Royal Bank of Canada v. Kaddoura, 2013 ABQB 630

Court of Queen ’ s Bench of Alberta Citation: Royal Bank of Canada v. Kaddoura, 2013 ABQB 630 Date: 20131023 Docket: 0801 14897, 0901 16409 Registry: Calgary Between: Action Number 0801 14897 Royal Bank of Canada Plaintiff - and - Ali Kaddoura Defendant AND Between: Action Number 0901 16409 Perry Young, Kathy Young, Travis Eade and Neil Barclay Plaintiffs - and - Royal Bank of Canada, Canada Mortgage and Housing Corporation, Duc Bao Lam, 1282350 Alberta Ltd., Taranjeet Aujla, George Georgeou, Remax House of Real Estate, Guy Rivard, Shaun Folk, Monica Maksymik Folk, John R. Condin, K.

Grant Watson, Kevin Graham, Linda Anderson, Mirrella Desantis, Keith Worral, Tien Lam, Tri Lam Defendants - and -

George Georgeou Third Party _ ________________________________________ ______________ Reasons for Judgment of J.T. Prowse , Master in Chambers _________________________________________ ______________ [ 1 ] The primary issue in this application is whether, in a dispute between a ‘straw buyer’ and the lawyer who represented the straw buyer, files the lawyer handled for other straw buyers are producible in the litigation. My conclusion is that, subject to solicitor and client privilege, those prior files are relevant and material and therefore producible.

The principal reason for their relevancy is that they may establish a pattern which distinguishes the transaction in question from a bona fide transaction and therefore are relevant to the issue of whether the lawyer ought to have made enquiries of the straw buyer to ascertain the true nature of the transaction.

What is a ‘straw buyer’? [ 2 ] Straw buyers are people who participate in schemes to defraud mortgage lenders by agreeing to purchase houses which they have no intention of occupying, and taking out mortgages they have no intention of paying. [ 3 ] The sophistication of the straw buyers, in the sense of whether they appreciate that they are in fact participating in a fraudulent scheme, varies greatly. Some are recent immigrants with little or no knowledge of the English language who are talked into participating by other members of their community.

Others are sophisticated, well educated persons with prior involvement in real estate transactions. [ 4 ] The scheme commences with a mastermind who is the driving force behind the fraudulent scheme.

The fraudulent scheme typically works as follows: • the mastermind (who has already purchased the house but does not disclose that) says they know someone who wishes to purchase that house but for some reason cannot qualify for mortgage financing; • the mastermind, or someone acting on behalf of the mastermind, asks the straw buyer to sign an agreement to purchase the house (for what is, unknown to them, an inflated price), and to apply for and sign the mortgage necessary to obtain funds to complete the purchase.

The straw buyer is told that the house will immediately be transferred to the party for whom it is intended and all mortgage payments will be made by the mastermind and/or the new buyer; • the mastermind assures the straw buyer that the purchase and mortgage are legal and will be documented by a lawyer; • the straw buyer is often paid a fee for participating in the scheme; • the mastermind provides the down payment for the proposed purchase; • the purchase price being paid by the straw buyer is always inflated.

Since the straw buyer has been assured that they will not be making any financial contribution, they pay no attention to the price they are agreeing to pay, and may be unaware that the mastermind has shortly before acquired the property for substantially less; • by artificially inflating the purchase price payable by the straw buyer, the mastermind is able to obtain mortgage financing which exceeds the price which the mastermind paid to acquire the property in the first place; • the mastermind often creates forged employment letters and other documentation to make the straw buyer appear more creditworthy than they in fact are.

The mastermind often facilitates the financing approval process by bribing and corrupting an employee or agent of the lender, who then approves the financing; • the mastermind chooses the lawyer who represents the straw buyer, the vendor (i.e. the mastermind or an agent of the

mastermind), and the lender; • straw buyers often assert that they receive little or no legal advice from the lawyer. Sometimes they never meet the lawyer. Sometimes the lawyer or the lawyer’s paralegal says nothing more to them than “sign here” and “sign here”.

