R. v. Gertner, 2015 ONSC 1637

R. v. Gertner, 2015 ONSC 1637

COURT FILE NO.: 0489/12

DATE: 20150312

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

HER MAJESTY THE QUEEN

– and –

HENRY GERTNER

Defendant

Renna Weinberg, for the Crown

Seth Weinstein and Jill Makepeace, for the Defendant

HEARD: February 23-27, 2015

E.M. Morgan J.

1The Defendant is charged with two counts of fraud in respect of mortgage investments which he arranged for Karl and Anna Wald, who were longtime clients of his law practice. The transactions in issue took place between 2003 and 2009.

2The Walds lost a substantial part of their $550,000 investment with the Defendant. There is little doubt that the Defendant’s law practice was, like his desk and entire law office, terribly sloppy – as his own counsel put it, something of an “unmade bed”. As clients who invested their hard earned money with him, the Walds were understandably upset with his conduct, especially with his failure to produce appropriate legal documentation and to properly secure their interests; they are certainly disappointed with the adverse financial consequences of their dealings with him.

3In March 2009, Karl Wald approached a friend of his who was a police officer and reported that he and his spouse had been “robbed of our money”. He and Anna gave the police a written statement, and delivered to the police all of the documents they had that related to the transactions in issue. Karl testified that the reason he went to the police was that he thought this would be an avenue to recover what he and his wife had lost.

4The question here is whether the Defendant intentionally or recklessly perpetrated acts of “deceit, falsehood or other dishonest act” that deprived the Walds of their funds or that put their funds at risk: Théroux v The Queen, 1993 CanLII 134 (SCC), [1993] 2 SCR 5, at para 24. Did his conduct go beyond negligence, conflict of interest, breach of fiduciary duty, and professional misconduct, to encompass acts for which he can be held criminally responsible?

I. The complainants

5For several decades, Karl Wald ran a photocopy supply and repair service called Solid Image Inc. Over the years, he had built the business from a small “mom and pop” operation to a substantial business with some 40 employees. Karl’s spouse, Anna Wald, was the bookkeeper and financial manager for the business as well as for their household.

6The Defendant was an early customer of their photocopy business, and Karl and Anna both testified that they got to know him well over the years, had visited his home, socialized occasionally with the Defendant and his wife, and knew his children. The Walds used the Defendant as their lawyer on a number of transactions over the years, including several real estate purchases and the eventual sale of their business to a division of Toshiba in January 2003.

7It is fair to say that Karl and Anna Wald are both intelligent business people who together have made for a successful team. They each owned 50% of Solid Image Inc., and their success is clearly a product of their combined efforts. Karl testified that he not only built his business from the ground up, but that he had himself negotiated the profitable deal with Toshiba in January 2003. He impressed me as a knowledgeable sales and service person who had developed an acumen for sizing up promising investment prospects.

8Likewise, Anna testified that she managed the family and business finances in a very organized and efficient way. She keeps careful track of their bank balances and investments, and, indeed, records every credit and debit for the household on ongoing Excel spread sheets. She was so valuable to the company that Toshiba has kept her on in a managerial capacity since acquiring the Walds’ business in 2003. Overall, she impressed me as a very astute financial manager.

9Much as I was impressed with the Walds’ business savvy, their approach to tax reporting, which is discussed in Part VI below, gives me pause. I say this not because their own business or conduct is in issue here, but because their approach lends an unexpected complexion to the allegations against the Defendant which are at the core of this case.

II. The initial mortgages

10The Walds sold their business for $2.4 million in a deal that closed at the end of January 2003. Several weeks or a month prior to the closing, they had a conversation with the Defendant as to what they planned to do with the funds they were about to receive. Karl testified that the Defendant suggested that they invest in second mortgages.

11The Defendant was at the time representing the Walds as their lawyer on the sale of their business. The evidence is clear that it was the Defendant who proposed and arranged for a number of second mortgages in which the Walds would invest part of the funds they received from the sale of Solid Image Inc. The evidence is equally clear that the Walds were experienced enough in business to understand what a second mortgage is and to size up the financial viability of a mortgage investment. They had made previous real estate purchases and also had a portfolio of securities investments.

