MCAP Service Corporation v Halbersma, 2013 ABQB 185

Court of Queen ’ s Bench of Alberta Citation: MCAP Service Corporation v Halbersma, 2013 ABQB 185 Date: 20130327 Docket: 0701 12900 Registry: Calgary Between: MCAP Service Corporation Plaintiff - and - Constancia Halbersma Defendant - and - Malik Shoukat Ashraf, 1306438 Alberta Ltd. operating as Malik Properties, Danilo Montorio, Worldwide Employment Agency Inc., Canada Property Management Inc., Catherine Steele and David Steed Third Parties _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice R.E. Nation _______________________________________________________

Introduction [ 1 ] This is yet another case where rogues have taken advantage of a person who was willing to sign legal documents with little care for their meaning. Here, the defendant signed documents to purchase land, while incurring mortgage obligations. Defaults on the loan leave her open to a large deficiency judgment. Long after the rogues have disappeared with the money, the question is who should bear the loss caused by their actions. [ 2 ] The recent written decisions in Alberta dealing with these types of mortgage frauds have been cases decided at the Master or Queen's Bench level where an application has been made for

summary judgment on a mortgage, and the court has had to consider if a

summary judgment will be allowed, or whether there is some evidence that requires a trial of the matter. There is a paucity of written decisions after a trial, dealing with the application of the law to proven facts at trial. [ 3 ] Each case turns on its own facts. Here the defendant tries to avoid a deficiency judgment on a mortgage, alleging that the plaintiff lender should not be able to enforce its security, and if it can, that the lawyer, Mr. Steed and his paralegal, Ms. Steele should indemnify the defendant for any judgment, due to their negligence.

The Issues [ 4 ] The following are the issues arising from this trial: 1. Is the defendant liable to the plaintiff? 1.1. Can the defendant successfully plead non est factum ? 1.2. Is the plaintiff barred from enforcing its security due to the conduct of the mortgage broker? 1.3. Is the plaintiff barred from enforcing its security due to the conduct of the third party solicitor? 1.4. Is the plaintiff barred from enforcing its security due to unconscionability, a failure to exercise diligence or by being "involved" in the fraud? 2. Is the third party lawyer, Mr. Steed, liable to the defendant? 3.

Are the other third parties liable to the defendant? The Facts [ 5 ] The facts relevant to this lawsuit are as follows:

1. Ms. Halbersma immigrated to Canada from the Philippines in 1975. Although English is her second language, she speaks and understands the language and no suggestion was made that she was incapable of understanding any of the relevant transactions due to limitations in her language skills. She has raised three children in Canada. In 2005, she bought a condominium in Calgary, so had the experience of dealing with a lending institution, and attending a lawyer's office to sign the documents to close a residential real estate transaction involving a mortgage. 2. In the summer of 2007, Ms.

Halbersma met an old work acquaintance, one of the third parties, Danilo Montorio, who advised her that he owned a business called Worldwide Employment Agency Inc. (another third party) whose business it was to facilitate foreign workers to gain entrance into Canada. In August, 2007, Ms. Halbersma paid Mr. Montorio a fee of $10,000, as she wanted her nephews and nieces to come to work in Canada. Ms. Halbersma testified that this was money which she received as a result of a settlement from an automobile accident. 3. Ms. Halbersma would see Mr. Montorio from time to time.

He told her that he wanted to buy a house as an investment. Ultimately Ms. Halbersma gave Mr. Montorio the sum of $5,000 to invest, but insisted on documentation for that loan. Mr. Montorio wrote up a document (exhibit 1- tab 5), which outlined that $5,000 had been paid to his company, Canada Property Management Inc. (another third party) from Ms. Halbersma and the investment would receive interest of 20% from August 27 to October 31, 2007. 4. Ms. Halbersma testified that she insisted on more formal documentation, (seemingly for the total of $15,000) and so Mr. Montorio took her to see a lawyer, David Steed.

She testified that she went into a conference room at Mr. Steed's office in September 2007 with Mr. Montorio. An unidentified woman gave her a pile of papers about eight inches thick, and told her to sign wherever an "X" was put on the document. She did so; the whole procedure took about thirty minutes. She acknowledged her signature on some thirteen various documents, including both the conveyance documents to transfer residential lands into her name, and the mortgage that is the subject matter of this lawsuit.

She testified that she did not read the documents; no one described them or explained them to her, or gave her any advice about them or their meaning. She thought she was signing for some type of investment, but gave little detail in her evidence of what she understood that investment to be. No one told her she could not read the documents. She did not read the documents to see if they set out the deal she understood she had with Mr. Montorio (or one of his companies) nor did she tell anyone she did not understand the documents, or ask to take them to anyone else to get advice. 5. Some ten days later Mr.

