Lawyer ‘made an honest mistake’

Judges from the Ontario Court of Appeal said the Law Society Tribunal Hearing Panel properly found that a lawyer “made an honest mistake” in mishandling mortgage cases, overturning some aspects of findings by the Law Society Tribunal Appeal Panel and the Ontario Divisional Court.

The Aug. 30 Court of Appeal decision, The Law Society of Upper Canada v. Nguyen, 2018 ONCA 709, was written by Justice Robert Sharpe, with justices Russell Juriansz and Lois Roberts concurring.

Sharpe ordered $7,500 in costs to be paid to the appellant for the Court of Appeal case and $5,000 for the previous Divisional Court case.

There were several issues at play in the court, said Brad Teplitsky, a lawyer who represented appellant Steve Nguyen.

One issue was whether mortgage fraud had taken place and what test the court should use to make that determination, and the other was whether Nguyen possessed what Sharpe called “the mental element” required to sustain mortgage fraud. A third issue in the case was whether there should be a new hearing with a different test of mortgage fraud.

The appeal decision focused on six of the 750 real estate closings Nguyen performed between 2006 and 2009, at the following addresses: 5442 Wellington Road in Guelph, Ont., 116 Comoq Avenue in Vaughan, Ont., 320 Hemlock Avenue in Stoney Creek, Ont. and Toronto properties at 60 William Cragg Drive, 5 Montcrieff Drive and 28-3690 Keele St.

In the transactions, Nguyen did not inform the mortgage lender that the purchasers of the properties were relying on credits such as promissory notes and gifts.

The Court of Appeal decision defers to the Law Society Tribunal Hearing Division Panel 2014 finding that, while Nguyen had failed to serve his clients in the transactions, the law society did not prove “the transactions were fraudulent or that the appellant had dishonestly withheld information.”

However, the court disagreed with the hearing panel’s approach to defining mortgage fraud.

“None of the shortcomings in the legal test for mortgage fraud that the Hearing Panel applied undermine its finding that the appellant was not aware of, wilfully blind or reckless to any fraud,” Sharpe wrote in the decision.

“The Hearing Panel properly found that the appellant made an honest mistake and fell below the required professional standard.”

It’s still unclear whether mortgage fraud ultimately took place, based on the various arguments outlined by the different levels of court, says Teplitsky.

But Teplitsky says Nyugen was successful in that the Court of Appeal found there should not be a new hearing.

After the 2014 tribunal decision, the Law Society Tribunal Appeal Division Panel in 2016 ordered a new hearing, finding “the Hearing Panel had erred in law in its definition of mortgage fraud.”

In 2017, the majority of the Divisional Court, which had one dissenting opinion, also decided that the hearing panel “erred in its legal analysis” of the mortgage fraud, but it said the court should not have ordered a new hearing.

However, the Aug. 30 Court of Appeal decision agreed with the Divisional Court that there should not have been a new hearing and said “it was unreasonable for the Appeal Panel to conclude that it would be possible to come to a different conclusion on a new hearing simply by viewing the appellant’s conduct through a different legal lens.”

The alleged frauds, called “value fraud,” might be similar to a scheme that has been common since the 1980s and 1990s, says Lee Akazaki, a partner at Gilbertson Davis LLP Barristers and Solicitors, who was not involved in the case but has seen mortgage fraud cases where lawyers have been duped.

This type of fraud often involves a staged transaction where a property sells for more than the fair market value, Akazaki says. In this situation, the lender loses the money represented by bogus credits, he says.

“Any time we have a time when property values — in Toronto, for example — are increasing by 25 to 30 to almost 40 per cent per annum, depending on the location, you can buy a property and then flip it, and the lender might not recognize there’s a problem here when the flipped price is 40-per-cent or 50-per-cent higher.”

But Nyugen faced a different fraud that was more difficult to prove, says Teplitsky. In the situations experienced by Nyugen, some of the properties sold at fair market value.

Nguyen acted for multiple parties in some of the transactions, and some of the clients were repeat clients.

Some of the clients told Nguyen that they were friends or relatives with previous debts to each other.

Nyugen investigated the credits used in the case and satisfied themselves that they were legitimate, the decision says.

The Law Society of Ontario said it is reviewing the decision, and the Law Society Tribunal declined to comment, citing policies against commenting on decisions.

Teplitsky says the decision may make it harder for the law society to prove future mortgage fraud in future cases.

“The analysis of mortgage fraud will now likely move away from consideration of the traditional red flags of mortgage fraud to the consideration as to whether there has been nondisclosure of material facts. And on that analysis, the law society is going to find it much more difficult to establish the existence of a mortgage,” Teplitsky says.