Sep 4, 2018

ONTARIO COURT OF APPEAL SUMMARIES (AUGUST 27 – 31, 2018)

The Law Society of Upper Canada v. Nguyen, 2018 ONCA 709 (CanLII)

Facts:

The respondent, The Law Society of Upper Canada brought disciplinary proceedings against the appellant, a Toronto real estate lawyer, alleging professional misconduct in relation to eight real estate transactions. The appellant, who practices exclusively in the area of real estate law, completed approximately 750 real estate closings over a 2½ year period between 2006 and 2009. The respondent alleged that he had acted improperly in eight of those transactions and that his conduct amounted to participation in mortgage fraud. The respondent alleged that in each of those eight transactions, the purchasers had failed to provide all of the funds on closing required by the agreements of purchase and sale and had relied instead on credits that were not disclosed to the lender. The respondent alleged that the appellant’s failure to disclose the credits to the lenders amounted to assisting or participation in mortgage fraud.

The Law Society Tribunal Hearing Division Panel (the “Hearing Panel”) found that the Law Society had failed to prove that the eight transactions were fraudulent or that the appellant had dishonestly withheld information regarding the credits from the lender. However, the Hearing Panel also found that as the appellant had not disclosed the discrepancy between the amounts required to close the transactions by the agreements of purchase and sale and the amounts actually provided in seven of the eight transactions, he had failed to perform legal services in a competent fashion. The Hearing Panel imposed a penalty of two months’ suspension.

On appeal by the respondent, the Law Society Tribunal Appeal Division Panel (the “Appeal Panel”) found that the Hearing Panel had erred in law in its definition of mortgage fraud and that the error tainted its analysis of the evidence.

The Appeal Panel ruled that given the nature of the alleged frauds, the Hearing Panel should have asked itself the following questions with respect to each transaction:

  • Were material facts not disclosed to the lender?
  • If so, should an inference of dishonesty be drawn with respect to the transaction?…[A]n inference of dishonesty can be made based on circumstantial evidence, including red flags for fraud. In the absence of any other evidence, an inference should be drawn that the borrower was subjectively aware that the failure to disclose material facts put the economic expectations of the lender at risk, and accordingly was dishonest.
  • If the transactions were fraudulent, was the lawyer aware of, wilfully blind or reckless to the fraud?
  • If the lawyer had not knowingly participated in mortgage fraud, had he nevertheless committed a less serious form of professional misconduct by failing to recognize or act on signs of possible fraud?
  • The Appeal Panel ordered a new hearing with respect to six of the eight transactions.

    By a majority, the Divisional Court affirmed the Appeal Panel’s decision, finding that the Appeal Panel’s articulation of the test for fraud was reasonable.

    Issues:

    Did the Divisional Court err in:

    (1) upholding the Appeal Panel’s conclusion that the Hearing Panel applied the incorrect test for mortgage fraud?

    (2) upholding the decision of the Appeal Panel to order a new hearing?

    Holding:

    Appeal allowed.

    Reasoning:

    (1) No. The Court of Appeal did not accept the appellant’s submission that the appropriate standard of review is correctness. The issue of mortgage fraud by practising lawyers is a matter with which the Appeal Panel deals on a regular basis and that falls squarely within its area of expertise. It follows that the applicable standard of review is reasonableness.

    The Appeal Panel provided a detailed review of the principles of mortgage fraud based upon the jurisprudence of the Law Society Tribunal. The Appeal Panel’s statement of the proper test for mortgage fraud in the context of legal practice was reasonable. Furthermore, the Court of Appeal rejected the appellant’s submission that there was an inconsistency between parts one and two of the test as stated by the Appeal Panel.

    (2) Yes. The Hearing Panel found the appellant “to be a credible and truthful witness” and accepted his evidence. The Hearing Panel accepted the appellant’s evidence that he was aware that the credits were red flags of fraud, that he had investigated each one, and that in each case, he was satisfied with the explanation that the purchasers or their solicitors gave that the credits were proper.

    The Hearing Panel accepted the appellant’s evidence that in not disclosing these various credits to the lenders, he had not acted dishonestly but had made an honest mistake. That mistake meant that his conduct fell below the required standard and warranted a finding of failing to serve his client. However, given the lack of dishonesty, the Law Society had failed to make out an essential element of participation in mortgage fraud.

    While the Court of Appeal accepted the reasonableness of the Appeal Panel’s articulation of the test for mortgage fraud, the Court disagreed that it was reasonable to order new hearings in the circumstances of this case. As is clear from step three of the Appeal Panel’s test, to sustain a finding of participation in mortgage fraud, the Law Society must prove that the lawyer was “aware of, wilfully blind or reckless to the fraud”. While it is no defence to fraud if the accused identifies a risk but merely hopes that it will not materialize, those are not the facts of this case. Additionally, while the appellant’s belief was mistaken, it nonetheless indicates that he was not aware, wilfully blind or reckless to the possibility that his failure to disclose the credits could put the lender’s economic interests at risk.

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