Montorio contacted Ms. Halbersma, telling her that there were more documents that needed to be signed and she attended a different lawyer's office, where she signed a mortgage to the Royal Bank of Canada for $412,366.50 (exhibit 1-tab 43). 6. The MCAP mortgage, which Ms. Halbersma had signed and was ultimately registered with the land transfer, fell into arrears, and ultimately the property was ordered to be sold to the plaintiff. Ms. Halbersma testified she was shocked when MCAP called her, as she knew nothing about the house or the mortgage.

MCAP now asks for a deficiency judgment of $139,091.72, being the difference between the balance due on the mortgage and the fair market value of the property, plus interest from November 11, 2008 to February 26, 2013 at the mortgage rate of 5.84% which equates to $34,874.16, for a total of $173,965.88 with a per diem interest rate of $22.24. 7. MCAP is in the business of lending money. The request for the mortgage in question came in through a mortgage broker, Tanya at Unisource.

The evidence was that all of MCAP's business comes in through brokers who are approached by borrowers to source the most favourable mortgage for the borrower from among many lending agencies. MCAP expects that any broker will meet with the borrower and will obtain the documents that MCAP requires to process the application and the mortgage. MCAP ultimately pays a commission fee to the broker. 8. The application for this mortgage was filled out online, and submitted electronically. A signed real estate purchase contract evidencing a purchase of the property from "Malik Properties/1306438 Alberta Ltd." by Ms.

Halbersma was provided to MCAP, indicating a purchase price of $445,000 with a $7,000 initial deposit, new financing of $422,750 and a balance owing of $15,250. Ms. Halbersma denies ever signing this real estate document. 9. MCAP sent out a commitment letter outlining: the loan amount; the CMHC insurance premium (which is paid by MCAP and added to the amount of the mortgage); the monthly payment; the interest rate; the term of the mortgage; and the amortization period.

The document outlined various conditions precedent to an advance, which included: verification of previous employment by way of a 2006 income tax return or notice of assessment; a drive-by appraisal which would be paid for by MCAP; approval by CMHC; the lender's commitment signed and returned with a void cheque from the bank account through which mortgage payments were to be made; a written confirmation that payments of $21,750 had been made to the vendor; written confirmation that Ms.

Halbersma was employed at Worldwide Employment Agency with an annual salary of $105,000; a copy of a paystub; proof of a satisfactory payment history on the

mortgage on the defendant's current residence; and receipt of identification verification, with photocopies of the identification of the defendant. 10. Ms. Halbersma provided her Canadian Citizenship documents and driver's license to Mr. Montorio in the context of the immigration matters for her relatives, as well as her 2006 notice of assessment which showed income of $37,611.

Unbeknownst to her, MCAP received from the broker documents which she testified were false: a letter from Worldwide Employment Agency Inc. confirming that she was employed there as a senior office administrator making $105,000 a year since August 6, 2006; a copy of her pay cheque for $6,363.71; a bank statement showing a bank account with activity over three months; and a blank cheque with Ms. Halbersma's current address from an account at Canada Trust. I accept Ms. Halbersma's evidence that these were all falsified documents, of which she had no knowledge.

I also accept her evidence that she had never met with any mortgage broker. 11. Upon receiving the above documents, MCAP called Worldwide to confirm verbally the employment, and did a corporate registry search as well as an internet search to confirm the existence of the company and that it had a web site. MCAP received a consumer credit report on Ms. Halbersma, confirmed that the account number at Canada Trust was a valid bank account, and checked the bank statements provided for that account to see that income amounts as alleged were going into the account.

Satisfied with the information provided, and having received a drive-by appraisal of the home to confirm the value, MCAP applied for CMHC insurance, as the value of the mortgage was greater than 80% of the property value. CMHC approved the insurance. 12. Zimmerman and Company was the law firm identified on the real estate purchase contract as the conveyancing counsel chosen by the parties. MCAP sent documentation to that law firm to prepare the necessary mortgage documentation, as MCAP generally used the same lawyer as the mortgage recipient chose to act in the sale. 13.

MCAP then awaited confirmation from the lawyer that everything was in place and ultimately advanced funds under the mortgage. MCAP had no direct contact with Ms. Halbersma, until the default in payment of the mortgage. 14. MCAP denied that it had any knowledge that this was a skip transfer. The actual real estate transaction involved 407009 Alberta Ltd. transferring the lands to 1306438 Alberta Ltd. for $380,000. This transfer was registered just prior to the transfer from 1306438 Alberta Ltd. to Ms. Halbersma for $445,000. All transfers were registered by Mr.

Steed in conjunction with the mortgage on September 25, 2007. 15. Mr. Steed testified that he graduated from law school in 2002 and was practicing law at Zimmerman and Company at the pertinent time. He worked closely with a paralegal, Catherine (Kate) Steele. He recalls almost nothing of this transaction, other than the physical appearance of Mr. Malik, the president of 1306438, and a discussion with Ms. Steele about a concern that there were tenants in the property. He testified that he trusted Ms. Steele to meet with clients.

