Justice Corbett: TD Bank could not have known mortgaged house was matrimonial home
The matter of Pessotski v. Toronto Dominion Bank was heard by Justice Corbett of the Ontario Superior Court of Justice in April of 2011.
The spouses in this case had separated and Mr. Pessotski encumbered [laid claim to] the matrimonial home to two separate lending institutions (one of which was the TD Bank) under false pretences – he told them that he was not married.
This is a significant lie to tell within the context of both family law and real estate law because as a result of these unilaterally sought after and executed transactions, Ms. Pessotski did not consent to the loans, which is a violation of Section 23 of the Family Law Act.
Mr. Pessotski mortgaged one of the loans against the matrimonial home via a secured line of credit. Ms. Pessotski therefore brought an Application to set aside this line of credit.
Ms. Pessotski’s argument that the TD mortgage is not enforceable is two-fold. First, she claims TD should have known Mr. Pessotski was married as a result of past dealings between the couple and TD Waterhouse. Second, TD did not register the mortgage until after it had notice of Mr. Pessotski’s status as a spouse.
TD’s argument was that they did not have knowledge of Mr. Pessotski’s spousal status and that the late registration of the encumbrance does not impact its enforceability.
It should be noted that between the time the encumbrance was issued by the bank and the time the matter against the bank was heard by the Court, Ms. Pessotski obtained a Caution on Title, which is something that essentially serves as notice to others that she has possessory rights in the property. TD claims that this Caution does not create a legal interest in the property and that Ms. Pessotski’s application should have been directed at her husband and not them, as the money can be accounted for through some other means of settlement, such as an equalization payment or support payment.
Justice Corbett states that it is clear to him that Mr. Pessotski committed fraud by lying to the bank about his spousal status and obtaining financing for personal use without informing his wife or obtaining her consent. However, insofar as the bank is concerned, Justice Corbett confirmed that they did not actually know of Mr. Pessotski’s spousal status, nor were they wilfully blind to it.
So, then where does the onus lie in this case?
Is the bank expected to make any inquiry into what their clients are telling them, or are they simply to take the information at face value? Justice Corbett’s position is that under these circumstances the bank is under no obligation to search through the information of its affiliates in order to confirm what they heard from Mr. Pessotski. The information that would have put people at the bank on notice of the spousal status was not available to the relevant TD personnel because the TD Waterhouse information could not be accessed directly by the TD loans department. Because there was no basis for suspicion in this case, TD Bank did not do anything to assist in the fraud and there is no duty to undertake due diligence to confirm a declaration made by someone seeking a loan.
The relevant portions of the Family Law Act are as follows:
Equitable Mortgage for Value Without Notice
Section 21(1)(a): No spouse shall dispose or encumber an interest in a matrimonial home without the consent of the other spouse.
Subsection 21(2): If a spouse disposes of or encumbers an interest in a matrimonial home in contravention of subsection (1), the transaction may be set aside on an application under section 23, unless the person holding the interest or encumbrance at the time of the application acquired it for value, in good faith, and without notice, at the time of acquiring it or making an agreement to acquire it, that the property was a matrimonial home.
Justice Corbett determined that TD showed its actions fit into subsection (2) above and Ms. Pessotski was ultimately unsuccessful in her claim against the bank because the fault lied with her husband and not TD. Justice Corbett’s reasoning was based on the fact that the bank acquired its mortgage security before it had notice of Ms. Pessotski’s spousal status, and therefore she had no entitlement under Section 23 of the Family Law Act.