Court of Appeal for Ontario
Docket: C64918
Judges: Sharpe, Juriansz and Roberts JJ.A.
Parties
Between
The Law Society of Upper Canada Applicant (Respondent)
and
Cuong The Nguyen (also known as Steve Nguyen) Respondent (Appellant)
Counsel
Brad Teplitsky, for the appellant
Glenn Stuart, for the respondent
Hearing and Decision
Heard: August 14, 2018
On appeal from the order of the Divisional Court (Justices Edward F. Then and Harriet H. Sachs, Justice Ian V.B. Nordheimer dissenting), dated September 14, 2017, with reasons reported at 2017 ONSC 5431, dismissing an appeal from an order of the Law Society Tribunal Appeal Division, dated April 27, 2016, with reasons reported at 2016 ONLSTA 9, reversing in part an order of the Law Society Tribunal Hearing Division, dated October 30, 2014, with reasons reported at 2014 ONLSTH 209.
Decision
By the Court:
Introduction
[1] 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 Law Society alleged that in each of those 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 Law Society alleged that the appellant's failure to disclose the credits to the lenders amounted to assisting or participation in mortgage fraud.
[2] 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 amount 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.
[3] On appeal by the Law Society, 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 ordered a new hearing with respect to six of the eight transactions.
[4] By a majority, the Divisional Court affirmed the Appeal Panel's decision. The dissenting judge accepted that the Hearing Panel had erred in its legal analysis of the elements of mortgage fraud but found that on its findings, the mental element required for mortgage fraud could not be made out and that the court should not have ordered a new hearing.
[5] For the following reasons, we allow the appeal. The Divisional Court did not err in finding that the Appeal Panel's articulation of the legal test for mortgage fraud was reasonable. However, the order to remit the matter for a new hearing cannot withstand scrutiny in the face of the Hearing Panel's careful reasons finding that the appellant lacked the mental element required to sustain mortgage fraud.
Facts
[6] 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 Law Society alleged that he had acted improperly in eight of those transactions and that his conduct amounted to participation in mortgage fraud.
[7] Six of the eight transactions remain at issue. In four of those transactions, the appellant acted for both the purchaser and the lender. In one, he acted for all parties and in another, he acted for the vendor. In each of these transactions, the purchaser did not provide the funds required by the agreements of purchase and sale to close the transaction. The purchasers relied on credits of various kinds involving arrangements of which the mortgage lender was unaware: a promissory note, set-offs from pre-existing debts, gifts from the vendor and money that the purchaser allegedly paid directly to the vendor. The appellant investigated these credits, satisfied himself that they were legitimate and that the properties were sold at fair market value and did not disclose the credits to the lender.
Hearing Panel
[8] The Hearing Panel began its analysis by focusing on the appellant's understanding of mortgage fraud as involving "flip and value fraud" where the sale was for greater than the fair market value of the property with bogus credits used to reduce the purchase price. The appellant testified that he was aware of the red flags of mortgage fraud, that he investigated the credits involved in the eight transactions and that he was satisfied that the transactions were completed at fair market value. The Hearing Panel accepted his evidence. It found that his limited understanding of mortgage fraud at the time, while erroneous, was understandable since the Law Society's publications focused on value fraud and given the fact that a lender's major concern was the value of its security. The appellant understood his obligation to be to report credits that he, after investigation, concluded were bogus or unjustifiably inflated the purchase price. The Hearing Panel found that, while mistaken, his belief was honest. He had thoroughly investigated each of the credits and concluded that all of them were legitimate. There was no evidence that they were not. The Hearing Panel concluded that the Law Society had failed to prove that the eight transactions were fraudulent and that it had failed to prove that the appellant had dishonestly withheld the credits or other information from the lender knowing that they were material to the lender's economic interests.
[9] However, in seven of the eight transactions, the Hearing Panel found that by failing to report the credits to the lender, the appellant had failed in his duty to serve his client. It imposed a penalty of two months' suspension.