In the fall of 2007, he was responsible for about eighty to one hundred real estate transactions a month; it was a busy practice. He testified it was not unusual to see skip transfers, where one person sold property to a buyer who immediately transferred it to another buyer for a higher price, as real estate prices were quickly rising in Calgary at that time. He confirmed his signature as counsel asking for the mortgage funds to be advanced, and that he commissioned the signature of Kate Steele on the documents. 16. Ms.

Steele testified that she had been a real estate paralegal in Canada for the last seventeen years. She could not recall meeting Ms. Halbersma. She testified as to her standard practice in meeting with a client to sign documentation to close a standard residential real estate transaction with a mortgage. She went through all the documentation that was signed by Ms. Halbersma in this case. She confirmed that with multiple copies it may well have been a stack of paper approximately eight inches thick. Ms.

Steele testified that she always went through documents in the same order, starting with the statement of adjustments, and then moving through: the reconciliation of funds; the actual land transfer; the transfer back; and all of the necessary mortgage documents. Her standard explanation in relation to the CMHC documents involved her being clear that there could be personal liability if there is a default and if the value of the land did not cover the amount of the mortgage. She described how she would draw a diagram about this. One of the documents (exhibit 1-tab 25) signed by Ms.

Halbersma expressly acknowledged this potential liability. 17. Ms. Steele testified that these meetings generally lasted 30 minutes to 1 hour and that she was alert to issues of language comprehension or coercion and would halt a meeting if she felt a person did not understand her description. Her practice was to make an "X" on the document after she described it to the client, and have them sign by the "X". She would give one copy of the documents to the client when they left the office. At the end of the meeting, she would congratulate the person on the purchase of the property.

18. Ms. Steele referred to the financial details of the real estate transaction between the parties in going over the statement of adjustments. She recalled discussions with MCAP on this file only because it came to her attention that there were tenants in the property from her meetings on the first transfer, and she understood the type of mortgage here was meant for owner occupied property. MCAP gave her the go ahead despite her concern, as it appeared that the renters had been given notice to vacate. 19. Ms. Steele indicated that the vendor paid all legal costs associated with the transfer and mortgage.

She received confirmation from the vendor that it had received the deposit monies. Usually these would go through the trust account, but they did not in the situation, but were accounted for in the statement of adjustments. Ms. Halbersma signed standard documents (exhibit 1-tab 26) that the down payment was from her resources, not borrowed and that she intended to live in the property; it was not a rental property. Conflicting Evidence [ 6 ] There was one area of conflicting evidence, and my finding of fact in that area is material to the decision in this case.

There was a direct conflict between the evidence of Ms. Halbersma and that of the paralegal, Ms. Steele as to what happened when Ms. Halbersma signed the documents at Mr. Steed's office. It is necessary that I find the facts of what occurred in the office of Zimmerman and Company. Do I accept the evidence of the defendant that she was merely presented with a stack of papers, and that she had to go through and sign only where there was an "X"? Or do I accept the evidence of Ms.

Steele that her standard practice would be to go through the documents, and that she believes she did so in this case, as there are "X's" on the documents and she swore the affidavits of execution before Mr. Steed, saying she had seen Ms. Halbersma sign the documents? [ 7 ] When I consider all the evidence, I find that Ms. Steele did sit down with Ms. Halbersma and explain the documents, witness her signature and that although Ms. Halbersma chose to remain silent, she understood at minimum what Ms. Steele was explaining, a real estate transaction involving a transfer of land and a mortgage.

I make this finding for the following reasons: 1. Ms. Steele had substantial experience, and spoke of her usual practice, which I accept; 2. From the evidence presented, there was nothing to give me the impression that Ms. Steele would sign a document as a witness and swear a false affidavit of execution before Mr. Steed; 3. Ms. Halbersma suggested that as a relatively unsophisticated client, she was able to go through a large stack of real estate and mortgage closing documents and find each place she was to sign, including initialing a portion of an affidavit that was stuck out.

She testified this was without any assistance, except for an "X" at each place (although there were not "X's" on some places where she still did sign). I find this to be very unlikely, when one views all the documents and types of signatures necessary, especially when some of her signatures involved an affidavit of execution, a signature that many individuals have trouble completing correctly; 4. Ms. Halbersma was very vague about the "investment" that she made with Mr. Montorio. The document that he wrote up has no resemblance to the legal documents she signed.

There is no relationship between her evidence of the oral agreement she thought she was making, the written document Mr. Montorio prepared, and the land transfer and mortgage. I find it hard to believe she would sign the mountain of documentation without listening to or understanding any explanation. There was no suggestion that she was coerced by Mr. Montorio, or somehow under his power or control. The fact that she would sign this documentation apparently without looking at it suggests she was at a minimum reckless, but more likely aware of some larger scheme going on in the background.

