First National Financial GP Corporation v. Kulaga, 2012 ABQB 8

Court of Queen ’ s Bench of Alberta Citation: First National Financial GP Corporation v. Kulaga, 2012 ABQB 8 Date: 20120105 Docket: 0901 17409 Registry: Calgary Between: First National Financial GP Corporation Plaintiff - and - Andrew Kulaga Defendant - and - Royal Bank of Canada, Ilan Levy, Michael Davidson, Heather Liska, Mortgage Aliance Company of Canada, John Cumming Third Parties _______________________________________________________ Reasons for Judgment of J.B. Hanebury, Master in Chambers _______________________________________________________

[ 1 ] First National Financial GP Corporation seeks judgement against Edward Kulaga for the amount remaining outstanding on an insured mortgage. It alleges Dr. Kulaga was a straw buyer. Dr. Kulaga does not deny that he was a straw buyer. However, he is defending the claim, alleging that a fraud was perpetrated as the property in issue was fraudulently flipped to inflate the price just before being transferred to him. He states that First National knew or should have known about this fraud.

FACTS [ 2 ] This is the classic straw buyer situation and is one more example of how, during the heady days of the latest boom in Alberta, people’s normal caution flew out the window. [ 3 ] The facts before the Court come from the affidavits of Dr. Kulaga. The only evidence filed by the representative of First National was a standard form Affidavit of Default setting out the details of the mortgage and the amount outstanding. No evidence was filed by the lawyer who handled the transaction, Mr. Cumming. [ 4 ] Dr. Kulaga states that he heard about an investment possibility from a colleague.

The investment involved holding a mortgage on a house for 2 to 4 months until the buyer could acquire the property. He would be paid a fee for providing the financing during that period. [ 5 ] As a result, he spoke with Mr. Levy, allegedly a mortgage specialist from the Royal Bank of Canada. Mr. Levy advised him that he had a buyer for a certain property but the buyer could not finance the property for three months and needed interim financing. [ 6 ] Dr. Kulaga was interested and met with a mortgage broker employed by Mortgage Alliance Co. of Canada. She obtained income and employment information from him. Dr.

Kulaga had some concerns and asked both Mr. Levy and the mortgage broker if the transaction was legal and was advised it was. He was told that he was “simply purchasing a property and obtaining a mortgage on the property for approximately 3 months until the buyer... could repurchase the house.” [ 7 ] He signed a real estate purchase contract to purchase the property for $1.495 million from Tom and Rhonda Banic. He did not see the house and only had a general idea of its location and did not know who would lend the money for the purchase. [ 8 ] Dr. Kulaga attended at the offices of a lawyer, Mr.

Cumming, where he signed a number of documents including a mortgage commitment, a statutory declaration, an order for payment and direction to pay, and an acknowledgment that Mr. Cumming was also acting for the vendor and First National. [ 9 ] Dr. Kulaga did not read the documents and says that they were not explained to him nor did Mr. Cumming leave the office to allow him to read them. He says that he was not advised that he was swearing under oath that he had made the down payment on the property and would occupy it. [ 10 ] Dr. Kulaga states that he never retained Mr.

Cumming and understood that he had been retained by the mortgage specialist or broker. [ 11 ] Dr. Kulaga says that he did not know at the time that the property was being flipped and he was purchasing it from a numbered company, 1331579 Alberta Ltd.

[ 12 ] Subsequent investigation by Dr. Kulaga’s lawyer brought to light two other real estate contracts which Mr. Cumming had forwarded to the lender on Feb. 27, 2008. The first is from the Banics to the numbered company and was executed by Mr. Banic in November, 2007, for a purchase price of $1.1 million with a closing date of Feb. 28, 2008. The second appears to be the one executed by Dr. Kulaga but the Banics’ names appear to have been removed, and the vendor is the numbered company, 1331579 Alberta Ltd. Dr. Kulaga says he did not execute that contract.

Not surprisingly, the numbered company was owned in part by Mr. Levy, the mortgage specialist who had proposed the arrangement to Dr. Kulaga. [ 13 ] The transfer of land was attached to Dr. Kulaga’s affidavit. The Banics executed the transfer to Dr. Kulaga for $1.1 million, however the affidavit of transferee executed by Dr. Kulaga states that he was receiving the property for $1.495 million. [ 14 ] Mr. Cumming’s file disclosed three different statements of adjustments. The first was provided to Dr. Kulaga and showed a purchase by Dr. Kulaga from the numbered company for a price of $1.495 million.

Subsequently there was an amended statement of adjustments prepared and found on the lawyer’s file showing the purchase by Dr. Kulaga from the Banics for a purchase price of $1.1 million. A third statement of adjustments was attached to a letter addressed to Dr. Kulaga in April, 2008, and it showed the vendor as the numbered company and the purchase price as $1.495 million. It indicated that Dr. Kulaga had paid a deposit of $150,000.00. [ 15 ] The approximately $300,000.00 profit from this flip and financing did not go to the numbered company but, at the direction of Mr. Levy, went to Mr.

