Kulaga v. First National Financial GP Corporation, 2013 ABQB 377

Court of Queen ’ s Bench of Alberta Citation: Kulaga v. First National Financial GP Corporation, 2013 ABQB 377 Date: 20130702 Docket: 0901 13049 Registry: Calgary Between: Andrzej Kulaga Also Known As Andrew Kulaga Plaintiff - and - First National Financial GP Corporation, Royal Bank of Canada, Ilan Levy, Michael Davidson, Heather Liska, Mortgage Alliance Company of Canada and John Cumming Defendants - and - Ilan Levy Third Party _______________________________________________________ Memorandum of Decision of J.T. Prowse, QC Master in Chambers _______________________________________________________

Summary judgment application against a straw buyer [ 1 ] There have been so many fraudulent mortgage transactions in the last decade that the term ‘straw buyer’ is well known to lawyers and the Courts in Alberta. [ 2 ] A straw buyer is a person who, typically in return for a cash payment, signs papers to buy a house and obtain a mortgage, when the straw buyer in fact has no intention of moving into the house or making the mortgage payments.

The mastermind behind the fraudulent scheme has assured the straw buyer that the mortgage payments will be made by others and that the house will shortly be transferred to another who will continue with the mortgage payments. In fact the mortgage payments soon cease and the straw buyer finds himself subject to foreclosure proceedings and a claim for a large deficiency judgment. [ 3 ] The plaintiff in this case, Andrew Kulaga, is a straw buyer.

He says he was duped into becoming a straw buyer and that the lawyer who acted for him and the lender, John Cumming, had knowledge of suspicious circumstances which should have caused Mr. Cumming to advise Mr. Kulaga not to proceed with the transaction. Mr. Kulaga seeks indemnity against Mr. Cumming based on Cumming’s alleged negligence in that regard. [ 4 ] Cumming argues that it is not necessary to delve into his alleged negligence because the transaction in which he may have failed to provide proper advice is one in which Kulaga acted in an immoral or illegal fashion by seeking to obtain credit by fraud.

Cumming says the law is clear and beyond doubt that Kulaga cannot seek indemnity or contribution from Cumming due to the common law doctrine of ex turpi causa non oritur action (out of a base or immoral cause no action arises). As a result, Cumming asserts, any issue of alleged negligence by him is irrelevant. He seeks to summarily dismiss Kulaga’s claim. Previous case law on

summary determination of the liability of a straw buyer [ 5 ] There have been numerous reported cases involving

summary determination of the liability between a straw buyer, a lender and agents or employees of a lender. Some cases have resulted in

summary determinations. In other cases

summary judgment has been declined due to the existence of triable issues. [ 6 ]

Summary determinations in favour of the lender or lawyer have been make in the following cases: MCAP Service Corp. v. Molina-Tan , 2009 ABQB 472 , 2009 CarswellAlta 2333, 503 A.R. 1 (Master); Dhillon v. Ashraf , (unreported, QB Action 0901 09483, December 3, 2010), reversing 2010 ABQB 423 , 2010 CarswellAlta 1316; Toronto Dominion Bank v. Khosla , 2010 ABQB 652 , 2010 CarswellAlta 2138 (Master); Toronto Dominion Bank v. Poon , 2012 ABQB 606 , 2012 CarswellAlta 1692. [ 7 ]

Summary determinations have been refused due to triable issues in the following cases: Royal Bank v. Levy , 2011 ABQB 700 , 2011 CarswellAlta 2022, 89 C.C.L.T. (3d) 289, 527 A.R.379; First National Financial GP Corp. v. Kulaga , 2012 ABQB 8 , 2012 CarswellAlta 27 (Master); Royal Bank v. Levy (#2) , 2012 ABQB 310 , 2012 CarswellAlta 856, 19 R.P.R. (5 th ) 52, 65 Alta.L.R. (5 th ) 1; Scotia Mortgage Corp. v. Aab , 2012 ABQB 464 , 2012 CarswellAlta 1278 (Master); CIBC Mortgages Inc. v. Lucas , 2012 ABQB 402 , 2012 CarswellAlta 1095 (Master); Kindrachuk v. Belseck , 2012 ABQB 515 , 2012 CarswellAlta 1414 (Master). [ 8 ] In the four cases where

summary judgment was granted, there were either no allegations that the lender, its employee or its lawyer were or ought to have been aware of the fraud, or there was no evidence to support such allegations. In the cases where triable issues were found there was evidence that the lender, its employee or its lawyer were or ought to have been aware of the fraudulent nature of the loan. [ 9 ] As I stated in Kindrachuk , supra, at paragraph 9 :

In my view, the application of the ex turpi causa and in pari delicto doctrines to straw buyer situations, where there is evidence that an employee or agent of the lender was involved in the fraud, is a complicated and nuanced matter. Absent trial-based precedents, the applicability of these doctrines to straw buyer situations should not be decided summarily. Needless to say, a straw buyer should not be able to hold off a foreclosure or deficiency claim merely by asserting that employees of the lender were involved in the mortgage fraud.

