CITATION: Law Society of Upper Canada v. Talarico, 2014 ONSC 3423
DIVISIONAL COURT FILE NO.: 112/14
DATE: 20140730
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
DAMBROT, SWINTON AND TOSCANO ROCCAMO JJ.
B E T W E E N :
The Law Society of Upper Canada Applicant/Respondent in Appeal
– and –
Rosario Talarico Respondent/Appellant
Sean Dewart and Shosan Bentley-Jacobs, for the Applicant/Respondent in Appeal
Graeme A. Hamilton, for the Respondent/Appellant
HEARD at Toronto: May 28, 2014
Dambrot J.:
[1] The appellant, Rosario Talarico, is an experienced real estate practitioner in Ottawa. He acted for the ultimate purchaser and the institutional lender on thirteen “flip transactions” in which a property was acquired by one purchaser and rapidly flipped to the ultimate purchaser for an inflated price. The Law Society of Upper Canada (“Law Society”) brought disciplinary proceedings against the appellant in respect of these transactions.
[2] In para. 3 of its Notice of Application commencing the proceedings against the appellant, the Law Society alleged that the appellant:
(a) participated in or knowingly assisted in fraudulent or dishonest conduct by his vendor and purchaser clients and himself or associated persons to obtain mortgage proceeds under false pretences involving certain properties, or, alternatively, failed to be on guard against being duped by unscrupulous clients or associated persons in connection with the transactions;
(b) acted for multiple parties with conflicting interests without any or adequate disclosure;
(c) failed to be honest and candid when advising his lender clients and purchaser clients in connection with the transactions by failing to disclose material facts to the lender clients, as set out in the particulars; and
(d) failed to serve his lender and purchaser clients to the standards of a competent lawyer, in certain particularized ways.
[3] The central allegation made by the Law Society was that the appellant participated or knowingly assisted in fraudulent or dishonest conduct by not being honest and candid when advising his clients. More specifically, the Law Society alleged that the appellant: (1) was aware of the nature of the flips, but did not disclose the flips to the lenders, and (2) failed to disclose to the lenders that he was facilitating a scheme in which he permitted the purchasers to acquire the properties without putting in the equity that the lenders expected and required.
[4] The Law Society attempted to prove its case by adducing the documentary evidence that related to the transactions, a transcript of the appellant’s interview with a Law Society investigator, and an expert witness who testified about the standards of a reasonably prudent real estate lawyer at the relevant time. The appellant did not testify.
[5] On January 3, 2013, the Law Society Hearing Panel (“hearing panel”) concluded that allegations (a), (b) and (c) were not established on the basis that it is “impossible to draw inferences of fraud or dishonest conduct or intent” without evidence from “the persons involved in the transactions.” It did find that the appellant had committed professional misconduct because he failed to serve his lender and purchaser clients to the standard of a competent lawyer (allegation (d)).
[6] The Law Society brought an appeal to the Law Society Appeal Panel (“appeal panel”). On January 30, 2014, the appeal panel allowed the appeal and ordered a new hearing on all particulars. The appeal panel held that the hearing panel misdirected itself as to how fraud must be proven and that this skewed its evaluation of the existing circumstantial evidence and tainted its findings.
[7] Talarico brought an appeal from the decision of the appeal panel to the Divisional Court, seeking an order setting aside the appeal panel’s order and reinstating the order of the hearing panel.
THE IMPUGNED CONDUCT
[8] Beginning in 1998, Carlo Ardovini began referring real estate files to the appellant. Ardovini and members of his family, or companies they controlled, purchased properties and flipped them within a short period of time for a significantly increased price. The appellant represented the ultimate purchasers of the properties as well as the institutional lenders who provided mortgage funds to these purchasers. Luigi Savone, another lawyer, represented the vendor (Ardovini and his family members) in all but one of the transactions.