12The Defendant ultimately arranged three second mortgage investments for the Walds, for a total of $450,000 to be invested on February 1, 2003 – the day after the closing of the Solid Image Inc. sale. Two of the mortgaged properties were located in Toronto and one in Innisfil, Ontario.

13Karl Wald visited the two properties in Toronto and satisfied himself that they were valuable pieces of real estate that were appropriate for this type of second mortgage investment. He also stated that he was aware that one of the Toronto properties, which was located on Bathurst Street, was owned by the Defendant’s son Terrance, and that the other Toronto property, which was located on Russell Hill Road, was being renovated by Terrance. Karl knew Terrance and testified that he was confident in his abilities as a property renovator.

14Karl also testified that he did not visit the out-of-town property, but rather trusted the Defendant that the investment was sound. He did not know who owned this property. As Karl put it on the witness stand, the $125,000 mortgage “wasn’t worth the drive to Innisfil.”

15All three of the second mortgage investments proposed by the Defendant carried what Karl described as “high but not outrageous interest rates”. This suited the Walds’ investment objectives, as they were looking for vehicles that would produce substantial cash flow. With the sale of their family business, they were interested in receiving monthly payments which would replace their previous business income.

16The three investments were each summarized by the Defendant in a series of memos addressed to Karl and Anna Wald. The memos are accurate, setting out the amount of the Walds’ second mortgages, the amount of the first mortgage on each property, the appraised value of the properties, the amount of the “interest only” payments during the life of the mortgage, etc. Two of the mortgages – on the Innisfil and the Russell Hill properties – were stated to be for 6 month terms, expiring on August 1, 2003 and July 31, 2003 respectively. The mortgage on the Bathurst Street property was described in the Defendant’s memo as having a one year term, from February 1, 2003 to February 1, 2004.

17In addition to the three memos, the Defendant sent the Walds a reporting letter with respect to the Russell Hill investment. The Russell Hill reporting letter repeats the terms of that $200,000 mortgage as summarized in the memo; in addition, the letter adds that the Walds’ investment was, in fact, a share in an existing second mortgage rather than a stand-alone second mortgage. Although Karl and Anna both expressed surprise that their investment was a share of another second mortgage rather than its own second mortgage, the “subject” line of the February 1, 2003 reporting letter states explicitly: “acquisition of $200,000/$376,000 share of 2nd mortgage on: 210 Russell Hill Road, Toronto…”

18For unexplained reasons, the Defendant did not write a reporting letter in respect of the Bathurst Street or Innisfil investments. Furthermore, the Defendant never sent the Walds any other mortgage documentation with respect to the three investments. The Russell Hill reporting letter contains a list of “Enclosures” that supposedly accompanied the letter, none of which actually accompanied the letter and none of which were ever sent to the Walds. Indeed, there is no indication that any of the supposedly accompanying documentation was ever drafted or produced by the Defendant. These documents, as listed on the Russell Hill reporting letter, include:

1. Registered 2nd Mortgage/Declaration of Trust as to your $200,000 share

2. post-dated cheques

3. Standard Charge Terms No. 9320

4. Acknowledgment re Standard Charge Terms

5. Acknowledgment of Mortgage Debt

6. Statutory Declaration of mortgagor

7. Strata Plan/Survey

8. Floor plans

9. Appraisal

10. Copy of Lease

11. Copy of first mortgage

19Moreover, a review of the land titles abstracts for the relevant properties shows that the three second mortgages were never registered on title to the properties. For their part, the Walds did receive the Russell Hill reporting letter with its list of absent “Enclosures”, but never inquired of the Defendant as to why they did not receive the missing documentation.

20As indicated, the Walds’ mortgages were all supposed to be short term. However, the six month point came and went and the Walds received no principal payout of the Innisfil and the Russell Hill mortgages, and similarly the one year point came and went without the Walds receiving a principal payout of the Bathurst Street mortgage. Nevertheless, for several years after making these investments, the Walds continued to receive interest payments more-or-less in accordance with the monthly interest listed on the original memos produced by the Defendant. Anna Wald kept track of each and every one of these payments on her spread sheet.