Appeal Panel
[10] The Appeal Panel concluded that the Hearing Panel had erred by starting its analysis by focusing on the appellant's mental state and on value fraud. Nondisclosure of important facts may constitute fraudulent means and fraud need not involve actual loss by the lender. Making a misrepresentation to induce a loan amounts to fraud as it puts the lender's economic interests at risk, even if the purchase price is at fair market value and the loan is properly secured. A misrepresentation regarding the funds provided on closing puts the lender at risk as it may affect the borrower's ability to service the loan.
[11] The Appeal Panel also found that the Hearing Panel had erred by holding that actual knowledge was required as recklessness or wilful blindness is sufficient to sustain a case of fraud.
[12] 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 (at para. 41):
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?
[13] The Appeal Panel ruled that the Hearing Panel did not begin its analysis by asking whether the material facts were disclosed to the lender, and if they were not, whether an inference of dishonesty should be drawn with respect to the transaction. Because of this error, the Hearing Panel's review of the evidence was skewed. The Appeal Panel accordingly ordered a new hearing with respect to six of the transactions to determine whether mortgage fraud was made out.
Divisional Court
[14] By a majority, the Divisional Court dismissed the appellant's appeal. The majority found that the Appeal Panel's articulation of the test for fraud was reasonable. The majority also agreed that the Hearing Panel had skewed its analysis by focusing on the appellant's understanding of fraud. The issue was not the appellant's subjective belief as to what was or was not fraud but rather whether on an objective view, the conduct of the purchasers amounted to fraud. While the undisclosed credits did not inflate the value of the properties, those credits did bear upon the borrower's ability to make the mortgage payments and thereby put the lender's economic interests at risk. As the Hearing Panel's findings relating to the appellant's mental state were based upon an erroneous and incomplete definition of mortgage fraud, those findings could not be sustained and a new hearing was required.
[15] The dissenting judge accepted the majority's conclusions on the definition of mortgage fraud. However, he concluded that, even though the Hearing Panel's legal analysis of mortgage fraud was flawed, it did not automatically follow that the Hearing Panel's factual findings relating to the appellant's mental state were irretrievably tainted. To find the appellant guilty of mortgage fraud, it was necessary to find that he was aware of, wilfully blind or reckless to the fraud. On the basis of the Hearing Panel's factual findings concerning the investigations the appellant conducted and his state of mind, it would be impossible to conclude that he knew or was wilfully blind or reckless to a fraud that put the lender's financial interests at risk.
Issues
[16] The appellant raises two issues:
Did the Divisional Court err in upholding the Appeal Panel's conclusion that the Hearing Panel applied the incorrect test for mortgage fraud?
Did the Divisional Court err in upholding the decision of the Appeal Panel to order a new hearing?
Analysis
(1) Did the Divisional Court err in upholding the Appeal Panel's conclusion that the Hearing Panel applied the incorrect test for mortgage fraud?
(a) Standard of Review
[17] We do not accept the appellant's submission that the appropriate standard of review is correctness on the ground that the test for fraud turns upon general principles of criminal law.
[18] The issue of fraud that arises in this case is of a very specific nature, namely, what amounts to mortgage fraud in relation to a solicitor's work in real estate transactions. We agree with the Divisional Court that the appropriate standard of review is reasonableness. As both this Court and the Supreme Court of Canada held in Groia v. The Law Society of Upper Canada, 2016 ONCA 471, 131 O.R. (3d) 1, at paras. 53, 76-77; 2018 SCC 27, 34 Admin L.R. (6th) 183, at paras. 51, 57, reasonableness applies to Appeal Panel decisions on questions of law unless the question is both of central importance to the legal system and outside the tribunal's area of expertise. 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.
(b) The Test for Mortgage Fraud
[19] The Appeal Panel provided a detailed review of the principles of mortgage fraud based upon the jurisprudence of the Law Society Tribunal. We agree with the Divisional Court that the Appeal Panel's statement of the proper test for mortgage fraud in the context of legal practice was reasonable.