[9] I will not summarize the evidence adduced by the Law Society in detail. For the purposes of this appeal, it is sufficient to say the following. In all of these real estate transactions, the institutional lenders provided mortgage financing that represented well over 100% of the original purchase price. There was no evidence that an institutional lender was ever advised that the properties had been flipped or what the original purchase price had been. Any deposits on the second purchase were purportedly paid directly to the vendor (ordinarily, deposits are held by real estate brokers or lawyers to protect purchasers if the transactions do not close). Moreover, in many transactions, the purchase was completed on the strength of an uncertified cheque and closed in contravention of the institutional lender’s specific instructions or the terms of the agreement of purchase and sale. The appellant participated in the placement of secondary financing on some properties, despite the institutional lender’s instructions that no secondary financing was to be placed on the properties. Finally, Ardovini assumed the ultimate purchasers’ transaction costs on a number of files, which is an unusual practice.
THE DECISION OF THE HEARING PANEL
[10] In its Decision and Order, the hearing panel determined that although not all of the allegations had been established, the appellant contravened s. 33 of the Law Society Act, R.S.O. 1990, c. L.8, and ordered that the appellant be suspended for three months and pay costs of $25,000.
[11] While the decision of the hearing panel is nineteen pages long, the analysis of the Law Society’s case is found in three pages of a section of the hearing panel’s decision entitled “Analysis and Findings.” This section of the decision actually begins at para. 93, but in paras. 93-98, the panel simply restates the Law Society’s allegations, mentions in brief compass the evidence adduced by the Law Society and criticizes the thoroughness of the Law Society’s investigation, a criticism rejected by the appeal panel. The hearing panel’s actual reasons are found in paras. 99-118. The comments said to reflect errors in law are scattered throughout those paragraphs.
[12] Consideration of the allegation of participating or assisting in fraudulent conduct in para. 3(a) of the Notice of Application begins at para. 99. The first comments reflecting the hearing panel’s analysis of this allegation are as follows:
[99] The Law Society provided no evidence and called no witnesses to testify that they were misled by the Lawyer or had suffered an economic loss as a result of the conduct of the Lawyer in the subject transaction or otherwise.
[100] It is also important to note that there was no allegation to the effect that the Lawyer had taken funds not owing to him, or that he had been unjustly enriched in some way by his participation in these transactions.
[13] After referring in para. 101 to the appellant’s comments in his interview that he had heard no complaints about the transactions from any of the parties, the panel continued:
[102] The absence of any evidence from persons involved in the transactions, or any proof beyond what is (or, more correctly, what is not) in the Lawyer’s files, makes it impossible to draw inferences of fraud or dishonest conduct or intent. All that is before the panel is the Law Society’s assertion that, since aspects of the transactions seemed irregular on their face, they must be so.
[14] At para. 104, the panel noted the appellant’s explanation in his interview for not thinking that quick flips at inflated prices were fraudulent: he thought that Ardovini was doing significant improvements in the short time between purchase and sale, and that in some cases this was possible because the vendor gave Ardovini access before closing in order to permit him to renovate.
[15] Next the panel said, at para. 105, that the unusual features of the transactions relied on by the Law Society as evidence that the appellant had facilitated an obviously fraudulent scheme were viewed by the appellant as not unusual for Ardovini. The panel noted that the appellant said in his interview that the only conclusion that made sense to him for the prices of distressed properties to go up as they did, having regard to the fact that the banks must have appraised the properties, “would have to be value added to the property.”
[16] The panel continued:
[106] Absent any evidence from the banks that would contradict Mr. Talarico’s statements to the investigator about the context in which he completed these transactions, the contention that he was dishonest with his purchaser and lender clients cannot be made out. [Emphasis added.]
[17] The panel added, at para. 107, that the context included the appellant’s “appreciation” of Mr. Savone, the lawyer on the other side of the transactions, who, he said in his interview, had a very good reputation as honest and conscientious.