The fact that a few days later she signed a second unrelated mortgage at Mr. Montorio's request, supports the latter conclusion; and 5. Case law has made it clear that when an individual cannot recall a specific transaction due to the sheer volume of times they perform a function, or due to the passage of time, but it is an event which occurs routinely in the course of the person's work or professional practice, evidence of a regular practice can be accepted as evidence of what happened on a specific occasion. This is often the case in real estate transactions. See: Bank of Montreal v.

Yerxa , 2005 NBQB 135 ; Bain v. Empire Life Insurance , 2004 BCSC 1577 , 27 R.P.R. (4th) 64; and Firstline Trust Co. v. Mills , 2000 BCSC, 226 , 31 R.P.R. (3d) 17.

Discussion of the Issues 1. Is the defendant liable to the plaintiff? [8] The Law of Property Act, R.S.A. 2000, c. L-7, in s. 43 expressly allows a deficiency judgment against an individual in thecircumstances of this mortgage, a high-ratio mortgage given to secure a loan under the National Housing Act, R.S.C. 1985, c. N-11.There was no argument over the terms of the mortgage, or the amount of the deficiency, or the interest rate or calculations.

The defencesraised relate to the circumstances of the mortgage being applied for, signed and registered and whether any of those circumstances meanthat MCAP cannot enforce its security for the money advanced. [9] The defendant argued that the plaintiff should not be able to obtain a deficiency judgment as a result of a number ofrecognized legal principles that should apply to this case: non est factum; that the mortgage broker was the agent of the plaintiff andtainted the transaction; that the solicitor who acted for the plaintiff was tainted with the fraud; and that the plaintiff through its conductfailed to take due diligence to guard against the fraud or was involved in the fraud, making the transaction unconscionable. 1.1.

Can the defendant successfully plead non est factum? 1.1.1. The defence of non est factum [10] The defendant claims the defence of non est factum, that she did not comprehend the documents that she signed, and that sheshould not be liable as a result. [11] The plaintiff argues that this defence is not available to the defendant, as a result of the circumstances around the execution ofthe documents and her carelessness. 1.1.2. The law [12] The principle of non est factum is that the mind of the signor did not follow their hand in executing a document, as they didnot understand the document they were signing.

Generally non est factum is plead when there is a language problem, or a party iscoerced into signing a document, or a rare situation where a party could not have understood the document, so their mind does not followthe signature of the document. [13] It is not enough to simply say that the signor did not put his mind to it, or understand.

When a person of adult age andintelligence, who can read and write, signs a legal document in circumstances where it is apparent on the face that it has legalconsequences, and the person does not read the document, but signs it as it is, that person cannot argue that it was a nullity from thebeginning. See: Royal Bank v. McLean (1997), 211 A.R. 287, at paras 65-72, and Mutual Life Assurance Co. of Canada v.

Campbell,2001 ABQB 391, 298 A.R.87, paras 21 and 22. [14] The leading case in Canada on the subject of non est factum where there has been a fraud and the question is which of twoinnocent parties is to suffer for the fraudulent act of a third party is the case of Marvco Color Research Ltd. v. Harris et al., (SCC), [1982] 2 S.C.R. 774. In that case the defendants executed a mortgage to the plaintiff as collateral security, based onrepresentations that the document was required to correct certain discrepancies in a mortgage of the bank. Neither defendant read themortgage before signing it.

The Supreme Court of Canada held that the defence of non est factum is not available to a party, who,knowing a document has legal effect, carelessly fails to read a document, and thereby permits a third party to perpetrate a fraud on aninnocent party.

In that case, the plaintiff bank was found to be innocent of any negligence, carelessness or wrongdoing, and the courtfound the defendants by their careless conduct made it possible for the wrongdoers to inflict the loss. [15] The principle as discussed by the Supreme Court of Canada is that justice requires that the party who by the application ofreasonable care could have avoided a loss to any of the parties, should bear any loss that results when the only available alternative of

non est factum would be to put the loss upon an innocent party (the lenders). 1.1.3. Application of the law to the facts [16] Here, although the defendant testified that she did not understand that she was signing mortgage documents, she knew that theinvestment involved the purchase of land. She had the ability to look at the documents, and she could understand words such as"mortgage". There is no question that she was careless in the meeting with Ms. Steele by failing to say that she did not agree to orsomehow understand the transaction as it was being explained to her.

In these circumstances, the defence is not available to her asgenerally a person of full age and understanding is bound by his signature to a document, whether he or she reads or understands it. I findthe documents were explained to her. Non est factum is not a defence where there is evidence that a document was explained to a person. [17] In addition, for reasons outlined in this decision, there is no finding from the evidence that MCAP employees were in any waydirectly or by inference involved in a fraud. Thus, as between MCAP and Ms.

Halbersma, who sat by and did nothing and had the chanceto stop the process, the principles in Marvco Color Research make it clear that the loss caused by the rogue sits with Ms. Halbersma, notMCAP. 1.2. Is the plaintiff barred from enforcing its security due to the conduct of the mortgage broker? [18] The argument of the defendant is that MCAP cannot enforce its security against Ms. Halbersma, as the mortgage broker wasMCAP's agent.

