BC Court Of Appeal Leaves Lender Holding The Bag In Homeowner Refinance Transaction, Saying It Bears The Loss Where Notary/Escrow Agent Absconded With Proceeds

In Vancouver, British Columbia, The Vancouver Sun reports:

• A lawsuit that resulted from an $8-million notary fraud case is rippling through B.C.’s legal community over the question of whether it sets a precedent in trust relationships between parties in real estate transactions.
  
  In the case, Hsui-Wen Lin and Min Sheng Tang hired notary Agatha Chung in 2013 to handle a refinancing of the mortgage on their home.
  
  According to court documents, Lin and Tang sought financing from CIBC, which hired its own notary, Timothy Ko, to handle its half of the transaction.
  
  However, when Chung disappeared with the money forwarded to her to pay out the previous mortgage, along with more than $8 million from 41 other clients, it touched off a legal battle over who holds the loss, Lin and Tan as borrowers, or their lender, CIBC, and whose insurance should cover it.
  
  On Dec. 18, the B.C. Court of Appeal upheld the trial decision of B.C. Supreme Court Judge John Steeves that the loss belonged to CIBC.
  
  His ruling was that since Lin and Tan hadn’t received the benefit of mortgage money that had been forwarded to Chung, the bank still “owned” the funds and the mortgage was void, although the notary had completed all the other necessary steps in the transaction.
  
  Now, lawyers in real estate practice argue that the decision could have wider repercussions if they can’t rely on the undertakings that professionals make to one another to establish liability.
  
  “We have a system in place for dealing with undertakings to rely on (property) title in either mortgaging real property or transferring real property,” said property lawyer Brent Clark.
  
  “And what the court’s done is sort of turn that upside down and said, ‘You can’t rely on that system anymore’,” said Clark, a partner in the commercial lending practice at the firm Miller Thomson.
  
  Clark wasn’t a party to this dispute, which is referred to in court documents as Lin v. CIBC, but as counsel who often represents lenders, he said that upon reading the decision he and many of his peers are rethinking how they should fund mortgages.
  
  “It’s uncertain what we’ll have to do to avoid this risk,” Clark said.
  
  The lawyer for Lin, however, argued the case was a matter of determining from whom the funds had been stolen, and it doesn’t represent a wider precedent.
  
  “It was a property question,” said Karen Carteri, a lawyer with the firm McMillan LLP in Vancouver.
  
  In an interview Tuesday, she said this case is an aberration to the usual relationship between parties in a transaction.
  
  “Normally, these promises and undertakings are central to transactions and can be trusted,” she said. “Here, the undertaking failed.”
  
  In the case, notaries Ko and Chung completed the required documents for the $520,000 new mortgage from CIBC and Ko forwarded funds to Chung’s notary practice trust account with an undertaking that she would pay out Lin’s previous mortgage with Scotiabank, putting the CIBC loan with first claim on the home’s property title.
  
  Chung, however, disappeared along with the money before the process was complete.
  
  The CIBC mortgage was registered on Lin’s property title second to the Scotiabank mortgage, and they continued paying off both loans.
  
  In May of 2014, Lin filed suit in B.C. Supreme Court and won a civil claim on the argument that property law applied to the case, which meant it was a matter of determining who owned the money at the time it disappeared to establish the loss.
  
  CIBC appealed the decision, however, arguing it was an error to decide the case under property law instead of agency law and determining whether the borrowers held liable for the actions of Chung.
  
  After the fact, Clark wonders why the Society of Notaries Public(1) hasn’t stepped in to cover the loss, and is considering insisting on dealing just with lawyers on transactions in the future.
  
  “Which would be bad for the notaries,” he said.
  
  However, the lawyer for the notaries argued that Lin v. CIBC is not unique to notaries and its circumstances would have applied equally if lawyers were involved.
  
  To date, the society has paid out $8.6 million in the case, said Ron Usher, general counsel to the society, and no innocent party in the case will be stuck with a loss.

Source: Notary fraud case causing legal waves in B.C. courts.

For the British Columbia Court of Appeal ruling, see in Lin v. CIBC Mortgages Inc., 2015 BCCA 518 (December 18, 2015).

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(1) Apparently, the position of Notary in the Canadian province of British Columbia is unique in North America, whereby it is considered as a member of one of the branches of the legal profession and is sanctioned and safeguarded by law, providing non-contentious legal services to the public. Reportedly, the professional work of a British Columbia Notary is covered by an insurance plan that protects the public.