegations in case I am found to have erred in reaching the conclusion above. Submissions Based on Alleged Specific Fraudulent Misrepresentations by Gray [ 46 ] CMHC argues that the Court should find that Gray made fraudulent misrepresentations of a different nature that support an order under paragraph 178(1) (

e) of the BIA even if he did not know, and ought not reasonably to have known, of the Misrepresentations. It says that Gray’s misrepresentations took the form of a failure to advise RBC regarding four matters: (1) that he was not the beneficial owner of the Property; (2) that he intended to occupy the Property; (3) that he did not intend to pay the mortgage payments due under the Mortgage; and (4) that he would receive $2,500 for participating in the transaction.

I propose to discuss the significance of these four alleged misrepresentations in order. [ 47 ] First, I do not agree that the immigrant participant, rather than Roberts and Gray, was the beneficial owner of the Property. The evidence clearly establishes that Gray and Roberts acquired the Property as tenants in common and granted the Mortgage. There is no evidence of any trust arrangement in favour of third parties. To the contrary, there is undisputed evidence that Gray understood that was purchasing the Property and assuming the risk if the third party did not pay the Mortgage.

He says this was explained to him as a matter of no concern because Roberts and Gray could sell the Property for a profit if the third party failed to make the mortgage

payments. He also took some comfort from the fact that Roberts was also liable on the Mortgage and in a mistaken belief that Roberts was also concerned about any risk. However, Gray understood he was a part-owner of the Property and ultimately liable on the Mortgage if the third party failed to make the Mortgage payments. Moreover, this is precisely what CMHC bargained for. [ 48 ] Second, I also do not agree that Gray’s failure to advise RBC that he was being paid $2,500 for participating in the transaction constitutes a misrepresentation for the following reasons.

I accept for this purpose the evidence of CMHC that they would not have approved the CMHC insurance of the Mortgage if CMHC had known about this payment. However, demonstration of causation is not sufficient to establish a misrepresentation. In this case, there is no specific representation made, or implied, by Gray to RBC. The mortgage application is not before the Court. The Standard Charge Terms do not contain a representation that addresses this matter. Mere silence, even if intentional, does not constitute a misrepresentation unless it renders an express or implied representation untrue or misleading.

CMHC cannot demonstrate any such express or implied misrepresentation. [ 49 ] Accordingly, the discussion below addresses the alleged fraudulent misrepresentations of Gray that: (1) he intended to occupy the Property; and (2) he intended to pay personally the mortgage payments.

I conclude there are two difficulties with CMHC’s assertion that Gray made fraudulent misrepresentations in respect of these matters. [ 50 ] First, I am not satisfied that CMHC has established that Gray made either of such representations either expressly or by operation of law for the following reasons. [ 51 ] As mentioned, Gray’s mortgage application is not before the Court.

In any event, there is no evidence that either representation would have been made in the RBC standard form of mortgage application that Gray executed. [ 52 ] CMHC says that Gray is deemed to have made these representations by virtue of execution of a standard form RBC document entitled “Approval of Mortgage and Cost of Borrowing Disclosure Statements”, which acknowledged the primacy of the terms and conditions of the Standard Charge Terms over the signed statement. There is, however, no conflict between these documents that is relevant for the issue on this application. [ 53 ] CMHC also suggests that

section 9 of the Land Registration Reform Act , R.S.O. 1990, c. L.4 (the “LRR Act”) is relevant in this context.

Section 9 of the LRR Act provides that a charge shall be deemed to include standard charge terms filed under section 8(1) of the LRR Act if the terms are referred to in the charge. Accordingly, the Mortgage was deemed to include the Standard Charge Terms. [ 54 ] CMHC relies upon the following covenants in

section 14 and section 24(1) in the Standard Charge Terms: 14. In return for our agreeing to lend the Principal Amount to you, you promise and confirm that: (

a) You own your Property, you have the right to give the Mortgage and you mortgage your entire interest to us…. (

c) You will pay all of the Outstanding Amount to us and keep all of your other Promises, as provided in the Mortgage. (

d) There are no limitations or restrictions on your title to your Property, except those disclosed to us in writing and that we approved. (

e) Your title to your Property is subject only to: (

i) Those interests filed in the land registry office at the time you give us the Mortgage; and (ii) Any unregistered interests we have approved. … 24(1). You promise that you will occupy your Property. If you want to rent, lease or enter into any form of tenancy agreement covering all of any part of your Property, you promise to get our prior consent. We may refuse to give it, at our option. [ 55 ] However, I do not think that these provisions of the Standard Charge Terms assist CMHC in the present circumstances for the reason that I do not think that they constitute deemed representations, as opposed to deemed covenants, by virtue of the operation of

section 9 of the LRR Act. Section 24(1) is expressed to be a promise. Similarly, the introductory language of

section 14 is worded “promise and confirm”.