[18] The panel also stated, at para. 108, that the idea that the economic interests of the lenders was imperiled by the non-disclosures of the flips, despite the fact that their money was the only money in the transactions, “cannot be clearly and convincingly shown without proof. Here the panel had no proof, either by way of evidence from the banks, or evidence that the uncertified cheques were never negotiated.”
[19] The panel concluded its consideration of para. 3(a) at para. 111, stating, “The panel accepts and adopts the submissions on particulars 3(a) … made by counsel for the Lawyer.”
[20] The panel then turned to the allegation in para. 3(c) that the appellant failed to be honest and candid when advising his lender clients and purchaser clients in connection with the transactions, by failing to disclose material facts to his lender clients, including:
(1) recent re-sales and price escalations of properties;
(2) non-payment of deposits as provided in the agreements of purchase and sale;
(3) the granting of credits for additional purported deposits or for items outside of the agreement not provided for in the agreements;
(4) closing funds not being advanced by the purchasers;
(5) payments to non-parties from sales proceeds;
(6) discrepancies between purchase prices shown in agreements and the actual consideration paid on closing; and
(7) the beneficial ownership of the properties.
[21] The complete consideration of this allegation is found in para. 112 of the hearing panel’s reasons, where it stated:
The panel finds that there was insufficient evidence to determine that the Lawyer failed to be honest and candid by failing to disclose material facts, as set out in particular 3(c). The admission in his Interview to the effect that he failed to apprise the lenders of “flips” and discrepancies does not, in our view, rise to the level of dishonesty when viewed in the context of what he knew of the parties and their practices, including the lenders, and the total absence of evidence from the other parties to these transactions.
[22] Paras. 113-115 deal with the allegation that the appellant failed to serve his clients to the standard of a competent lawyer. The panel found that this allegation was made out. The concluding paragraphs add nothing to this analysis.
THE STANDARD OF REVIEW
[23] Pursuant to ss. 49.38 and 49.39(1) of the Law Society Act, the appellant has a right of appeal to this court from the decision of the appeal panel on any grounds. However on this appeal, the appellant argued that the appeal panel erred in law in concluding that the hearing panel misdirected itself as to how fraud must be proven. As a result, he argued, initially, that the standard of review on this appeal is correctness.
The Law Society agreed that the Appeal Panel’s decision regarding the test for fraud is a question of law requiring a standard of review of correctness. However it argued that the decision regarding the application of the test for fraud to the facts is a question of mixed fact and law, appropriately reviewed under the standard of reasonableness. I agree with the position of the Law Society.
ANALYSIS
The reasons of the appeal panel
[24] In careful and detailed reasons, the appeal panel concluded that the hearing panel misdirected itself in concluding that the Law Society failed to prove that the transactions were fraudulent, and that this tainted all of the hearing panel’s disputed findings and compelled a new hearing. More specifically, the appeal panel concluded, at para. 39:
The hearing panel misdirected itself as to how fraud must be proven. This skewed its evaluation of the existing circumstantial evidence. This misdirection tainted all of its findings except perhaps for its finding that the respondent had indeed failed to serve his clients. For example, it may not have accepted the respondent’s lack of subjective dishonesty had it found that the transactions were fraudulent. Alternatively, it may have found that the respondent failed to be on guard against unscrupulous persons, even if not satisfied that he knew he was involved in fraud. Accordingly, there must be a new hearing on all particulars that were dismissed.
[25] The appeal panel’s conclusion that the hearing panel misdirected itself as to how fraud must be proven had several components. I will not attempt to summarize the entirety of the appeal panel’s reasons. But I will set out its key points.
[26] The appeal panel agreed with the Law Society that the hearing panel misdirected itself as to how fraud must be proven as a result of two, interrelated legal errors. First, the hearing panel erroneously believed that mortgage fraud of this nature could not be proved in the absence of evidence from the participants in the transactions or the institutional lenders. The second error is really the other side of the coin from the first error: the hearing panel erroneously believed that it was not open to it to infer the elements of fraud from circumstantial evidence.