The defendant alleges that the mortgage broker was involved in the fraud and the broker’s knowledge and conductbecomes that of MCAP. [19] The position of MCAP is that the mortgage broker was not its agent, and factually, it cannot be proven in this case that themortgage broker was involved in the fraud. 1.2.1. The law [20] The law of principal and agent is clear. Generally the knowledge of an agent is imputed to his principal. This notion is basedon the presumption that an agent will communicate his knowledge to his principal, as it is his duty to do so.

The presumption will not bemade when it is shown that motives exist in the mind of the agent that make it in his interest to conceal the truth from his principal:Durbin v. Monserat Investments Ltd, (1978), (ON CA), 87 D.L.R. (3d) 593 (Ont. C.A.). [21] There is nothing in Alberta's Real Estate Act, R.S.A. 2000, c. R-5 creating a presumption of agency between a lender and amortgage broker. [22] In Xceed Mortgage Corp. v. Wood, [2007] O.J.

No. 3703; affirmed on appeal, 2008 ONCA 175, the court held that there mustbe evidence of a mortgage broker acting as an agent of the lender in order to bind the lender to the broker's actions. It held that themortgagee's belief in agency, absent any source of such belief, was insufficient to establish an agency or holding out. Additional evidenceis required: see paras 20-23 (S. Ct.). 1.2.2. Application of the law to the facts [23] The mortgage broker was not a party sued in this action, the broker did not testify. I accept the evidence of the defendant thatshe never met with the broker.

I also have found that the broker provided to MCAP information that was forged or altered, for instancethe original agreement to purchase land, the pay stub for the defendant, and the letter confirming her employment. There is no evidenceof how the broker got this information. There is no evidence tying knowledge of the fraud to the broker; it is impossible to tell if thebroker was involved in the fraud, or unwittingly duped. Defendant's counsel argues that I should infer involvement, that at minimum thebroker should meet with the client, and that did not occur here.

[ 24 ] I have no evidence of what is the reasonable conduct of a mortgage broker. No evidence (expert or otherwise) was provided at trial as to the usual practices of mortgage brokers. The only evidence I have is that MCAP pays the fee for the broker, but MCAP does not hire the broker; the broker is sought out by the individual who desires financing. Brokers can access and place mortgages with any number of lenders. This broker was not an employee of MCAP. No evidence suggested this broker had ever been in the position of an agent for MCAP, or that this broker was in any way obligated to bring a client to MCAP.

There was no corporate connection between the broker and MCAP. [ 25 ] Although the conduct of the broker here is suspect, from the very limited information before me, I cannot find from the facts, nor am I willing to infer, that the broker had knowledge of or was involved in a scheme to obtain monies for the rogues in this case, who certainly included Mr. Montorio and at least his company, Worldwide. Fraud is a serious allegation, and should not be inferred on the basis of innuendo or suggestion.

There is an equally plausible possibility in this case that the broker received the documents in some manner that the entire application seemed legitimate, and the broker merely passed documentation on to MCAP. The mere payment of a commission to the broker in this case is not sufficient to find an agency relationship. [ 26 ] From the evidence that an independent broker provided an application for financing to MCAP, who treated any broker as a representative of the applicant, I am not willing to find that the broker in this case was the agent of MCAP.

As a result, MCAP is not estopped or unable to enforce its security due to some wrongdoing of the broker. 1.3. Is the plaintiff barred from enforcing its security due to the conduct of the third party solicitor? [ 27 ] Counsel for the defendant argued that Mr. Steed who acted as counsel for MCAP as well as counsel for the defendant, became the agent of MCAP. He argued that Mr. Steed was involved with the fraudulent scheme to an extent that would restrict MCAP's ability to enforce its security. This argument was advanced by the defendant, based on comments in various Alberta cases that have considered and rejected

summary judgment applications in favour of the lender. Counsel argued that a lawyer is the agent for the lender, and if the lawyer is implicated in the fraud, that may pass through to affect the lender's ability to enforce the mortgage. 1.3.1. The law [ 28 ] In the case of Royal Bank of Canada v. Lee , 2012 ABQB 320 , Master Wacowich dealt with an alleged fraudulent scheme, and a

summary judgment application. At para 34, the Master set out the allegations that were made about the conduct of a lawyer who met with the purchaser/defendant. The Master held that as the lender offered no explanation of the alleged conduct of its counsel, which it was argued was suggestive that the counsel had knowledge or acquiesced in the mortgage fraud, that was an issue that had to go to trial. [ 29 ] Isaacs v.

Royal Bank of Canada , 2010 ONSC 3527 , upheld on appeal at 2011 ONCA 88 at paras 45 to 47 , dealt with an argument that the solicitor, who acted for both the borrower and the bank, had not explained the documents and was in breach of his duties. It was also alleged that the solicitor knew the property had been flipped, and thus it was argued that this may be a misrepresentation by omission by the lawyer, which may be attributed to the bank, as the lawyer was acting as agent for the bank.