[20] We do not accept the appellant's submission that there is any inconsistency between parts one and two of the test as stated by the Appeal Panel. In our view, when applied to transactions of the kind at issue on this appeal, the test is well-supported by the Law Society Tribunal's jurisprudence and, indeed, by general principles of criminal law. There is no error in principle that would justify judicial intervention.
[21] Accordingly, we do not give effect to this ground of appeal.
(2) Did the Divisional Court err in upholding the decision of the Appeal Panel to order a new hearing?
[22] The Hearing Panel found the appellant "to be a credible and truthful witness" and accepted his evidence. The Hearing Panel noted that his "demeanour carried the conviction of truth", and that he was "earnest, consistent and at times impassioned" in his evidence. He admitted to the errors he had made without hesitation. In particular, he admitted that his decision not to disclose credits unless they appeared to him to be bogus was incorrect. He stated that he now understood that the governing professional standard required that he disclose such facts and leave it to the lenders to decide whether or not to proceed with the transaction.
[23] 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. His conclusion that the credits were valid was supported by the fact that vendors do not typically accept less than fair market value and that he was satisfied that the transactions were completed at fair market value.
(a) Analysis of the Six Transactions
[24] The Hearing Panel reviewed the particular circumstances of each transaction in detail.
1. 28-3690 Keele St., Toronto
[25] In this transaction, the appellant acted for both the purchaser and the lender. The purchaser paid $14,690.98 on closing and the balance of the funds due on closing, $28,931.14, was shown as a credit paid by way of promissory note. The appellant knew the vendor and had acted for him on a prior transaction. As the closing date drew near, the purchaser informed the appellant he had insufficient funds to close. The appellant asked the vendor's solicitor for an extension of the closing date. The vendor did not want to delay the transaction as there were power of sale proceedings pending. The vendor agreed to take a promissory note to close the transaction to avoid power of sale. The appellant considered the amount of the mortgage and the prices paid for the property in prior transactions. He concluded that the sale price was at fair market value, the credit and the promissory note were genuine and that the lender's economic interest was not at risk.
[26] The Hearing Panel accepted the appellant's evidence that he believed there was no fraud or risk of fraud in the transaction. While the appellant fell below the standard of a reasonably competent practitioner in failing to report the credit to the lender, his failure to do so was not dishonest.
2. 5442 Wellington Road, Guelph
[27] The appellant acted for both the purchaser and the vendor. The purchaser did not pay the $5,000 deposit and did not provide funds on closing. Rather, there was a $52,434.69 credit on the statement of adjustments. The appellant investigated the situation and was satisfied that the purchase price was not inflated. As for the unpaid deposit and closing funds, the vendor's solicitor told the appellant that the parties were cousins and that the credit was a set-off for a pre-existing debt. The appellant was satisfied that the credit was genuine.
[28] The Hearing Panel accepted the appellant's "evidence that he did not believe there was a fraud or that the credit was material to the bank". The Law Society did not dispute that the sale was for fair market value. The Hearing Panel concluded that the appellant was not knowingly involved in fraud but that he had fallen below the standard of an ordinarily competent lawyer in failing both to obtain written confirmation of the loan and to disclose the credit to the lender.
3. 116 Comoq Avenue, Vaughan
[29] The appellant acted for both the purchaser and the lender. There was a $77,477 credit on closing and the purchaser provided no funds on closing. The appellant investigated and both the vendor's solicitor and the purchaser told him that the credit was for a pre-existing debt. The sale price was at fair market value and the mortgage was less than the prior mortgage. The Hearing Panel found the appellant had fallen below the required standard but "accept[ed] [the appellant's] evidence that he believed there was no fraud and that the credit was not material to the bank". The Hearing Panel stated that the appellant "had a reasonable basis for coming to those conclusions based on his understanding of fraud and all of the facts".