[27] The appeal panel began by reviewing the passages in the hearing panel’s reasons that suggest that the hearing panel made the first error in its analysis of mortgage fraud. In these paragraphs the panel asserted that in the absence of evidence from the persons involved in the transaction and without any proof beyond the content of the appellant’s file, it is impossible to draw inferences of fraud, dishonest conduct or intent.
[28] The appeal panel then considered and rejected the appellant’s argument that these passages were not articulating a general approach to the proof of a mortgage fraud of this nature, but rather an explanation of how the hearing panel viewed the evidence in this case. While recognizing that it was not its function to make findings of fact, the appeal panel demonstrated that the hearing panel could not have been making a case-specific statement in view of the overwhelming nature of the evidence of fraud and the absence of any innocent alternative scenario. I will not review this analysis other than to say that it is entirely convincing.
[29] The appeal panel then proceeded to review a series of paragraphs in which the hearing panel exhibited the second error: its erroneous belief that it was not open to it to infer the elements of fraud from circumstantial evidence. In these instances, the hearing panel stated that there was no evidence that lenders were misled, no evidence of economic loss, no evidence that economic interests were imperilled by non-disclosure of the flips, and no evidence of fraud, dishonest conduct or intent. In each instance the appeal panel demonstrated that there was a wealth of circumstantial evidence from which the elements of fraud could be inferred.
[30] The appeal panel also demonstrated that the hearing panel made additional errors of law. For example, it erroneously believed that that the Law Society had to prove that there was an actual loss in order to prove fraud, that the Law Society had to prove that the appellant took funds not owing to him or that he had been unjustly enriched by the transactions and that if the Law Society actually believed that the appellant had perpetrated a fraud it would have obtained an order for interim suspension or restriction of his practice.
The appellant’s argument
[31] The appellant’s argument, in a nut shell, was that in the guise of identifying errors of law, the appeal panel interceded in the hearing panel’s assessment of the evidence. The appeal panel failed to accord the requisite deference to the hearing panel’s findings of fact and assignment of weight.
[32] The appellant also argued that the appeal panel fell into the error of dissecting the reasons into small pieces and examining each piece in isolation as if it described, or was intended to describe a legal principle applied by the trier of fact: R. v. Morrissey (1995), 22 O.R. (3d) 514 (C.A.) at pp. 524-25.
[33] In addition, the appellant argued that an error of law will arise from the assessment of evidence only if the hearing panel failed to consider relevant evidence, in the sense that it completely disregarded relevant evidence, or if its assessment was based on a wrong legal principle.
The Law Society’s argument
[34] The Law Society argued that the appeal panel correctly found that the hearing panel misdirected itself on how fraud is proven. The hearing panel considered a number of irrelevant factors in determining whether the appellant committed fraud, therefore misapplying the test for fraud and committing an error of law.
[35] First, the hearing panel found proof of real economic loss on the part of the appellant’s lender clients necessary for a finding of fraud. However, all that must be proved is a dishonest act and a corresponding deprivation. Deprivation can include putting clients’ economic interests at risk even if they suffer no actual loss.
[36] Second, the hearing panel also incorrectly considered whether the second transaction, the “flip”, was for fair market value, another irrelevant consideration to the issue of whether fraud was committed.
[37] Third, the hearing panel considered the adequacy of the Law Society’s investigation into the appellant. The appeal panel correctly found, albeit in obiter, that the adequacy of an investigation is not properly part of the test for fraud.
[38] Fourth, in response to the appellant’s argument, the Law Society said that the appeal panel did not unduly dissect the hearing panel’s decision – it merely reviewed the hearing panel’s decision with the necessary level of detail to fully explain its reasoning.
Did the appeal panel allow the appeal on the basis of an error in law?