The buyer needs to bring forward some evidence to support this assertion, as Mr. Kindrachuk has done in this case. The evidence before the court in this case [ 10 ] Kulaga is a physician and a pathologist. He was advised by a fellow physician that he could earn a fee for providing bridge financing for someone who was not presently able to obtain mortgage financing. [ 11 ] Kulaga followed up on the lead he was given and he was introduced to Ilan Levy (a ‘mortgage specialist’ with the Royal Bank of Canada), Heather Liska (a mortgage broker employed by Mortgage Alliance Company of Canada) and Michael Davidson.

Kulaga says that they tricked him into becoming a ‘straw buyer’ of a house financed by First National. [ 12 ] Levy arranged for Kulaga to use Cumming as his lawyer in the transaction. First National also used Cumming as its lawyer, as did the vendor of the house. [ 13 ] There is conflicting evidence as to the dealings between Cumming and Kulaga. Since this dismissal application is brought by Cumming I must assume (for the purpose of this application only) that Kulaga’s evidence in that regard is accurate. [ 14 ] Kulaga paints a picture of neglect by Cumming.

He alleges that he attended at Cumming’s office and signed a stack of papers that Cumming asked him to sign. The documents were not explained to Kulaga when he signed them. [ 15 ] Ultimately First National foreclosed on the house in question. First National is looking to Kulaga to pay the significant shortfall, approximately a half a million dollars, between the amount owing on the mortgage and the proceeds received from the sale of the house. [ 16 ] Unlike most straw buyer situations, where litigation begins when the lender commences foreclosure proceedings, litigation here was first commenced by Kulaga.

He issued a statement of claim in this action in September of 2009 naming as defendants Ilan Levy, Levy’s employer the Royal Bank, Heather Liska, her employer Mortgage Alliance Company of Canada, and Michael Davidson. The final defendant named is Cumming. Kulaga alleges he was duped into entering into the fraudulent transaction and that his lawyer Cumming failed to protect his interests. [ 17 ] Kulaga specifically alleges that Cumming: (

a) failed to provide any or any proper advice to Kulaga; (

b) allowed Kulaga to enter into the transaction and sign the mortgage documents without being satisfied that Kulaga understood his obligations in relation thereto;

c) failed to make enquiries as to the nature of the transactions between Levy, another corporation named 133, Kulaga and First National;

(

d) failed to take any steps or measures to properly protect the interests of Kulaga; (

e) failed to properly advise Kulaga that the vendor, 133, had acquired the property for substantially less than the purchase price, which sale closed simultaneously or immediately before the sale of the property to Kulaga; (

f) failed to review the purchase and sale agreements between Banic, the original vendor, and between 133 and Kulaga, which agreements were scheduled to close on February 28, 2008 for glaringly different sale prices of $1,100,000 and $1,495,000; (

g) failed to follow the instructions of Kulaga by paying the balance of the proceeds from the mortgage loan to Davidson in the sum of $42,500 and to Levy in the sum of $248,128.87; and (

h) failed to make enquiries of Levy about the suspicious nature of the transactions in the circumstances in which all instructions were provided by Levy and First National without review or agreement by Kulaga. [ 18 ] In November of 2009 First National commenced foreclosure proceedings against Kulaga (the “Foreclosure Action”) and Kulaga issued third party proceedings against the same parties that he has named as defendants in this action. Ultimately First National obtained title to the house by means of a Rice Order.

First National is looking to Kulaga to pay the half a million dollar shortfall between the amount owing on the mortgage and the proceeds received from the sale of the house. [ 19 ] First National applied for

summary judgment against Kulaga in the Foreclosure Action. This application was dismissed by Master Hanebury in January of 2012 on the basis that there were triable issues. Her reasons can be found at First National v. Kulaga , 2012 ABQB 8 , 2012 CarswellAlta 27. Master Hanebury observed, in her reasons for judgment, at paragraph 27: Dr. Kulaga alleges that the lawyer, as agent for the lender, was a participant in the fraudulent scheme and held information back from the straw buyer. Dr. Kulaga also alleges that the Bank knew or ought to have known of the fraud and advanced the funds regardless.

The lender has chosen to provide no explanation of the situation. It has not denied that it received notice of the back to back offers showing a significant increase in the value of the property in a very short period of time. 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 of the lawyer’s actions certainly raise questions as to his knowledge of, and acquiescence in, the fraudulent scheme. [ 20 ] In the case at hand, there is actual evidence, as opposed to mere allegations, that the lawyer acting for the plaintiff, Cumming, knew or ought to have known of the fraudulent nature of the transaction, and did not disclose this to Kulaga. Accordingly, I do not think that Kulaga’s claim against Cumming should be summarily dismissed. This conclusion is supported on other grounds which I will now discuss.

My premise is that a trial judge is better equipped to decide the following issues after hearing detailed testimony as to the facts, rather than having these difficult legal issues determined on a paper record.