21During this time, the Walds never asked about the payout of their principal that was supposed to come at the end of the respective mortgage terms. Although Anna noted any shortfalls in the monthly payments and occasionally sent the Defendant an accounting of the relatively small outstanding balances, the Walds never made any demands for payout of their principal or indicated that they were contemplating any mortgage remedies. The impression left by their testimony on this point is that they were satisfied with the cash flow so long as the interest payments were being made.

22Indeed, the first indication that the Walds were contemplating getting paid out of their investments is contained in a letter from them to the Defendant dated April 10, 2005 – over two years after the initial investment in the mortgages. It was not followed with any further demand until February 3, 2006.

23The April 10, 2005 letter itself hardly qualifies as a serious demand letter by panicked investors; it is signed by Anna and Karl Wald, and begins:

…you have been great at investing our money in mortgages which we have been very thankful for.

III. The Heath Street investment

24In March 2003, the Defendant introduced Karl Wald to a new investment proposal in a property located on Heath Street in Toronto. This property was being renovated by the Defendant’s son Terrance. There is no suggestion that Karl was unaware that Terrance was involved – in fact, Terrance himself took Karl on a physical inspection of the property and explained his renovation plans to him. On April 7, 2003, they registered an Ontario corporation named Ter-Wald Enterprises Ltd. of which Terrance, Karl, and Anna were the three directors. According to Karl, this company, which was jointly owned by the Walds and Terrance, was formed in order to purchase the Heath Street property.

25Karl testified that on March 28, 2003, he and Anna paid $100,000 in respect of the purchase of an interest in Heath Street. These funds, as Karl understood it, were supposed to be used by Terrance to complete the renovation. Upon the eventual sale of the Heath Street property, Karl expected that he and Anna would receive their money back plus 10% interest. The transaction was documented by means of a “Mutual Release” prepared by the Defendant, in which a “vendor” named Rosanna Messina releases Ter-Wald Enterprises Ltd. as “purchaser” from any claims arising out of the property and directs a $200,000 deposit to be returned to the “purchaser”.

26On the witness stand it was clear that Karl did not understand the meaning of this Mutual Release. Indeed, it is an understatement to say that this was an obtuse piece of legal work. That said, the Crown has not included the Heath Street investment as part of the fraud that the Defendant is alleged to have perpetrated. Whatever the frailties of the legal documentation may have been, the land titles abstract indicates that title did get registered in the name of Ter-Wald Enterprises Ltd., as everyone expected would happen.

27The Heath Street investment turned out not to be profitable. As will be described below, the Walds’ $100,000 investment in this property eventually got combined with the Walds’ three mortgage investments and rolled into a further mortgage arranged by the Defendant. That investment in a mortgage on a property located at 1202 Avenue Road, Toronto, is alleged to be part of the fraud perpetrated by the Defendant; and so, while the Heath Street investment was not itself a product of any alleged fraud, the funds invested in Heath Street ended up in a later transaction that is part of the fraud charges at issue here.

IV. The rollover mortgage

28After receiving the April 10, 2005 letter, the Defendant met with Walds and proposed amalgamating all of their investments into a single large second mortgage on a property located at 1202 Avenue Road. The Defendant gave the Walds some documentation to sign, including an Acknowledgment and Direction to put $580,000 outstanding on the other investments into the 1202 Avenue Road mortgage. The $580,000 referenced in this document incorporated the $450,000 of principal they had put into the initial three mortgages plus the $100,000 they had invested in Ter-Wald Enterprises Ltd. in respect of the Heath Street property.

29Karl and Anna were both aware that the $580,000 being “rolled over” into the 1202 Avenue Road mortgage represented an extra $30,000 in principal over and above the $550,000 they had actually invested with the Defendant in the three mortgages and in Heath Street. Karl testified that he assumed that this represented compensation for the outstanding balance on the interest payments owing from the previous investments. For her part, Anna made it clear that the April 10, 2005 letter had accurately set out the outstanding balances; that letter indicated that there was only $7,395.84 in interest owing to the Walds. Neither of the Walds could explain where the $30,000 tacked onto the $550,000 actually came from.

30Karl stated that he already knew the 1202 Avenue Road property, and had been taken there and toured through it by the Defendant and Terrence. Karl testified that he thought it was a very substantial property with rental income. He was apparently happy with the investment.