Given that this is a standard form document of RBC, if RBC had intended that this provision was to constitute a deemed representation of a mortgagor with potential consequences under section 178(1) of the BIA , rather than a covenant whose consequences would be limited to establishing an event of default under the Mortgage, I think it was required to make that intention express. [ 56 ] Second, even if these provisions of the Standard Charge Terms are construed to be deemed representations of a mortgagor, I am not satisfied that any such representations are false, with the possible exception of the covenant in the first sentence of section 24(1).

The provisions of

section 14 relied upon by CMHC relate to title, or, in the case of

section 14(c), payment. As discussed above, I see no inaccuracy in any representation to the effect that Roberts and Gray are the owners of the Property. In the absence of any agreement with Naik or Mike, as the presumed occupants of the Property, there is also no third party who had an interest in the Property. In particular, there was no a tenancy agreement, and no renting or leasing of the Property, for the purposes of the second sentence of section 24(1).

Nor do I see any inaccuracy in the representation to the effect that Roberts and Gray would pay the Mortgage, given that they are liable on the Mortgage. [ 57 ] Lastly, and in any event, CMHC has failed to establish that Gray had any knowledge of these representations which CMHC says he is deemed to have made in the Standard Charge Terms. CMHC acknowledges that there is no evidence that Gray ever received a copy of the Standard Charge Terms.

In these circumstances, I am of the opinion that CMHC cannot establish the necessary intentional requirement for fraudulent misrepresentations. [ 58 ] Demonstration of fraudulent misrepresentations requires, among other things, evidence that the representor has knowledge that the representation is false or that the representor was recklessly indifferent to its truth. In the absence of knowledge of the particular

representations which a party is deemed to have made, the party cannot have knowledge of the falsity of such representations or have been recklessly indifferent to the truth of any such deemed representations. Accordingly, even if the effect of

section 9 of the LRR Act is to deem Gray to have made such representations and even if CMHC can prove that such deemed representations were false, CMHC cannot establish that they were fraudulent representations given the absence of evidence that Gray was ever aware of these representations before the Mortgage was granted. [ 59 ] Based on the foregoing, I therefore conclude that CMHC cannot establish that Gray’s actions constitute the making of fraudulent misrepresentations for the purposes of paragraph 178(1) (e).

Submission Based on Knowledge of, or Wilful Blindness in Respect of, the Scheme [ 60 ] Lastly, CMHC argues that Gray had actual knowledge of the Scheme, as distinct from the Misrepresentations of Roberts which furthered the Scheme, or was recklessly indifferent to the existence of the Scheme. CMHC says that his failure to disclose any of the four matters described above should be understood in this context. [ 61 ] There is, however, no evidence that Gray had actual knowledge of the Scheme.

CMHC therefore argues principally that Gray was wilfully blind in respect of the Scheme to the point where his failure to advise RBC that he would not be living on the Property, did not intend to be the party making the mortgage payments, and expected to receive $2,500 for his participation in the transaction, constituted fraudulent misrepresentations.

I do not accept this argument for the following reasons. [ 62 ] I accept that there are a number of indicia that might raise a concern on the part of a reasonable person in Gray’s position regarding the accuracy of the representations made to him by Mike and Roberts. For example, Naik introduced herself as a vendor not a purchaser.

Further, Gray did not ask to meet the alleged immigrant who was going to occupy the Property, nor did he ask to see information regarding the employment status, income or credit status of this party to verify his or her ability to make the mortgage payments and to take over the Property. [ 63 ] However, even if it were held that such factors should have raised a concern in Gray’s mind that called for further investigation that would have uncovered the Scheme, the test for the purposes of wilful blindness is a factual one – was Gray’s suspicion aroused to the point where he saw the need for further inquiries but deliberately chose not to make those inquiries?

I conclude that CMHC has not demonstrated such a state of knowledge on Gray’s part. [ 64 ] It is Gray’s evidence that he trusted Roberts and therefore failed to question any of the features of the transaction that should have raised concerns in his mind. He acknowledges that, in retrospect, his judgment was foolish and the consequences have been devastating. In particular, he says that, having no prior experience in these matters, he trusted Roberts’ representations that arrangements of the sort in which he was asked to participate were normal.

He says it was for this reason that he did not advise RBC of the four matters which CMHC alleges constituted misrepresentations by his silence. He also took comfort in Roberts’ own participation in the transaction. In addition, he says that, when he raised the absence of the promised agreement to make the mortgage payments that was to come from the alleged immigrant, he was told it was coming and submitted to Roberts’ and Mike’s manipulation of the situation to make him feel “stupid”.

Lastly, Gray says he thought that, in some way, he was also helping Roberts, as his friend. [ 65 ] The onus of proving wilfull blindness rests with CMHC. I conclude that, on the facts of this case, it is at least as probable that Gray’s evidence is credible – that he foolishly trusted Roberts and Mike beyond a point which was reasonable based on a lack of experience regarding what was usual or unusual in mortgage transactions and, I would add, weakness in the presence of stronger individuals that made him vulnerable to manipulation by them for unscrupulous purposes.