Should a lawyer be allowed to raise ex turpi causa as a defence to a claim by a client, where the alleged illegal or immoral activity was the very transaction on which the lawyer ’s advice was (or was not) provided? [ 21 ] While ex turpi causa has been discussed in a number of the decisions referred to above, none of the cases discuss whether it is appropriate for a lawyer to strike out a client’s claim on the basis of a transaction which is ex turpi causa when the client asserts that the lawyer should have advised him not to proceed with the allegedly illegal or immoral transaction.

[ 22 ] For example, assume a client is contemplating a transaction where he will move his assets to a tax haven. Before implementing the plan the client consults a tax lawyer who provides an opinion that the proposed transaction does not contemplate tax evasion. The transaction proceeds but is successfully challenged by the tax authorities, who obtain a ruling that the transaction constitutes evasion. The client is faced with fines and penalties. He sues his tax lawyer for negligent advice.

Can the lawyer assert that the suit should not be allowed to consider whether the advice he/she gave was negligently given because the claim is barred by the doctrine of ex turpi causa ? After all, the client would be seeking to obtain from his lawyer contribution or indemnity for a loss arising from his entering into an immoral or illegal contract.

Common sense would seem to dictate that this type of claim should not be barred. [ 23 ] Does Kulaga’s claim against Cumming fit into the preceding hypothetical situation? [ 24 ] Cumming points out that Kulaga did not bring to his attention the fact that Kulaga was a straw buyer.

Indeed, a number of the cases comment on the failure of the client to advise the lawyer of the nature of the transaction, for example, that the client does not intend to occupy the house or make payments on the mortgage. [ 25 ] This failure to disclose is a very important factor and certainly diminishes the likelihood that the client’s claim against his lawyer will succeed. However, I suggest that this factor alone should not be considered conclusive.

What if the circumstances of the particular transaction, and perhaps other transactions orchestrated by the same fraudsters and documented by the same lawyer, would lead a reasonable lawyer to suspect mortgage fraud?

Should the lawyer be asking the client about the background to the transaction, rather than proceeding in the face of the silence of the client? [ 26 ] For example, Cumming was aware of a ‘skip transfer’ which seemed to indicate that Kulaga was acquiring the property from someone who, that same day, was acquiring the property for hundreds of thousands of dollars less than the price being paid by Kulaga. Should this have led Cumming to enquire of Kulaga how it was that he agreed to pay the price he was paying?

The answer to that question alone would likely have uncovered the ‘straw buyer’ nature of the transaction, and the transaction would not have proceeded because Cumming would have been duty bound to report the true situation to his other client First National. [ 27 ] To me it is not clear and beyond doubt that ex turpi causa would provide a defence to Cumming. This is a difficult question of law that should be decided by a trial judge after hearing all the evidence. As I stated in Genstar v. Plains Midstream , 2012 ABQB 457 , 2012 CarswellAlta 1271 (Master) at paragraph 19 : In

summary judgment applications courts have declined to provide

summary relief where there are difficult or intricate legal issues: see 732311 Alberta Ltd. v. Paradise Bay Spa & Tub Warehouse Inc. , 2003 ABQB 228 ... at para. 56. Likewise, in the context of

summary judgment, it has been stated that

summary disposition should be declined where a legal issue is so unsettled or complex and nuanced that it should not be decided on a paper record: see Papachase Indian Band No. 136 v. Canada (Attorney General) 2004 ABQB 655 ... at para. 53. [ 28 ] I think that the court should be very cautious in transporting principles of ex turpi causa from cases involving claims between two wrongdoers to cases involving a client seeking to recover damages from his lawyer for negligent advice leading to the very unlawful transaction in question.

Discretionary nature of ex turpi causa [ 29 ] This observation in the Kindrachuk decision, supra , at paragraph 21, applies likewise to this case: Another recent decision which, in my view, supports the advisability of a trial in a case involving ex turpi causa is Bartlett v. Bartlett , 2012 ABQB 122 , CarswellAlta 437. While that action involved a matrimonial property claim, rather than mortgage fraud, the court reviewed the scope of ex turpi causa and concluded ‘it is clear from the cases that the application of the doctrine is a discretionary exercise by the Court’. Conclusion

[ 30 ] For the reasons set out above, I decline to summarily dismiss Kulaga’s claim against Cumming. Costs [ 31 ] If counsel cannot reach agreement on the costs of this application they shall approach me for a ruling within 30 days. Heard on the 24 th day of April, 2013. Dated at the City of Calgary, Alberta this 2 nd day of July, 2013. J.T. Prowse M.C.C.Q.B.A. Appearances: Christy J. Elliott and Robert William Armstrong Jensen Shawa Solomon Duguid Hawkes LLP for the Defendant John Cumming Matthew X. James Machida Shewchuk James LLP for the Plaintiff Kulaga Francis N.J. Taman Bishop & McKenzie LLP for the Defendant First National Financial GP Corporation