31Anna was less enthusiastic in her testimony, indicating that she accepted the rollover to the new mortgage thinking that she had no real choice. She conceded that no one forced her and Karl to accept the Defendant’s proposal, but she thought that this was the only way to salvage the principal they had already invested.

32Karl and Anna both understood that they would be getting a second mortgage on 1202 Avenue Road. Karl conceded that his due diligence did not include finding out who the first mortgagee was or the amount of the first mortgage. He also indicated that he did not get an appraisal for property and so was unsure whether there was sufficient equity to cover what he thought would be their second mortgage. He did indicate, however, that starting on July 1, 2005, he and Anna received the expected interest payment on their $580,000 mortgage on 1202 Avenue Road. The interest payments continued, with sporadic shortfalls, for a nearly a year and a half.

33On September 27, 2005, nearly four months after the rollover to the 1202 Avenue Road mortgage, the Walds wrote to the Defendant reminding him that they still had not received the registration documents for this mortgage. In response, on October 7, 2005 the Defendant faxed them a Charge/Mortgage form used for registering a mortgage with the land titles office. However, the document was only a draft, and was in fact never registered. There was no explanation as to why the Defendant sent them a draft document, and since the fax cover sheet has never been produced there is no way of knowing whether it was accompanied by any written explanation.

34The Defendant did not try to hide from the Walds the fact that the Charge/Mortgage he sent them on October 7, 2005 was a draft copy. It states explicitly across the top right side of the page – albeit in rather small font – that it is “In preparation on 2005 10 06”. On the top left side of the form it states: “This document has not been submitted and may be incomplete.”

35Likewise, the Defendant did not try to hide from the Walds the fact that the owner of 1202 Avenue Road was his son, Terrance. The draft Charge/Mortgage states clearly that the Chargor is a corporation of which Terrance Gertner is the President and authorized signing officer.

36Despite the fact that the mortgage document sent to the Walds stated that it was an unregistered draft, the Walds both testified that they did not notice this advisory. Karl stated that he was relieved when he received the document, thinking that they finally had a copy of a registered second mortgage.

37As indicated above, in early February 2006 the Walds wrote to the Defendant indicating that they wanted to cash in their mortgage and have their principal paid out. At the time they were in the process of settling some litigation with a former employee of Solid Image Inc. named Kirk, who had sued the Walds and Toshiba for moneys that he claimed were owed to him. The Walds were looking to the return of their principal on the 2012 Avenue Road mortgage as a way of financing the litigation settlement. The Defendant never responded to this overture by the Walds.

38In June or July 2006, the Kirk litigation settlement was being finalized by Toshiba’s lawyers at the Fasken law firm. Fasken told the Walds that they should receive independent legal advice on the settlement, and the Walds retained a lawyer named Jay Krieger for this purpose. Karl and Anna Wald both testified that during the course of their meeting with Mr. Krieger they told him of their desire to cash in their mortgage on 1202 Avenue Road, and that in response to this conversation Mr. Krieger logged into the land titles system to check on the registration of the Walds’ mortgage.

39Mr. Krieger could not find any sign of a mortgage in favour of the Walds registered on title to 1202 Avenue Road, whether a second mortgage or otherwise. Karl and Anna both testified that they were shocked at this news. They stated that they were experienced enough with mortgages to understand that their investment was seriously jeopardized by the fact that it was not registered on title. Anna Wald expressed her feelings toward the Defendant at this point in their relationship: “It’s hard to believe people are that deceitful.”

40In spite of this shocking news, the Walds took no action during the next six months. In fact, from the time that Mr. Krieger advised them that their mortgage was not registered until the end of the calendar year, they continued to receive regular interest payments on the mortgage. They did not even discuss the matter of registration with the Defendant until early December 2006, and even then did not seem particularly anxious to have the registration done in any expeditious way.