4. 320 Hemlock Avenue, Stoney Creek
[30] The appellant acted for both the purchaser and the lender. The transaction was between brothers and the purchaser's common law spouse. There was a gift of $84,322 from the vendor and the vendor paid $64,258 to the purchaser on closing. The appellant explained that both brothers had previously bought the property, but only the brother who was the vendor appeared on title. There was a refinancing involving both brothers and the transaction at issue resolved the accounting between them. The price was at fair market value and the appellant confirmed with the vendor's solicitor that the credit was legitimate. The Hearing Panel found that while the transaction did not appear legitimate on its face, the appellant's explanation was credible and the Law Society did not offer a plausible alternative.
[31] The Hearing Panel accepted that the appellant "did not believe that this was a fraudulent transaction or that the credit was material to the bank". The arrangement between the brothers was unorthodox but believable. There was no reason to believe that the brothers intended to mislead or hide the arrangements from the bank.
[32] Again, while the appellant fell below the required standard in failing to report the credit to the bank, his failure to do so was not dishonest.
5. 60 William Cragg Drive, Toronto
[33] The appellant acted for all parties involved in this transaction. The purchaser did not provide any funds on closing through the appellant. However, the vendor acknowledged that he had received $55,000, the amount of the deposit and the funds required to close, directly from the purchaser. The vendor and purchaser were friends and the bank confirmed it held the purchaser's $55,000 redeemable Guaranteed Investment Certificate. The price was at fair market value and the mortgage was not inflated.
[34] The Hearing Panel was not persuaded that the parties intended to mislead the bank and accepted the appellant's evidence that he did not believe there was any fraud or that the credit was material to the lender. The appellant fell below the required standard by failing to advise the lender of the credit and that he acted for all parties but the mistake was not dishonest.
6. 5 Montcrieff Drive, Toronto
[35] The appellant acted for the vendor. The purchaser did not pay the deposit of $10,000 to the appellant as required but the vendor acknowledged that he had received it directly from the purchaser. There was a credit to the purchaser of $15,685. The explanation for the credit was that the purchaser was buying the property to set off a debt from the vendor who was also indebted to other parties. The price was at fair market value. The Hearing Panel did not accept that there was any intent to mislead the lender or that the parties had structured the transaction to obtain financing under false pretences. The Hearing Panel found that the appellant did not fall below the standard of a competent lawyer in his inquiries or in executing his retainer for the vendor.
(b) Mortgage fraud: Hearing Panel's conclusion
[36] 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.
(c) Was it unreasonable to order new hearings on the allegations of mortgage fraud?
[37] The majority of the Divisional Court upheld the Appeal Panel's order for new hearings with respect to these six transactions as the Hearing Panel's findings relating to the appellant's mental state were based upon an erroneous and incomplete definition of mortgage fraud.
[38] While we accept the reasonableness of the Appeal Panel's articulation of the test for mortgage fraud, we are unable to agree that it was reasonable to order new hearings in the circumstances of this case.
[39] For convenience, we repeat here the approach the Appeal Panel laid down, at para. 41:
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 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?
[40] The Hearing Panel did not approach the case in this manner. We point out, however, that the Hearing Panel was aware that "fair market value is no defence to mortgage fraud" and that "'it is fraudulent to tell a lie to induce a loan, even a loan that is well-secured'" (para. 27, quoting The Law Society of Upper Canada v. Durno, 2013 ONSLAP 42, at para. 34, aff'd 2014 ONSC 2993 (Div Ct)).
