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Real Property - Deferred Indefeasibility (Fraud). Chippewas of Saugeen First Nation v. South Bruce Peninsula (Town)
In Chippewas of Saugeen First Nation v. South Bruce Peninsula (Town) (Ont CA, 2024) the Ontario Court of Appeal considered an indigenous claim seeking damages and a declaration that "excluded coastline (the “Disputed Beach”) forms part of the Reserve, that no third parties have any interest in the Disputed Beach, and that the honour of the Crown and its fiduciary duties were breached by the wrongful demarcation of the Reserve boundaries".
The court considered the issue of the relationship between treaty land rights and the white private land property systems, here in the form of the "bona fide purchaser for value defence" (aka 'deferred indefeasibility'). While the court found error with the trial judge's conclusions, it found the order result to be correct:[54] The trial judge similarly found that the bona fide purchaser for value defence did not bar Saugeen’s exclusive right of use and possession of the Disputed Beach. The Town’s reliance on this defence was barred given it had actual notice of Saugeen’s claims at the time it acquired its deeds to land alongside the Disputed Beach. The Families similarly failed in advancing this defence, albeit for a different reason: the trial judge found that, because Ms. Lemon and Ms. Twining had inherited their interest in the property, they were not purchasers for value. Relying on this court’s decision in Benzie v. Hania, 2012 ONCA 766, 112 O.R. (3d) 481, the trial judge held that Ms. Lemon and Ms. Twining were “disentitled from relying on the defence of bona fide purchaser for value without notice” because they had not themselves paid valuable consideration. By contrast, Mr. Dobson – who did not participate in the appeal – was not barred on this basis, given that he paid consideration in the form of a vendor take back mortgage on his property.
[55] The trial judge proceeded to apply the principles set out by this court in Chippewas of Sarnia Band v. Canada (Attorney General) (2000), 2000 CanLII 16991 (ON CA), 51 O.R. (3d) 641 (C.A.), leave to appeal refused, [2001] S.C.C.A. No. 63, and balance Saugeen’s Aboriginal rights in the land with the rights of the innocent landowners. She conducted this balancing exercise in relation to all three Families, even though she had already concluded that Ms. Lemon and Ms. Twining were barred from relying on the bona fide purchaser for value defence.
[56] The trial judge considered the fact that Mr. Dobson had a financial interest in his restaurant and that the Lemon and Twining families had a financial interest in using the vacant beach as a profit-making parking lot. She also acknowledged their sentimental attachments to their properties. She contrasted those interests with Saugeen’s constitutionally-protected Treaty rights and the sacred cultural connection between Saugeen and the lakeshore.
[57] After conducting this balancing exercise, the trial judge concluded that, under the overarching principle of reconciliation, “it would be inequitable to apply the defence of bona fide purchaser without notice to deprive Saugeen of their reserve interest in the Disputed Beach”.
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(a) The trial judge erred by limiting the availability of the bona fide purchaser defence to exclude the Families
[230] We find that the trial judge erred in law when she concluded that the Families were barred from raising the bona fide purchaser defence because Alberta Lemon and Barbara Twining did not purchase their land but rather inherited it. We agree with the Families that the trial judge’s conclusion leads to a “perverse result”, in that it would encourage a claimant to wait for a current bona fide purchaser to pass away before commencing their claim against the beneficiaries of an estate. Put simply, the defence is not lost when property passes from an estate to its beneficiaries without consideration.
[231] As the Supreme Court explained in i Trade, at para. 60 (quoting Lionel Smith, The Law of Tracing (Oxford: Clarendon Press, 1997), at p. 386):The effect of the [bona fide purchaser] defence is to allow the defendant to hold its legal proprietary rights unencumbered by the pre-existing equitable proprietary rights. In other terms, where the defence operates, the pre-existing equitable proprietary rights are stripped away and lost in the transaction by which the defendant acquires its legal proprietary rights. What passes to any heirs is the same as what the good faith purchaser held: the property stripped of pre-existing encumbrances.