41On January 22, 2007, the Walds wrote a note to the Defendant confirming that they had had a meeting at the beginning of the previous month in which the registration of the mortgage was discussed and a resolution was agreed upon. By this time, the ownership of 1202 Avenue Road had been transferred from a company controlled by Terrance to the Defendant himself. The Walds’ letter, written in a surprisingly friendly tone, makes it clear that the Walds were aware of this transfer and seemingly took no issue with it. The January 22, 2007 letter reads in its entirety:

Good morning Henry,

Further to our conversation on December 1, 2006, we had agreed to register the mortgage on 1202-1204 Avenue Road, effective January 1, 2007 in the amount of $580,000.00 as a third with an interest rate of 10%. You also stated that the existing 2nd would be discharged pending the sale in the spring of 2007 of 221 Old Forest Hill and that there would be a $100,000 pay down at that time. This would leave us with an existing 2nd mortgage of $480,000 which would be paid off on the sale of 1202-1204 Avenue Road.

Please let us know when the registration documents are ready. Also, we request post-dated cheques for the 1st of each month in the new amount of $4,833.33. This would prevent having to bother you every month.

Best regards,

Anna and Karl Wald

42Despite this apparent agreement, the Defendant never did pay down the Walds’ mortgage on 1202 Avenue Road. On March 27, 2007, the Wald mortgage was registered as a third mortgage, behind a first held by Home Trust Co. in the face amount of $977,000 and a second held by an individual named Karlina Nemanic in the face amount of $115,000.

43In addition, on December 6, 2006 – i.e. after the date of the Defendant and the Walds’ agreement to register as a third mortgage but before the agreed-upon registration date of January 1, 2007 – the Canada Revenue Agency (“CRA”) registered a tax lien in the amount of $292,101.90 on title to the property. It is not clear precisely what tax debt gave rise to the lien; it was registered against 1202 Avenue Road as well as against the Bathurst Street property owned by the Defendant and/or Terrance. What is apparent, however, is that the Defendant may not have known that a security interest in favour of the CRA would soon be registered at the time of his December 1, 2006 agreement with the Walds. Even Karl testified that when the Defendant was later advised of the existence of the tax lien, he “seemed surprised”.

44On October 5, 2007, the first mortgagee on 1202 Avenue Road, Home Trust, issued a Notice of Sale in respect of a default under its mortgage. This default was apparently cured, as Home Life never did sell the property in exercise of its rights. At the time, however, the Walds wrote to the Defendant indicating that they were taken aback by this development. They did acknowledge in the same letter that the Defendant had forewarned them that this would be coming, but they nevertheless expressed their understandable apprehension and concern.

45Nearly a year later, on September 16, 2008, the second mortgagee, Karlina Nemanic, issued a Notice of Sale in respect of a default under her mortgage. In the wake of this default, the Defendant wrote to the Walds on October 4, 2008 explaining the status of the property and indicating that the property is being groomed for sale. At the same time, the Defendant advised the Walds that he had moved offices, and confirmed with them that he had been suspended by the Law Society. He explained: “Pending the resolution of my law office suspension, I am operating a real estate and business consulting firm.”

46Karl testified that soon after receiving this letter, he made a preliminary investigation into the possibility of Anna and him purchasing 1202 Avenue Road themselves. According to Karl, a bank advised him at this time that with two mortgages and a CRA lien ahead of him, there may not be sufficient equity in the property to cover his existing third mortgage. This bit of unfortunate financial news discouraged him from pursuing any further the prospect of purchasing the property.

47On April 21, 2009, the second mortgagee finally sold 1202 Avenue Road under her Power of Sale. The first two mortgages were paid off as a result of the sale. The sale price was insufficient to cover either the CRA lien or the Walds’ mortgage, both of which were discharged at the time of the transfer to the new purchaser. The Walds never recovered any of the principal that they had invested in the mortgage – or rather, any of the principal that had been rolled over from their previous investments.

V. Theory of the Crown

48Counsel for the Crown states her position in a very straightforward way. She submits that the Defendant promised the Walds that if they gave him their money they would have a number of second mortgages – which eventually got rolled over into a single second mortgage – but instead they got nothing for their initial investments and only a worthless third mortgage on the rollover. The Crown’s view is that the Defendant’s failure to properly document or register any of the Wald’s mortgages amounts to intentional deceit that deprived them of their property or, at least, put their property at risk of deprivation.