Molloy, J. pointed out the difficulty with this argument, as knowledge of conduct that can attributed to a client, by virtue of being a client, would be attributed to both parties - lender and borrower- if a lawyer was acting for both. In addition, there, as here, where there was no allegation that the lawyer said or did anything to encourage the borrower to enter into the transaction, the fact that the lawyer failed to explain something or to adequately protect a client cannot operate to make the bank liable for the solicitor's omissions.

The claim, if any, is more properly framed as a direct claim in negligence or other tort or breach of contract between the borrower and the solicitor. 1.3.2. Application of the law to the facts [ 30 ] There was no evidence at all called in this case to indicate that Mr. Steed, or anyone from his office was directly involved in the fraudulent scheme that was put in place by some of the other third parties named in this action. Counsel for the defendant suggested that inferences could be drawn from various pieces of evidence to implicate Mr. Steed.

[ 31 ] The defendant argued that exhibit 1-tab 51 was the "smoking gun" which should cause this court to infer that the solicitor knew or ought to have known that a fraud was happening. This exhibit is the authorization for a pre-authorized cheque plan. The evidence is clear that this should have been signed by Ms. Halbersma, and it was not, the signature can only be described to match that of Mr. Montorio. Neither Mr. Steed or Ms. Steele could explain how this occurred; it is irregular.

This document was in the lawyer's office, and was page 17 of 18 pages faxed to MCAP by counsel, when requesting that funds be advanced to fund the mortgage. It is thus a reasonable inference that this document was signed by Mr. Montorio at Mr. Steed's office. As Mr. Montorio was not called as witness, Ms. Steele recalls nothing of the signing from her memory, and Ms. Halbersma testified that Mr. Montorio did not sign any documents at Mr.

Steed's office; there is no explanation as to how that came to be. [ 32 ] The defence also suggests that the fact that this real estate deal involved a "skip transfer" where 407009 transferred to 1306438 and 1306438 immediately transferred to Ms. Halbersma at a price that was $65,000 higher, should have alerted Mr. Steed to the possibility of fraud. MCAP's evidence was that it did not know this was a skip transfer, and that fact may have affected its willingness to advance on the mortgage. [ 33 ] The third item which the defendant points out is that Ms.

Steele signed the affidavit of the transferee from 407009 to 1306438, where she swore she was either the transferee or agent of the transferee, and that in her opinion the current value of the land was $380,000. This was sworn by her before Mr. Steed, when both of them would know that Ms. Halbersma had sworn an affidavit 10 days before saying that in her opinion the value of the land was $445,000. This affidavit should normally be signed by the transferee, not a paralegal.

Although the form allows an agent of the transferee to sign the affidavit, one has to question whether it is usual or a preferred practice to have a paralegal swear this type of affidavit. Ms. Steele justified it on the basis that she was giving an opinion of value that she received from the client. Both she and Mr. Steed suggested that in 2007, it was not unusual for parties to be buying and flipping real estate to make significant profits, the Calgary real estate market was showing large increases in value. [ 34 ] The question is whether these three facts are sufficient to find that Mr. Steed or Ms.

Steele are somehow tainted or made misrepresentations, or conducted themselves in a way that as agent of any party, they would taint that party. The allegation is that the fact that Mr. Montorio signed a document that should have been signed by Ms. Halbersma, an affidavit of value was sworn by a paralegal and the fact of a skip transfer is enough to suggest that Mr. Steed should be held to know, or ought to have known of the fraud that Mr. Montorio or his companies were perpetrating. [ 35 ] Although the signature of Mr.

Montorio on the pre-authorized cheque plan is irregular, I cannot say that in the context of the facts before me, the signature alone is sufficient to implicate Mr. Steed in the fraud. There is no question that Mr. Steed and his staff may not have followed best practices, such as allowing Ms. Steele to swear an affidavit of value for the transferee, rather than having the client reattend to swear it, or missing the fact that the one signature on the cheque authorization was by the wrong person. In addition, Ms.

Steele missed crossing out one of the alternatives in a dower affidavit on the transfer back (exhibit 1-tab 20). These items, along with the fact it was a skip transfer (which I accept was happening often in the Calgary economy of the time), are not sufficient, in my mind, to indicate that Mr. Steele, or his employee knew, or should have known, that a fraud was being perpetrated. [ 36 ] I note that it was not put to either Mr. Steed or Ms. Steele in their cross-examination that they were direct participants in the fraud, or that they had knowledge of it.

One would expect this, if it is argued that fraud should be found or inferred. No evidence was called about the prevalence or potential meaning to be ascribed to the skip transfer, other than the comments made by Mr. Steed and Ms. Steele as to their prevalence during 2007. [ 37 ] As a result, I do not find that the defendant has proven on the balance of probabilities that Mr. Steed or members from his office conducted themselves in a way, which results, because Mr. Steed was the lawyer for the bank, in the plaintiff being unable to enforce its security. 1.4.