[232] We agree with the Families that Benzie does not purport to alter the operation of the bona fide purchaser for value defence as the Supreme Court defined it in i Trade, and as it has existed for centuries. When this court in Benzie held, at para. 37, that “[h]eirs do not fall into the category of a bona fide purchaser for value without notice” because heirs are “volunteers in the sense that they give no consideration for title” to property, it was making the point that beneficiaries are not in the same relationship to testators as bona fide purchasers are to previous owners of whom they were unaware. Bona fide purchasers may stand in a better position than original owners because of the series of transactions that led to their acquisition of the property, and the defence protects that position. Heirs, however, cannot stand in a better position – or even, generally, in a different position – than the estate from which they inherit: Benzie, at para. 37. Equally, however, heirs do not stand in a worse position than the estate.
[233] The trial judge therefore erred in law by misapplying Benzie and by limiting the bona fide purchaser defence in the way that she did. This does not, however, end the matter. As we explain in the next part of these reasons, the trial judge’s application of this court’s decision in Chippewas of Sarnia, and her ultimate conclusion that the Families were not entitled to an equitable remedy even if they were not barred from relying on the defence, do not require appellate intervention.
(b) The trial judge did not err in balancing the interests under the principles of reconciliation to deny applying the bona fide purchaser defence
[234] As noted above, the Families and the intervener take the position that the decision in i Trade and equitable principles demand that the bona fide purchaser defence be absolute. As we will explain, this court in Chippewas of Sarnia held something different.
[235] The Families note that the trial judge’s decision is the first time in Canadian history that a court has dispossessed an innocent third party as a remedy for historical wrongs committed by the Crown alone. In their view, they are unfairly “bear[ing] the brunt” of the Crown’s misdeeds. The intervener points to the English Court of Appeal in the seminal case of Pilcher v. Rawlins (1872), L.R. 7 Ch. App. 259 (Eng. C.A.), where Sir W.M. James, L.J. wrote, at p. 268, that “[t]he plea of purchaser for valuable consideration without notice is an absolute, unqualified, unanswerable defence”. The intervener submits that it is important for the defence to be absolute because it must be capable of consistent, predictable application.
[236] However, in Chippewas of Sarnia, this court held, at para. 309:[W]e accept that … the need to reconcile aboriginal title and treaty claims with the rights of innocent purchasers … should be considered on a case-by-case basis. It may well be that where the denial of the aboriginal right is substantial or egregious, a rigid application of the good faith purchaser for value defence would constitute an unwarranted denial of a fundamental right. [Emphasis added.] [237] It was not necessary in Chippewas of Sarnia to consider the possibility outlined here – that the test should not be applied rigidly where there is a substantial denial of an Aboriginal right – because the court found that the First Nation had accepted the terms of the land surrender in question. But the court made it clear that the bona fide purchaser defence is not absolute, and must yield when fairness demands it.
[238] Therefore, in our view, it was open to the trial judge, who balanced all of the competing interests, to find that “fairness dictates that a rigid application of the doctrine of bona fide purchaser without notice would render an injustice in the circumstances of this case”.
[239] It is not surprising that the parties have been unable to find any reported cases where the defence has not succeeded. This is because according to traditional property law doctrine, a bona fide purchaser’s interest will almost always carry the stronger equity. However, this is not always the case when Indigenous interests in land are in play, especially when the land at issue was set aside as a reserve. Due to the sui generis nature of a First Nation’s interest in reserve land, the doctrinal rules of property law do not necessarily apply without modification. Thus, when an Indigenous land interest is competing against later acquired legal rights, it is incumbent on the court to weigh the equities and specifically to consider the conscionability of upholding the legal rights of the bona fide purchaser in the circumstances.
[240] It is important to emphasize how significantly the competing interests in Chippewas of Sarnia, where the equities clearly favoured the private landowners, differ from those in the present case. Here, the Families’ attachment to their properties is largely rooted in their cottages, which in both cases are across the street from the Disputed Beach. This decision will not alter their rights to those cottages. Both of the Families had primarily a commercial interest in the beach, which they used as a parking lot for tourists. By contrast, as the trial judge held, Saugeen has a “constitutionally protected Treaty right to exclusive possession of its reserve territory – all of it – until otherwise surrendered”. More than that, the Saugeen people have a “cultural connection … [to] the land and water, which is sacred”. As the Supreme Court observed in Southwind, at para. 105, reserve lands are not “fungible commodities that can be easily replaced”. The constitutionally-protected, spiritual connection of Saugeen to its unceded Reserve land outweighs the commercial interests of the Lemons and Twinings.