[41] Nonetheless, 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". At para. 25 of its reasons, the Appeal Panel distinguished participation in mortgage fraud from failure to live up to the standard of the reasonable practitioner:
A lawyer who is aware of, willfully blind or reckless as to fraud will be found to have knowingly participated in mortgage fraud. A lawyer who has failed to recognize or act on signs of possible fraud may be found to have committed a less serious form of professional misconduct, even absent knowledge, willful blindness or recklessness. For example, the licensee's conduct may have fallen below the standards of a reasonable practitioner to a point that justifies its characterization as professional misconduct. [citation omitted]
[42] 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. In each transaction, the appellant specifically investigated credits that could put the lender's economic interests at risk. He concluded that those credits were legitimate and would not be material to the lender's economic interests. The Hearing Panel accepted the appellant's testimony that if he investigated a suspicious credit and determined that it was legitimate, did not affect the property value, and did not indicate an unjustified price escalation, he did not see the credit as being material to the lender: paras. 51, 77-78. The Hearing Panel noted that the "Law Society had pointed out no warnings to the profession to be on the lookout for value fraud in the context of a sale for fair market value and a credit", and that the Law Society's expert witness admitted in cross-examination "that if the purchaser's lawyer determines on reasonable grounds that a credit is legitimate, he need not always disclose it to the bank". The Hearing Panel found as a fact that the appellant did not understand at the time that legitimate credits or gifts of equity could disrupt the mortgage ratio: paras. 53, 55, 57. While this belief was mistaken, it nonetheless indicates that the appellant 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.
[43] On this issue, we agree with and adopt para. 81 of the reasons of the dissenting judge in the Divisional Court:
There was no suggestion that the appellant was himself engaged in a fraudulent endeavour, that is, that he was an active participant in some plan to mislead the lenders. Indeed, there does not appear to be any evidence that the parties to the underlying real estate transactions were engaged in any such fraudulent conduct. The question was whether the appellant had, in some fashion, participated, or assisted, the perpetration of a fraud by intentionally withholding information from his lender clients. The evidence is clear that the appellant was alert to this possibility. Indeed, it was the appellant's concern that the parties might be involved in a fraudulent transaction, and his recognition of the "red flags," that led him to make the inquiries that he did regarding the credits so as to satisfy himself that the parties were acting honestly.
[44] The Hearing Panel carefully considered the evidence of the way the appellant had conducted these transactions. As the dissenting judge in the Divisional Court stated, at para. 85: "It is evident from the factual findings of the Hearing Panel that the appellant did not believe that the undisclosed credits had any financial impact on…the position of his lender clients, nor did it put their financial interests at risk". In our view, in the face of that finding, 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.
[45] The majority of the Divisional Court relied on the principle from R. v. Théroux, [1993] 2 S.C.R. 5, that the actus reus of the offence of fraud must be determined on an objective basis and that fraud may exist even when the perpetrator of the fraud viewed his or her actions as morally correct. However, the crucial point is that the mens rea required for fraud in the circumstances of this case demanded proof that the appellant knew or was reckless or wilfully blind to conduct that would put his lender clients at financial risk. 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. In Théroux, McLachlin J. found that the accused knew that he was placing his clients' money at risk but merely believed that the risk he perceived would not materialize: at p. 27. In contrast, in this case the Hearing Panel found as a fact that the appellant sincerely did not believe that his actions created any risk to the lenders' economic interests.
[46] The Hearing Panel properly found that the appellant made an honest mistake and fell below the required professional standard. In reaching this conclusion the Hearing Panel considered whether the appellant "suspected dishonesty and decided not to inquire, or was aware the transactions were dishonest but continued on despite the risk." We fail to see how it could be possible to find that this mistake could nonetheless amount to knowing, wilfully blind or reckless participation in fraud when the appellant honestly believed that his actions did not put the lender's economic interests at risk.
Disposition
[47] Accordingly, the appeal is allowed, the orders of the Divisional Court and the Appeal Panel are set aside and the order of the Hearing Panel is reinstated.
[48] Costs to the appellant fixed at $7,500 in this court and $5,000 in the Divisional Court, inclusive of disbursements and taxes, as agreed by the parties.
Released: August 30, 2018
"Robert J. Sharpe J.A."
"R.G. Juriansz J.A."
"L.B. Roberts J.A."