



COURT OF APPEAL FOR ONTARIO

CITATION: The Law Society of Upper Canada v. Nguyen, 2018
    ONCA 709 DATE: 20180830

DOCKET: C64918

Sharpe, Juriansz and Roberts JJ.A.

BETWEEN

The Law Society of Upper Canada

Applicant (Respondent)

and

Cuong The Nguyen (also known as Steve Nguyen)

Respondent (Appellant)

Brad Teplitsky, for the appellant

Glenn Stuart, for the respondent

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.

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 appellants 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 Panels
    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 Panels 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 Panels 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 appellants
    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 Societys publications focused
    on value fraud and given the fact that a lenders 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 lenders 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 appellants 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 lenders 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 borrowers 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):

1.

Were material
    facts not disclosed to the lender?

2.

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.

3.

If the
    transactions were fraudulent, was the lawyer aware of, wilfully blind or
    reckless to the fraud?

4.

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 Panels 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 appellants appeal. The majority
    found that the Appeal Panels articulation of the test for fraud was reasonable.
    The majority also agreed that the Hearing Panel had skewed its analysis by
    focusing on the appellants understanding of fraud. The issue was not the
    appellants 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 borrowers ability to make the mortgage payments and
    thereby put the lenders economic interests at risk. As the Hearing Panels
    findings relating to the appellants 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 majoritys conclusions on the definition of
    mortgage fraud. However, he concluded that, even though the Hearing Panels
    legal analysis of mortgage fraud was flawed, it did not automatically follow
    that the Hearing Panels factual findings relating to the appellants 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 Panels 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 lenders financial interests at risk.

ISSUES

[16]

The
    appellant raises two issues:

1.

Did the
    Divisional Court err in upholding the Appeal Panels conclusion that the
    Hearing Panel applied the incorrect test for mortgage fraud?

2.

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 Panels conclusion that the Hearing Panel applied
    the incorrect test for mortgage fraud?

(a)

Standard of Review

[17]

We
    do not accept the appellants 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 solicitors 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 tribunals 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 Panels statement of the proper test for
    mortgage fraud in the context of legal practice was reasonable.

[20]

We
    do not accept the appellants 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 Tribunals 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 appellants 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 vendors 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 lenders economic
    interest was not at risk.

[26]

The
    Hearing Panel accepted the appellants 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 vendors 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 appellants 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 vendors 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
    appellants] 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 purchasers 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 vendors solicitor that the credit was legitimate. The
    Hearing Panel found that while the transaction did not appear legitimate on its
    face, the appellants 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 purchasers $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 appellants 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
    Panels conclusion

[36]

The
    Hearing Panel accepted the appellants 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 Panels order for new
    hearings with respect to these six transactions as the Hearing Panels findings
    relating to the appellants mental state were based upon an erroneous and
    incomplete definition of mortgage fraud.

[38]

While
    we accept the reasonableness of the Appeal Panels 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:

1.

Were material facts not disclosed to the lender?

2.

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.

3.

If the transactions fraudulent, was the lawyer aware of, wilfully blind
    or reckless to the fraud?

4.

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, affd 2014 ONSC 2993
    (Div Ct)).

[41]

Nonetheless,
    as is clear from step three of the Appeal Panels 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 licensees 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 lenders economic interests at risk. He
    concluded that those credits were legitimate and would not be material to the
    lenders economic interests. The Hearing Panel accepted the appellants
    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
    Societys expert witness admitted in cross-examination that if the purchasers
    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 lenders 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 appellants 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 onthe 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 appellants
    conduct through a different legal lens.

[45]

The
    majority of the Divisional Court relied on the principle from
R. v. Thé
roux
,
[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 lenders 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.