Is the plaintiff barred from enforcing its security due to unconscionability, a failure to exercise diligence or by being "involved" in the fraud? [ 38 ] Defendant's counsel argued that recent cases in Alberta, dealing with

summary judgment applications, introduce a new suggestion that "involvement" of the lender by association with a fraudulent scheme means that the lender is unable to enforce its security. The argument is essentially that a rogue like Mr. Montorio could not perform this fraud on his own, and an obligation extends to the lender to guard against these frauds.

[39] The defendant argued that the failure of MCAP to: question the bank statements; to question the appearance of the personalcheque provided for the bank account from which mortgage payments should be paid; and to critically match the income letter with thedeclared income in 2006, are indications of its lack of care.

The defendant argues that these failures show MCAP turned a blind eyewhen it should have been alert to the scheme, and thus it would be unconscionable to allow it to enforce the mortgage. [40] Counsel for the plaintiff argued that absent special circumstances that somehow put the lender in a fiduciary or specialrelationship to the borrower, there is no duty of care owed by MCAP to the borrower.

Further it argued that whatever MCAP chose to doin terms of lending is its decision, any steps it took to protect itself or its investment were only for the lender's protection, and theborrower cannot somehow suggest that if it did not follow those procedures or did not detect a fraud, that somehow plays to theborrower's favour. 1.4.1. The law [41] This due diligence argument was examined by Master Hanebury in the case of MCAP Service Corporation v. Molina-Tan,2009 ABQB 472, 503 A.R. 1.

I agree with her conclusions from the case law she reviewed, that the conditions placed on theadvancement of a loan are the lender's and the lender can choose to enforce, alter or waive them. Furthermore, there is no obligation onlenders to look beyond the documents provided to them in apparent good faith by the purchasers. [42] The Isaacs case, at paras 38 to 44, looked at the issue of any duty owed to the borrower by the bank. The argument there wasthat if the bank had done its due diligence, it would have learned of circumstances that would have disclosed the fraud.

In that case, thecourt looked to determine if there was a simple debtor/creditor relationship, or rather if there was anything that would create a specialrelationship, for example, one of a fiduciary. It held that a lender per se has no special relationship to the borrower, and has no obligationto take steps or examine things for the protection of the borrower. There must be special knowledge held by the bank, or exceptionalcircumstances that would change the nature of the relationship. [43] Defendant's counsel pointed to recent cases that cite with approval the concept in Letkeman v.

Zimmerman, (SCC), [1978] 1 S.C.R. 1097, which deals with the enforcement of an illegal contract. That case dealt with the concept that a plaintiffwho has the intention to use the subject matter of the agreement for an unlawful purpose, cannot sue on it. If a transaction is connectedwith an illegal transaction to which the plaintiff is a party, an issue arises if that person can succeed in an action. This case has been citedby several Alberta Masters (in the context of not allowing

summary judgment applications, but insisting matters go to trial) for theproposition that if the lender was involved in some way in the fraud, it may have difficulty enforcing the contract due to its illegality.See: Scotia Mortgage Corp v. Aab, 2012 ABQB 464, and First National Financial GP Corp. v. Kulaga, 2012 ABQB 8. [44] There is no question that there are a number of cases where

summary judgment remedies have been rejected, as the borrowershave raised sufficient evidence of allegations that the lender, or an employee or agent of the lender, was involved in or perpetrated thefraud. Those cases are rightly sent to trial, not dealt with summarily. However, it is wrong to suggest that any of these cases are a newline of case law, or that they represent a new movement in law that "involvement" by the lender has a new meaning, which would limitthe lender’s ability to enforce its security.

These cases simply reference earlier legal principles which remain unchanged. [45] There is a body of cases that hold that if a transaction is unconscionable, for example where one party preyed upon the other,or a transaction is unconscionable and improvident on its face, the onus is upon that party to show that the document sought to beenforced was not procured by fraud. See: Premier Trust Co. v. Beaton, (1990) (ON SC), 1 O.R. (3d) 38 (Ont. Ct.

J.).Fiduciary relationships, contracts between two parties where one party is in a situation of protection to the other party, or instances wherea creditor is shoring up an existing debt and there is a relationship already between the two parties, might all be situations whereunconscionability may arise. There has to be an inequality of bargaining power that was used to an unfair advantage by one party.

In thefacts of Premier Trust, even with the unique facts of a woman who was deaf and had little speech, the mere fact of the financialinstitution lending money to her did not create a special relationship to infer or suggest unconscionability; the court found somethingmore must exist. 1.4.2. Application of the law to the facts [46] There is no evidence that MCAP was in any special relationship with the defendant. It had not previously leant her money, it

was not trying to "shore up" previous security, nor was there any express knowledge or connection proven with the fraudulent scheme ofMr. Montorio. [47] MCAP did take steps to verify the employment letter, as well as confirm the existence of the bank account, and that from thestatements provided, sufficient deposits were being made into that account. MCAP received a drive-by appraisal, it got a credit check andincome verification and ID verification.