[39] The appellant argued that the Law Society, and in turn the appeal panel framed the issues in this case in terms of legal error in order to permit the disturbance of “otherwise unassailable findings of fact.” It is true that viewed superficially, it might appear that the hearing panel’s decision simply turned on findings of fact. For example, near the end of its reasons, the hearing panel stated, at para. 116:
In conclusion, the panel finds that the Law Society has not met its burden to establish, on a balance of probabilities, that the Lawyer engaged in professional misconduct in relation to particulars 3(a), (b) and (c).
[40] It might appear from statements such as this that the decision of the hearing panel turned exclusively on a factual determination, which would not give rise to an appeal by the Law Society. The Law Society is restricted to appeals on questions of law or fact and law.[^1] However the appeal panel thought otherwise. It concluded, at para. 6 of its reasons:
In our view, the hearing panel misdirected itself in law in concluding that the Law Society failed to prove that the transactions were fraudulent. This tainted all of the hearing panel’s disputed findings and compels a new hearing. As a result, it is unnecessary for us to decide the other issues raised on appeal. [Emphasis added.]
[41] I have no doubt that the decision of the appeal panel turned on a pure question of law. Whether the appeal panel was correct in its appreciation of that question of law remains to be determined.
Did the appeal panel correctly determine that the hearing panel erred in law?
[42] I will say immediately that I am in substantial agreement with the reasons of the appeal panel. Its conclusions disclose no error of law. The appeal panel did not, as the appellant argues, fall into the error of dissecting the hearing panel’s reasons into small pieces and examining each piece in isolation as if it described, or was intended to describe a legal principle applied by the trier of fact: Morrissey at pp. 524-25. Nor did the appeal panel err in its conclusion that the decision of the hearing panel was based on a wrong legal principle. These two grounds of appeal are inexorably intermingled. As a result, I will deal with them together.
[43] I take no issue with the proposition that appeal courts must not dissect reasons for judgment into small pieces and examine each piece in isolation as if it described, or was intended to describe a legal principle applied by the trier of fact. On the other hand, it is impossible to review reasons for judgment without examining them bit by bit. The error of the reviewing tribunal is not the dissection; it is the examination of the pieces in isolation. The appeal panel did not fall into this error. On the contrary the panel looked at the troubling passages in the reasons together and in context. In order to demonstrate this, it is necessary to return to the hearing panel’s reasons.
[44] I have described the reasons of the hearing panel in some detail above, because the comments said to reflect errors in law are scattered throughout those paragraphs. Upon reviewing the entirety of the reasons of the hearing panel, as the appeal panel did, the consistent theme is impossible to miss: absent direct evidence from the other participants in the various mortgage transactions, the alleged misconduct is not capable of being established. To repeat, the hearing panel said:
- The absence of any evidence from persons involved in the transactions … makes it impossible to draw inferences of fraud or dishonest conduct or intent.
- Absent any evidence from the banks that would contradict Mr. Talarico’s statements to the investigator about the context in which he completed these transactions, the contention that he was dishonest with his purchaser and lender clients cannot be made out.
- [T]he idea that the economic interests of the lenders was imperiled by the non-disclosures of the flips … because theirs was the only money in the transactions … cannot be clearly and convincingly shown without proof. Here the panel had no proof, either by way of evidence from the banks, or evidence that the uncertified cheques were never negotiated.
- The panel finds that there was insufficient evidence to determine that the Lawyer failed to be honest and candid by failing to disclose material facts, as set out in particular 3(c). The admission in his interview to the effect that he failed to apprise the lenders of “flips” and discrepancies does not, in our view, rise to the level of dishonesty when viewed in the context of what he knew of the parties and their practices, including the lenders, and the total absence of evidence from the other parties to these transactions. [Emphasis added.]