49Accordingly, the Crown sees the Defendant’s guilt as established by a relatively small number of uncontroverted facts. The Walds did hand over their money to the Defendant. The Defendant did confirm in his initial memos regarding the Innisfil, Bathurst Street, and Russell Hill Road properties that they would be getting second mortgages. The Defendant further agreed in his June 2005 conversations regarding the 1202 Avenue Road property that the Walds’ funds would be rolled over into a second mortgage on that property.

50The land titles abstract shows that the Walds never had any mortgages on title to the first three properties, and that late in the day they had a third mortgage rather than a second mortgage registered on title to 1202 Avenue Road. Crown counsel submits that since a third mortgage is necessarily more risky and less valuable than a second mortgage, the Defendant’s conduct knowingly put their property at risk and ultimately resulted in the deprivation of their property. According to the Crown, all of the elements of criminal fraud are thereby established.

VI. Theory of the defense

51Defense counsel’s view of the matter is more complex.

52The defense argues, in effect, that if the Defendant failed to perform to the standards expected of a solicitor, those acts are not criminal in themselves: R v Waxman, 2014 ONCA 256, at para 12. While in the right circumstances, misdeeds and ineffective documentation by a lawyer may form part of the basis for a finding of fraud, the Crown needs to establish more than a series of civil wrongs or regulatory breaches for a conviction to ensue.

53The evidence does suggests that the Defendant engaged in a number of acts that were contrary to the ethical standards that a lawyer is required to uphold. It also suggests that the Defendant did not fulfill various civil duties that a lawyer is required to fulfill for his clients.

54In arranging for mortgages and investments in which he (or his immediate family members) had interests, through corporate vehicles or otherwise, the Defendant has been shown to have acted in conflict of interest. The defense points out, accurately, that in each of those instances the Defendant either disclosed the conflict to the Walds or the conflict was apparent on the face of the transaction. Nevertheless, there is no evidence to show that he ensured that the Walds obtained independent legal advice in entering those transactions, which he would be required to do under the Law Society’s Rules of Professional Conduct.

55Likewise, in arranging for mortgages in respect of properties in which he personally held title – specifically, the 2012 Avenue Road property at the time of registering the Walds’ third mortgage in 2007 – he effectively borrowed money from a client. This, again, would constitute a breach of the Law Society’s professional rules and, absent any other explanation, would be an improper transaction for a practicing solicitor.

56The same evidence that demonstrates these regulatory breaches also demonstrates that the Defendant’s approach to the Walds’ transactions amounted to violations of the fiduciary duties ordinarily owed by a solicitor to his clients. The Court of Appeal observed in Re Unique Broadband Systems, Inc., 2014 ONCA 538, at para 47, quoting Moffatt v Wetstein (1996), 1996 CanLII 8009 (ON SC), 29 OR (3d) 371, at 390 (Gen. Div.), that “[s]ubsumed in the fiduciary’s duties of good faith and loyalty is the duty to avoid a conflict of interest”. The trust that the Walds placed in the Defendant as their lawyer handling their money was breached by the Defendant’s evident shortfalls in his ethical and fiduciary duties.

57Moreover, it is apparent that the Defendant did not live up to the standard of care expected of a solicitor handling a mortgage transaction. In the first place, he failed to advise the Walds that they were potentially lending money on 1202 Avenue Road in excess of what the property was worth: Himel v Molsen, 2014 ONSC 3155.

58While the CRA lien may have come as an intervening surprise to the Defendant, it would appear that there was insufficient equity in the property to cover the Walds’ $580,000 mortgage even had the tax lien in an amount just shy of $300,000 not materialized. A prudent solicitor would certainly have provided his clients with advice in this respect, and no such advice was ever provided by the Defendant.

59Perhaps most importantly, the Defendant failed to document the mortgages in a way that protected his clients’ interest. He never produced the documentation for the first three mortgages in which the Walds invested (a list of which was appended to the Russell Hill reporting letter), and never registered those mortgages. Likewise, he only produced a draft mortgage for the Walds’ 1202 Avenue Road investment in 2005, and in 2007 finally registered a third mortgage in their name. This was a model case of imprudent lawyering that fell below any recognizable standard of care.