[241] The bona fide purchaser for value defence is not absolute. It is an equitable tool to achieve fairness: Canadian Imperial Bank of Commerce v. Pena, 2022 ONSC 6941, at para. 13; Urban Metal Contracting Ltd. v. Zurich, 2022 ONCA 589, 163 O.R. (3d) 652, at para. 59. There is no principled reason that a treaty-protected reserve interest of a First Nation should, in every case, give way to the property interest of a private purchaser, even an innocent, good faith purchaser for valuable consideration. Such an approach is inconsistent with this court’s decision in Chippewas of Sarnia, fails to recognize the sui generis nature of Indigenous land interests, and would not move us closer to reconciliation.
[242] We note, as did the trial judge, that the Families are not left without remedies. Pursuant to the Phasing Order, the Families’ claims for compensation will be determined in Phase 2 of the trial.
[243] The trial judge’s balancing of the competing interests, and her ultimate finding that the equities in this case favoured Saugeen, are owed deference. As there is no basis on which to interfere with the trial judge’s exercise of discretion, we would reject this ground of appeal. . Froom v. Lafontaine
In Froom v. Lafontaine (Ont CA, 2023) the Court of Appeal considers 'deferred indefeasibility', the doctrine that holds (roughly) that while an immediate real property transfer through a fraudster is vulnerable to the original owner, that a further sale (to a 'deferred owner') can nonetheless convey valid title:(2) Deferred indefeasibility does not assist 128
[66] Under the theory or doctrine of deferred indefeasibility, the mere registration of an instrument that is void because of fraud does not cure the defect for the party who immediately acquires the property by means of that fraudulent instrument, but the next person dealing with the property may rely on the fraudulent document and its registration and takes good title. Deferred indefeasibility was explained by this court in Lawrence, at para 67:Under this theory, the party acquiring an interest in land from the party responsible for the fraud (the “intermediate owner”) is vulnerable to a claim from the true owner because the intermediate owner had an opportunity to avoid the fraud. However, any subsequent purchaser or encumbrancer (the “deferred owner”) has no such opportunity. Therefore, in accord with s. 78(4) and the theory of deferred indefeasibility, the deferred owner acquires an interest in the property that is good as against all the world. [67] Before the 2006 amendments, this court had considered the theory of deferred indefeasibility and the LTA in Household Realty Corporation Ltd. In that case, the defendant wife had forged her husband’s signature to create a fraudulent power of attorney, which she used to grant mortgages on the property. The court held that these mortgages were valid and enforceable under s. 78(4) of the LTA, despite their fraudulent origin, because the mortgagees offered good consideration and did not have notice of the fraud.[29] Although the court expressly declined to determine whether deferred indefeasibility applied under the LTA, the result was seen as a rejection of deferred indefeasibility in favour of immediate indefeasibility.[30]
[68] When the 2006 amendments were being debated, some members of the Legislative Assembly spoke of their fear that this court’s decision in Household Realty would open the doors for people to commit title fraud.[31] However, this court soon overturned Household Realty in Lawrence. Justice Gillese, writing for a unanimous five-judge panel, held that Household Realty was wrongly decided.[32] She stated that deferred indefeasibility, rather than immediate indefeasibility or absolute title, was consistent with prior case law and the plain meaning of the statute, as well as being preferable from a policy perspective.[33] As Gillese J.A. noted, a system of deferred indefeasibility “encourages lenders to be vigilant when making mortgages and places the burden of the fraud on the party that has the opportunity to avoid it, rather than the innocent homeowner who played no role in the perpetration of the fraud”.[34]
[69] Notably, Lawrence was heard based on the LTA as it existed before the 2006 amendments because those amendments did not have retroactive effect to the date of the transaction in question. However, the Attorney General of Ontario, who intervened on that appeal, advised that Bill 152, which introduced the amendments, was “intended to make clear that, as of the effective date, the [LTA] operates on the basis of deferred indefeasibility”.[35]
[70] In view of this court’s decision in Lawrence and the legislative history of the LTA, there is little doubt that the Act incorporates the doctrine of deferred indefeasibility and should be interpreted accordingly. The Act operates to put the obligation on the party acquiring the interest in land to ensure that it acquires that interest from the true owner. But, as we will explain, it does not follow that the appeal should be allowed.