[45] Perhaps one of these comments standing alone could be understood to be a reference to an insufficiency of evidence in this particular case but viewed together, and in context, that cannot be so. The Law Society’s case was compelling, and the appellant called no evidence, relying solely on the exculpatory parts of his own statement to the Law Society investigator. The hearing panel clearly believed that inferences of dishonesty or inferences that the economic interests of the lenders were imperilled required direct evidence and could not be drawn from circumstantial evidence. The two conclusions reached by the appeal panel are inescapable: (1) the hearing panel erroneously believed that mortgage fraud of this nature could not be proved in the absence of evidence from the participants in the transactions or the institutional lenders, and (2) the hearing panel erroneously believed that it was not open to it to infer the elements of fraud from circumstantial evidence.
[46] I agree with counsel for the appellant when he says that it is hard to imagine that the hearing panel was not alive to the role that can be played by circumstantial evidence in the proof of fraud, particularly when case law on the issue was argued at the hearing. I can only say in response that the panel’s misunderstanding of the law ran deeper than that and skewed the result.
[47] For example, it is plain that fraud can be established without any proof that the mortgage lenders actually suffered an economic loss. See, for example, R. v. Olan, [1978] 2 S.C.R. 1175 at p. 1182, where Dickson J., as he then was, stated, for the court, “The element of deprivation is satisfied on proof of detriment, prejudice, or risk of prejudice to the economic interests of the victim. It is not essential that there be actual economic loss as the outcome of the fraud (emphasis added).” This was reiterated by McLachlin J., as she then was, for the majority in R. v. Theroux, [1993] 2 S.C.R. 5 at p. 15, and adopted in a decision of the Law Society Appeal Panel in Law Society of Upper Canada v. Hatcher, 2012 ONLSAP 27 at para. 23.
[48] However the hearing panel did not appear to understand that deprivation is satisfied on proof of a risk of prejudice to the economic interests of the victim. This is the only explanation for the panel’s comment that there was no proof that the interests of the lenders were imperiled by the non-disclosures of the flips, and its finding that evidence from the banks, or evidence that the uncertified cheques were never negotiated, was necessary. Of course, if an actual loss had to be established, the circumstantial evidence in this case was likely insufficient to prove it. But actual loss need not be established. Perhaps the hearing panel was led astray by the erroneous submission of counsel for the appellant (then respondent) before them. The panel stated, at para. 89, that counsel argued that in order to prove that the lawyer knowingly assisted in defrauding the lender through non-disclosure of fact, the Law Society had to prove, among other things, that “this information would have affected the lenders’ decision to advance the funds.” No such proof is necessary.
[49] This error goes to the heart of the matter. If the hearing panel had properly understood the elements of fraud, and the role of circumstantial evidence in proving it, the panel could, and no doubt would have found that there was a fraud in this case. Once satisfied that there was a fraud, it could have appropriately determined whether or not the appellant participated in it. But having misunderstood the nature of fraud, the panel’s conclusion that it is “impossible to draw inferences of fraud or dishonest conduct or intent” on the part of the appellant is fatally flawed.
[50] As a result, it is not necessary to consider the remaining issues raised by the Law Society.
DISPOSITION
[51] The appeal panel committed no error of law in allowing the appeal from the hearing panel. Its decision was reasonable, and this appeal must be dismissed.
[52] On the agreement of the parties, costs to the respondent are fixed in the amount of $10,000 all-inclusive, payable within 90 days.
DAMBROT J.
SWINTON J.
TOSCANO ROCCAMO J.
RELEASED: July 30, 2014
CITATION: Law Society of Upper Canada v. Talarico, 2014 ONSC 3423
DIVISIONAL COURT FILE NO.: 112/14
DATE: 20140730
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
DAMBROT, SWINTON AND TOSCANO ROCCAMO JJ.
B E T W E E N :
The Law Society of Upper Canada Applicant/Respondent in Appeal
– and –
Rosario Talarico Respondent/Appellant
REASONS FOR JUDGMENT
DAMBROT J.
RELEASED: July 30, 2014
[^1]: Section 49.33(2) of the Law Society Act provides that: The Society may appeal under s. 49.32 only on a question that is not a question of fact alone, unless the appeal is from an order under section 49.28, in which case the Society may appeal on any grounds.