60Indeed, it is the failure to document and register the mortgages that lies at the heart of the Crown’s contention that the Defendant perpetrated fraud. The conflict of interest, borrowing from a client, and failure to properly advise of the risks of a transaction are all civil wrongs that do not contain an element of criminal mens rea. The evidence in support of those allegations shows that the Defendant was a careless, substandard lawyer on whom clients could not depend for appropriate legal protection. The conflicts and the imprudent risks, however, were not hidden or otherwise obscured by the Defendant, and were reflective of his negligence and lack of professionalism more than they were an intentional deceiving of clients.

61The Crown submits that the failure to register the Walds’ second mortgages is in an altogether different category. This is also the aspect of the Defendant’s conduct that is the focus of the Walds’ attention.

62It is the failure to register, the Crown contends, that not only exposed Karl and Anna Walds’ investment, but that allowed the Defendant to put a different second mortgage on several of the properties, including the 1202 Avenue Road property. Crown counsel submits that as a result of his intentional omission, the Defendant was able to directly profit from his failure to properly secure the Walds’ mortgages. Without some further explanation, the Defendant’s conduct in this respect appears to be a form of intentional deceit and knowing deprivation of the Walds’ property for his own enrichment.

63Counsel for the defense submits that there is indeed a further explanation, which was underscored by Karl Wald himself during the course of his cross-examination. It is the defense position that, in fact, the Defendant’s failure to document and register the Walds’ mortgages for three years was done with the Walds’ tacit approval or acquiescence because it suited their interest.

64According to defense counsel, the Walds were anxious to obscure their mortgage investments, and had two distinct reasons for not wanting those mortgages to be visible to any member of the public who performed a basic title search. First, as previously described, the Walds were engaged in the Kirk litigation, and they did not want the extent of their assets revealed to their adversary in that action. Second, the Walds were intent on hiding their investment income from the tax authorities so that they would not have to pay income tax on it.

65The first explanation is a matter of speculation, and is based for the most part on a coincidence of timing. Toshiba and the Walds settled the Kirk claim toward the end of 2006. The Walds agreed with the Defendant to register their mortgage on 1202 Avenue Road as of the beginning of 2007. Prior to that, the Walds never evidenced any sense of urgency – indeed, they barely evidenced any discomfort at all – in seeking to have the mortgages registered. The fact that the Kirk settlement coincides in time with the Walds’ agreement with the Defendant to finally register their mortgage leads defense counsel to argue that prior to the end of December 2006 the Walds must have been anxious to hide their mortgage investments from Mr. Kirk’s prying eyes.

66This timing, however, is plausibly just a coincidence. In any case, while it is true that the Walds faced an expensive and difficult law suit by their former employee, there is no direct evidence indicating that this gave them a reason to hide any assets. While most defendants in a civil action would not want to discuss their net worth or assets with the plaintiff – certainly not until facing a judgment debtor examination, which the Walds never faced – there is no tactical reason for defendants to actively hide their assets. Karl Wald testified that he and Anna wanted to cash in their mortgage investments so that they could put the money toward the Kirk settlement, but nothing else suggests that the litigation was a reason for wanting the mortgages to remain hidden from public view.

67The second explanation, however, is based on actual evidence elicited at trial and, as stated in Part I above, does give me pause. Karl Wald testified in no uncertain terms that on his tax returns for 2003 through 2006, he intentionally hid the interest income earned on the mortgage investments at issue. The Innisfil, Bathurst Street, and Russell Hill properties, and later the 1202 Avenue Road property, generated investment income in the total amount of $4,100 per month for the first three years after January 2003, or roughly $50,000 per year.

68Karl’s testimony was unambiguous as to his non-declaring of this income for the relevant years. He even hid the income from his accountant so it would not be included on his tax returns:

Q: You knew that may not be kosher, no?

A: Correct.

Q: You knew very well that you were obliged to declare this income?

A: Correct.

Q: And so you purposely concealed that investment income from Mr. DiNovo [the Walds’ accountant]?

A: Correct

69When asked what he was thinking by not declaring this income as taxable, Karl was equally forthright in his response:

A: I don’t know what I was thinking back then, but I had already paid the government a lot of taxes so…

70Karl’s statement in respect of his taxes was startling. I am mindful of the fact, of course, that this is a trial of the Defendant, and not of Karl Wald as witness and complainant. And while it is possible that Karl’s admitted deception on his tax returns might go to his credibility as a witness, this admission itself has a double edge to it: it may equally speak to his honesty on the witness stand and the truthfulness of his testimony.

