In Canada Mortgage and Housing Corp v. Gray (Canada Mortgage and Housing Corp v. Gray, 2013 ONSC 1986), the Canada Mortgage and Housing Corporation (“CMHC”), the insurer of mortgages, attempted to block the release of a mortgage debt from a bankrupted individual who was a victim of a fraudulent scheme, but in CMCH’s view, was either aware of the scheme or that he was reckless and/or willfully blind to the scheme.
Section 178(1)(e) of the Bankruptcy and Insolvency Act (BIA) provides that an order of discharge does not release the bankrupt from any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation.
CMHC sought a declaration under s.178 of the BIA that the outstanding amount of the debt due to CMHC from Evan Gray (“Gray”) would not be released by an order of discharge made in respect of Gray’s bankruptcy. (Gray made an assignment in bankruptcy shortly after the fraud was discovered and as a result of the garnishment of his income and his inability to pay the debts outstanding as a result of the fraud).
At the proceeding, the Judge determined that the evidence established that the mortgage arose out of a fraudulent scheme perpetrated by one John Roberts (“Roberts”) and others, but not Gray specifically. Roberts was the co-applicant on the mortgage and co-purchaser of the property with Gray. Whereas, CMHC submitted that Gray had obtained the mortgage on false pretences and/or fraudulent misrepresentation, that Gray was aware of the fraudulent scheme at the time he applied for the mortgage, and in the alternative, that he was reckless and/or willfully blind to the scheme.
Justice Wilton-Siegel reviewed the jurisprudence, confirming that failing to disclose material facts can amount to fraud, if, among other things, the nondisclosure constitutes a fraudulent misrepresentation. Silence may give rise to a misrepresentation only where the silence or half-truths render an express or implied representation that has been given false or materially misleading. Absent other circumstances, Justice Wilton-Siegel found that mere silence does not, by itself, constitute a false misrepresentation.
The Court confirmed the elements of fraudulent misrepresentation pursuant to s.178 of the BIA:
(i) the existence of a representation;
(ii) that the representation was false;
(iii) that the bankrupt knew that the representation was false and intended the creditor to act upon it so as to enable the bankrupt to obtain the credit sought; and
(iv) that the creditor did rely upon the false representation and extend credit.
Justice Wilton-Siegel held that CMHC had not demonstrated on a balance of probabilities that Gray knew or ought to have known of the fraudulent scheme, that Gray made specific fraudulent misrepresentations of his own or that Gray was willfully blind to the existence of the scheme. There was no evidence that Gray was aware of any representations that Roberts made in the mortgage application or that these may have been false. Gray did not visit the property subject to the mortgage and apparently had no knowledge of the value of the property, apart from what he was told by Roberts. Justice Wilton-Siegel was not satisfied that CMHC had established that Gray made representations regarding who would occupy the property or personally pay the mortgage payments.
Finally, Justice Wilton-Siegel held that while there were a number of indicia that might have raised a concern on the part of a reasonable person in Gray’s position, the test for purposes of willful blindness is a factual one – one’s suspicion must have been aroused to the point where he saw the need for further inquiries but deliberately chose not to make those inquiries. CMHC had failed to demonstrate such a state of knowledge.
In this case, the court applied a very strict reading of BIA s.178(1)(e) and found that the evidence put forward by CMHC was not strong enough to show that Gray’s actions and non-disclosures constituted false pretences or fraudulent misrepresentations. The fact that the evidence supported that Roberts was the architect of the fraud and controlled the flow of information seemed to bear strongly on the Court’s decision that Gray was not responsible or had the requisite knowledge of the fraud. This case shows that the court may apply a very high standard as to what constitutes willful blindness, but did not clearly address at what point should Gray should have chose to make further inquiries into a transaction that was certainly out of the ordinary.
by: Frank Spizzirri & Bonnie Tsui