These were all steps to satisfy its own protocol, and despite these, it was taken advantage of bythe fraudsters, which included someone at Worldwide who answered the phone and verified false information. [48] It is correct that there is no evidence that MCAP examined the tax return for 2006 and whether income alleged fromWorldwide had been correctly reported, nor did it check signatures on the executed account form. However, there was no duty on MCAPto do so. This type of evidence falls far short of what would be necessary to suggest that MCAP was somehow involved in or hadknowledge of the fraud.

When this is considered in conjunction with the fact of a straight lender/borrower relationship between MCAPand the defendant, there is nothing to suggest that this transaction was unconscionable, and thus unable to be enforced due to the conductof MCAP. 2. Is the third party lawyer, Mr. Steed, liable to the defendant? [49] The defendant filed a third party notice, alleging that Mr. Steed was negligent in his duties to the defendant, and as a result,she is entitled to indemnity from Mr. Steed due to his professional negligence. It was admitted by counsel that Mr.

Steed in law would bevicariously liable for any negligence or omissions arising from the conduct of his paralegal, Ms. Steele. 2.1. The law [50] The law of negligence is clear. There must be a duty of care, a breach of that duty, and damages which result. There is noquestion that there was a duty of care here, by Mr. Steed to his client. There is a factual issue about what that duty is, and whether it wasbroken. [51] At this trial, no evidence was lead as to the duty of care owed by a real estate lawyer in similar circumstances (the closing of atransaction on a residential sale with a mortgage).

That would be usual evidence to be called by the plaintiff in a negligence case wherethe onus is on the plaintiff to establish the standard of care. Counsel for the defendant asked that I infer the standard from two cases hepresented: Gilkes v. Loucks, (1989), (AB KB), 101 A.R. 25 (Q.B.); varied on appeal as to damages (1991), 113 A.R.153 (C.A). and Spence v. Bell (1982) 1982 ABCA 282 , 39 A.R. 239 (C.A.). 2.2. Application of the law to the facts [52] There may be cases where without expert evidence, a court is able to establish the standard of care for a lawyer acting in asituation. They are rare.

On the evidence before me, the defendant has not met the standard of proof to show on the balance ofprobabilities that Mr. Steed's conduct did not meet a proven standard of care. I have found that Ms. Steele did explain the documents toMs. Halbersma. There is no evidence to suggest that there was a higher duty of care than this on Mr. Steed in the circumstances of thistransfer. [53] It must be appreciated that Mr. Steed's advice was not sought in relation to the real estate contract that was the basis of thetransaction here. The contract was provided to Mr. Steed's office, already signed. Ms.

Halbersma was not there asking if it was a prudentinvestment, or asking for advice on that contract. Also, she did not raise any concerns, or questions to put Mr. Steed on notice that she didnot want to enter the transaction, or that she had no knowledge of, and had not signed, the original real estate contract. There is nothing tosuggest Mr. Steed was advised of this or should have been suspicious that this was the case. [54] As a result, I do not find that the third parties Ms. Steele or Mr. Steed are liable in negligence to the defendant.

3. Are the other third parties liable to the defendant? [ 55 ] As all the third parties other than Mr. Steed and Ms. Steele have been noted in default, the defendant will have judgment against the third parties, Malik Shoukat Ashraf, 1306438 Alberta Ltd. operating as Malik Properties, Danilo Montorio, Worldwide Employment Agency Inc., and Canada Property Management Inc.

Conclusion [ 56 ] The plaintiff is entitled to judgment against the defendant in the amount of $139,091.72, plus interest from November 11, 2008 to February 26, 2013 at the mortgage rate of 5.84% which equates to $34,874.16, for a total of $173,965.88 with a per diem interest rate of $22.24. [ 57 ] The defendant is entitled to a judgment in the same amount against, Malik Shoukat Ashraf, 1306438 Alberta Ltd. operating as Malik Properties, Danilo Montorio, Worldwide Employment Agency Inc., and Canada Property Management Inc. [ 58 ] The third party notice against Catherine Steele and David Steed is dismissed. [ 59 ] The parties are at liberty to speak to costs.

Heard on the 25 th day of February, 2013 to the 27 th day of February, 2013. Dated at the City of Calgary, Alberta this 27 th day of March, 2013. R.E. Nation J.C.Q.B.A. Appearances: Ksena J. Court, Bishop & McKenzie LLP for the Plaintiff Byron W. Nelson, McGuigan Nelson LLP

for the Defendant Jennifer Blanchard, Norton Rose Canada LLP for the Third Parties, Catherine Steele and David Steed