71Interestingly, counsel for the defense does not exactly say that Karl is not to be believed as a witness. After all, he points out, Karl’s evidence is overall accurate. Karl conceded, for example, that the Defendant had never falsely advised him the mortgages were registered when they were not; rather, Karl maintained on the witness stand the factually accurate position that while the Defendant never explicitly lied about the registration, the Defendant never registered the mortgages as one would expect, and as a consequence they were unsecured and exposed to risk of loss.

72What defense counsel does say is that the Defendant delayed the documentation and registration of the mortgages, and that the Walds tacitly accepted this delay – or failed to seriously complain about this delay – so that they could decide for themselves whether and when to declare the income. Again, there is a coincidence of timing here – the Walds did not declare their income from the investments with the Defendant from 2003 to 2006, but apparently did declare their investment income starting at January 1, 2007. This date, of course, coincides with their specific instruction to the Defendant to finally register the 1202 Avenue Road mortgage.

73Defense counsel points out that the Walds discovered in mid-2006 that their mortgage on 1202 Avenue Road was not registered, and yet they did not even discuss the matter with the Defendant until the meeting of December 1, 2006. Even then, they did not insist that the mortgage be registered immediately, but rather agreed with the Defendant that the erstwhile second mortgage be registered as a third on January 1, 2007. And when that appointed date came and went, they wrote him a rather friendly letter several weeks later whose only form of “demand” was to remind him to “Please let us know when the registration documents are ready.”

74Defense counsel observes that this is not the response of an investor who expected to have a mortgage securely registered on title, and who has now discovered a long outstanding wrong.

VII. The fraud question

75Accordingly, Karl Wald’s testimony raises a serious question. Is he, like Lear, “a man more sinned against than sinning”? (W. Shakespeare, King Lear: III.ii.59-60). Or is he a client who, in committing a wrong himself, colluded in, or perhaps condoned through silence, his lawyer’s delay in securing his mortgages and making them publically visible?

76In other words, was the Defendant’s failure to document and register the mortgages before 2007 in some tacit or perhaps unspoken way related to Karl’s failure to declare the income from those mortgages before 2007? If so, the Defendant’s wrong may have been the poorest of lawyering, but it was not done with the intent to deprive the Walds of their property; it would have been done with their understanding and in coincidence with their wishes. Or, contrarily, were the Defendant’s omissions with respect to the documenting and registration of the mortgages unrelated to Karl’s omissions on his tax returns, and geared toward depriving the Walds of their investment? If so, the Defendant’s wrong may well have been directed against his clients and designed for the Defendant’s own profit.

77I do not know the answer to this question. Taking all of the evidence together, I can conclude that the Defendant’s lawyering was remarkably bad, and that the Walds’ conduct was remarkably suspicious. But I do not know whether the Defendant acted exploitatively toward his clients, or whether the Defendants’ imprudent and lazy lawyering coincided with and in effect supported his clients’ interest.

78It is trite law that the Crown must prove every element of the offense charged, including, here, the mens rea of fraud. As in all criminal cases, it must be kept in mind that, “[t]he onus resting upon the Crown to prove the guilt of the accused beyond a reasonable doubt is inextricably linked to the presumption of innocence”: R v Lifchus, 1997 CanLII 319 (SCC), [1997] 3 SCR 320, at para 13. While this incorporates the notion that “a reasonable doubt is not an imaginary or frivolous doubt”, ibid., at para 39, the Crown must adduce sufficient evidence to allow me as trier of fact to come to a determination “as to exactly where the truth of the matter lay”: R v Nimchuk (1977), 1977 CanLII 1930 (ON CA), 33 CCC (2d) 209, at para 7 (Ont CA).

79Under the circumstances, I am not able to come to that kind of firm conclusion. On the state of the evidence before me, I simply do not know whether the impugned act of the Defendant is one of negligence, or “is one which a reasonable person would see as dishonest.” Théroux, at para 39.

VIII. Disposition

80The Defendant is therefore not guilty on all counts.

Morgan J.