Levy and another party. [ 16 ] Dr. Kulaga realized that a fraud had occurred and sued First National, the fraudsters and Mr. Cumming. [ 17 ] First National then commenced a foreclosure action and Dr. Kulaga defended the action, adopting the allegations in the claim he had previously filed. He also third partied the fraudsters and Mr. Cumming. [ 18 ] First National filed no affidavit dealing with the specific allegations of Dr. Kulaga. Pursuant to the foreclosure action the property was transferred to First National, reserving the question of his liability for the deficiency in the sum of over $678,000.00.

First National seeks

summary judgment for that amount. ISSUES [ 19 ] Dr. Kulaga argues that

summary judgment cannot be granted as the mortgage contract is tainted by illegality by way of deceit or participation in the fraud by the lender. First National, he says, knew or ought to have known of the fraud and chose to lend the funds regardless. He also argues that Mr. Cumming, as agent for First National, failed to disclose the true transaction to him and thereby committed a misrepresentation upon which Dr. Kulaga relied. Finally, he argues that he is entitled to equitable set-off due to his claim against First National. ANALYSIS [ 20 ] The test for

summary judgment is well known. Essentially, judgment can be granted only if there is no material issue of fact or law to go to trial. The evidentiary burden is initially on the applicant to prove its cause of action on the balance of probabilities. If he is successful, the evidentiary burden then moves to the respondent to show that there is a genuine issue for trial. The ultimate burden remains with the applicant to demonstrate that it is beyond doubt that no genuine issue for trial exists: Pioneer Exploration Inc. v.

Uro- Am Pacific Enterprises Ltd. 2003 ABCA 298 . [ 21 ] The Courts have now seen many of these straw buyer situations. The case law has been canvassed in a number of recent decisions: MCAP Service Corp. v. Doiron 2006 ABQB 821 and 837; MCAP Service Corporation v. Molina-Tan 2009 ABQB 472 ; First National Financial GP Corp. v. Akhtari 2010 ABQB 320 ; Toronto Dominion Bank v. Khosla . 2010 ABQB 652 ; and Scotia Mortgage Corporation v. Lewandowski , 2011 ABQB 822 ..

[22] Dr. Kulaga is clearly not an innocent victim in this situation. He was, quite correctly, concerned that what he was doing wasillegal. To assure himself of the legality of the scheme he contacted the fraudsters and sought assurances that the scheme was aboveboard. Not surprisingly, he received the necessary assurances. He did not then seek legal advice as to the bona fides of the scheme. Hemakes no mention of asking any questions of the lawyer he ultimately saw in order to close the transaction.

He proceeded, regardless, tohis present regret. [23] As was noted in MCAP and Molina-Tan at para. 53, “participants in a scheme of this kind cannot then ask the court that itrefuse to enforce the contract that they signed on the basis of its illegality...” They do not have the requisite clean hands to do so. [24] However, this legal principle cuts both ways. If the lender was involved in some way in the fraud, it too may have difficultyenforcing the contract due to its legality. See: Letkeman v. Zimmerman (SCC), [1978] 1 S.C.R. 1097. [25] In MCAP Service Corp. v.

Doiron 2006 ABQB 821 and 837, Burrows J. refused to grant

summary judgment to the lender. Inthe course of his reasoning Burrows J. considered the argument of the defendant that MCAP could not sue on its security as its agents,including the mortgage broker and its lawyer, misrepresented to the straw buyer that there was a house on the property and they hadrelied on this misrepresentation. The evidence filed by MCAP did not address this issue and Burrows J. held that, as a result, there wereissues to go to trial and

summary judgment was denied. [26] A different conclusion was reached in Royal Bank of Canada v. Parmar, 2005 BCSC 1155, a decision that is not binding onthis Court. In that case the court held that a claim that the employee of the Bank was fraudulent was insufficient to find a triable issueand

summary judgment was granted. [27] Dr. Kulaga alleges that the lawyer, as agent for the lender, was a participant in the fraudulent scheme and held informationback from the straw buyer. Dr. Kulaga also alleges that the Bank knew or ought to have known of the fraud and advanced the fundsregardless. [28] The lender has chosen to provide no explanation of the situation. It has not denied that it received notice of the back to backoffers showing a significant increase in the value of the property in a very short period of time. [29] It has not denied that Mr.

Cumming was its lawyer for the transaction and it may be bound by his acts as its agent. Some ofthe lawyer’s actions certainly raise questions as to his knowledge of, and acquiescence in, the fraudulent scheme. [30] Dr. Kulaga is not an innocent party. However, it is not obvious that the lender itself comes to this court with clean hands.Summary judgment is not a remedy available on the facts as presented. It requires a trial to determine whether the lender is entitled to theentire claim it is making against Dr. Kulaga. [31] The application is dismissed. Costs may be spoken to if agreement is not reached.

Heard on the 31st day of October, 2011. Dated at the City of Calgary, Alberta this 5th day of January, 2012.

J.B. Hanebury M.C.C.Q.B.A. Appearances: Francis N.J. Taman Bishop & McKenzie LLP for the Plaintiff Norman K. Machida, Q.C. Machida Shewchuk James for the Defendant Andrew Kulaga