[71] 128 argues that it would be consistent with the purpose of deferred indefeasibility for the court to exercise its residual discretion, which was not abrogated by the amendments to the LTA, to protect an innocent party like 128 against fraud. We reject this argument.
[72] While this court recognized in Lawrence that the LTA is predicated on a theory of deferred indefeasibility, it also held that “it is the relevant legislative provisions that must drive the analysis”.[36] 128 argues that deferred indefeasibility, as applied to protect innocent property owners against fraud, was not expressly abrogated by the 2006 amendments, so that the exceptions to s. 78(4) are not limited to those types of fraudulent activity defined in s. 1 of the Act in accordance with s. 78(4.1), relying on the court’s comments in Lawrence that the theory of deferred indefeasibility permits common law principles of real property to remain the law unless expressly abrogated.
[73] For example, while the deferred indefeasibility of title regime typically guarantees that a transfer in favour of a subsequent purchaser or encumbrancer is valid once registered, there may be an exception for a subsequent purchaser or encumbrancer with actual notice of a defect. In MacIsaac v. Salo, 2013 ONCA 98, 114 O.R. (3d) 226, this court endorsed the principle, at para. 39, “that equity continues to have application to claims governed by the Land Titles Act and that the Act has not abrogated equitable principles of actual notice”.
[74] Despite the ongoing role of equity in decisions made under the LTA, deferred indefeasibility and the principles underlying it do not assist 128 in this case. There are four reasons for this. First, this is not a case about whether a purchaser or encumbrancer had actual notice of a defect in title. The discussion in MacIsaac is thus of limited assistance. 128 does not claim that there was a defect in title to the condominium and that Seligman had notice of that defect. To the extent actual notice of a defect may defeat the interest of a bona fide purchaser or encumbrancer for value with notice of the defect, the principle would not apply in this case.
[75] Second, 128’s argument rests on a misunderstanding of deferred indefeasibility. 128 essentially argues that because Seligman was the immediate, rather than deferred, encumbrancer, the mortgage is not valid in her favour. The problem with this argument is that the doctrine of deferred indefeasibility concerns fraudulent, and therefore invalid, instruments. It is not the case that any instrument is invalid as against the immediate person who registers it simply because that person is the first to deal with it. Here, the Legislature, through the 2006 amendments, has delineated what constitutes a fraudulent instrument. For the reasons discussed above, the mortgage is not a fraudulent instrument.
[76] Third, applying the doctrine of deferred indefeasibility in this case would arguably be inconsistent with its own underlying principles. The doctrine is premised in part on the principle that, as between two innocent parties, the party who, by due diligence, has an opportunity to uncover and possibly prevent the risk of fraud ought to be the one who bears it.[37] While the motion judge’s findings of fact in this case are limited, given that his analysis proceeded on the assumption that 128’s allegations are true, it is notable that there is no allegation that Seligman should have been aware of the alleged fraud. To the contrary, in her affidavit evidence, Seligman stated that her counsel conducted a search of the corporation and obtained corporate documents. These documents identified Lafontaine as the director and officer of 128 and did not disclose any obvious fraud. 128 was better placed to avoid this fraud by due diligence than was Seligman.
[77] Fourth, and relatedly, not extending deferred indefeasibility to this case says nothing about any remedies the appellant might potentially have against Lafontaine directly. If 128 is correct that Lafontaine fraudulently revived the corporation and made herself a shareholder, officer and director, 128 might have a valid claim against her for the amounts it owes to Seligman under the mortgage. That, however, is a separate issue from whether the mortgage is valid and enforceable by Seligman.
[78] For these reasons, the doctrine of deferred indefeasibility does not assist 128. To the extent the court has a residual discretion beyond the LTA to invalidate the registration of an instrument, the motion judge did not exercise that discretion to invalidate the mortgage, nor do we. There is no doubt that, of the three parties, Seligman is entirely innocent; it is not clear how the dispute between Froom and Lafontaine over 128 will end.
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