I would add the following comments in respect of this conclusion. [ 66 ] First, the circumstances of this case differ from other cases of mortgage fraud inasmuch as Roberts joined Gray as a co- mortgagor. In these circumstances, as mentioned, Gray’s reliance on Roberts’ involvement is understandable, even if foolish. The evidence does not disclose any evidence at the time that would have suggested that Roberts was not to be trusted.

In addition, there is no evidence that Roberts advised him to withhold the nature of his involvement from RBC or otherwise remain silent in any respect. [ 67 ] Second, for the same reasons, given his lack of experience and his trust in Roberts, there is an explanation for his acceptance of Roberts’ assurance that this was a normal transaction.

Moreover, there is no evidence that Gray was aware of fraudulent mortgage transactions of this nature or of the fact that the valuation submitted for the Property was inflated. [ 68 ] In these circumstances, I am not persuaded that the only explanation for Gray’s failure to question Roberts or Mike regarding the “red flags” was wilful blindness on Gray’s part to the possibility that the entire transaction was a sham intended to defraud RBC and CMHC in the inflated amount of the Property valuation. [ 69 ] Based on the foregoing, I conclude that CMHC has not demonstrated that it is more probable than not that Gray either knew of the Scheme or was wilfully blind in respect of the Scheme such that his failure to disclose the features of the arrangements described above constitute fraudulent misrepresentations for the purposes of paragraph 178(1) (

e) of the BIA . Allegation of Breach of Fiduciary Duty for Purposes of Paragraph 178(1)(

d) of the BIA [ 70 ] As mentioned, as an alternative position, CMHC also alleges that the Debt arose out of fraud on Gray’s part while acting in a

fiduciary capacity, which thereby triggers the provisions of paragraph 178(1) (

d) of the BIA . For this purpose, the alleged fraud is the making of the misrepresentations addressed in the preceding section. Given the determination above that Gray’s actions did not constitute false pretences or fraudulent misrepresentations for such purposes, there cannot be a viable claim asserted under section 178(1) (d). [ 71 ] In addition, I do not think that the mere fact that Gray owed a fiduciary obligation to his employer in his capacity as an employee is sufficient to establish a claim under paragraph 178(1) (d).

In making the alleged representations, Gray was acting in the capacity of a prospective borrower from the bank, rather than as an employee. There is no law that imposes a fiduciary obligation upon a prospective borrower. There is also no law of which I am aware that would treat Gray, even though an employee of the prospective lender at the time, any differently from any prospective borrower who had no such relationship to the lender. Application of the Limitations Act, 2002 [ 72 ] As a defence to CMHC’s allegations, Gray has also asserted a limitation period defence.

Gray submits that, as the assignee of RBC’s rights, CMHC is deemed under

section 12 of the Limitations Act, 2002 , S.O. 2002, c. 24 to have discovered its claim on or about July 27, 2006 when RBC discovered that the Mortgage had been obtained on the basis of the Misrepresentations of Roberts. Gray says that RBC did not allege fraud in the action commenced on November 30, 2007 and did not get a determination of fraud at the time it obtained the Judgment on January 16, 2008. As CMHC derives its title to the Debt through RBC and has no higher rights, Gray says CMHC is precluded from asserting a claim for fraud in this proceeding by virtue of the two-year limitation period in

section 4 of the Limitations Act, 2002 . [ 73 ] CMHC makes two arguments to the effect that this limitation period does not apply. First, it says that the present proceeding is not a new action but a proceeding for declaratory relief related to enforcement of the Judgment. As such, paragraphs 16(1) (

a) and (

b) of the Limitations Act, 2002 provide that there is no limitation period applicable to the relief sought. Second, CMHC says that RBC was not required to anticipate Gray’s fraud in its pleadings or to draft its pleadings with section 178(1) in mind. It relies on the principle originally articulated in Re Phillips, [1944] A.J. No. 499 (Alta. Q.B.) at paras. 32-35 . [ 74 ] Given the conclusions reached above, it is not necessary to reach a determination on this issue. However, if the Court were required to make such a determination, I would conclude that the Limitations Act, 2002 does not apply to prevent CMHC from asserting its claims under section 178(1)(

d) and (

e) for the reasons cited by CMHC. Conclusion [ 75 ] Based on the foregoing, the CMHC application is dismissed. Costs [ 76 ] Gray is entitled to reasonable costs of the motion as the successful party. However, there has been no activity on the part of CMHC that would attract costs on a substantial indemnity basis. In particular, given the “red flags” described above, it was not unreasonable to bring this application. Accordingly, Gray is entitled to costs on a partial indemnity basis. [ 77 ] Gray seeks costs totaling approximately $29,000, comprised of legal fees of $27,000 plus disbursements and GST.

Given the importance of the issue to him and the nature of the issues before the Court, I consider the time spent by counsel to be appropriate. I note that CMHC’s legal fees were approximately $22,000. In the circumstances, it is not unreasonable to expect that the debtor’s costs would be somewhat higher in mounting as comprehensive a defence as possible. I have made a small adjustment to reflect the actual length of the trial. Accordingly, I find fair and reasonable costs of this matter to be $28,000 on an all-inclusive basis. Wilton-Siegel, J. Date: April 30, 2013