The lawyers typically assert, to the contrary, that they provide fulsome advice to the straw buyers, and that the straw buyers deceived the lawyer by not telling him/her that they in fact have no intention of occupying or, in the long run, owning the house. • once the purchase is closed, and mortgage funds are advanced, the mastermind obtains the mortgage funds and pockets the profit. The mastermind may make a few mortgage payments, but shortly ceases doing so.

The straw buyer is then served with foreclosure pleadings and faces liability for a large deficiency judgment (as the amount of the mortgage far exceeds the value of the house which was purchased). Litigation between straw buyers and their lawyers [ 5 ] The two cases before me on this application involve straw buyers who have brought claims against the lawyers who represented them when they acquired the property.

Essentially the straw buyers are looking for indemnity for the liability that they face to the lenders. [ 6 ] In the first case, the Royal Bank of Canada commenced legal proceedings against the straw buyer Ali Kaddoura, and Mr. Kaddoura brought third party proceedings against his lawyer Harris Hanson. [ 7 ] In the second case, the Royal Bank of Canada commenced legal proceedings against the straw buyer Travis Eade. Mr. Eade subsequently commenced a separate legal action against various parties, including his lawyer Linda Anderson.

Affidavits of Records [ 8 ] Following the exchange of claims and defences, and prior to questioning, each party is obliged to serve on the other party an affidavit of records: Rule 5.5. [ 9 ] The affidavit of records is to disclose all records that are relevant and material to the issues in the action and that are or have been under the party’s control: Rule 5.6(b). [ 10 ] A record is relevant and material only if the record could reasonably be expected to significantly help determine one or more of the issues raised in the pleadings, or to ascertain evidence that could reasonably be expected to significantly help determine one or more of the issues raised in the pleadings: Rule 5.2(1). [ 11 ] The lawyers for Harris Hanson and Linda Anderson need to enquire of their clients whether they had, prior to the transactions in question, previously completed purchase and mortgage transactions where the same mastermind, agent of the mastermind or loans officer of the lender was involved.

If the answer to this is yes, then the lawyer for these lawyers must decide whether (subject to solicitor and client privilege) documents from those files are relevant and material, and therefore producible, as contemplated by Rule 5.2(1). [ 12 ] To determine if these documents are relevant and material the pleadings must be examined. The pleadings between Ali Kaddoura and Harris Hanson [ 13 ] Mr.

Kaddoura’s third party notice against Harris Hanson (including the attached statement of defence of Kaddoura) contains the following assertions: • Kaddoura is a stone mason from Lebanon with no working knowledge of written English; • Kaddoura worked as a stone mason for Sran, who approached Kaddoura with the proposition that Kaddoura purchase a condominium, which would then be resold to Sran and Manchanda for an $8,000 profit to Kaddoura; • in May of 2007 Kaddoura signed a purchase agreement for the condominium.

The purchase agreement had been prepared by Sran; • in June of 2007 Kaddoura met in a Tim Horton’s restaurant with Sran and Kolleen Langlois, a representative of the mortgage lender Royal Bank of Canada (“RBC”). Kaddoura did not speak English well enough to understand the information exchanged between Sran and Langlois. Langlois and Sran presented documents for Kaddoura to sign and he did so, notwithstanding that they were not explained to him.

He did so because he trusted them; • parenthetically, in a later affidavit Kaddoura deposes that an employment confirmation letter found in the RBC’s files, allegedly confirming a salary for him of $76,000 per year, is a document he has never seen before. • eventually Kaddoura was driven by Sran to a house in North East Calgary, where he was introduced to Zarmeen Zubair, a para- legal for Hanson. Sran and Kaddoura met with Zubair in Zubair’s kitchen.

In the presence of Zubair, Kadoura confirmed with Sran that Sran and Manchanda would be repurchasing the property from Kaddoura and, upon Sran confirming this, Kaddoura signed papers presented to him by Zubair. Zubair did not explain to Kaddoura that he could be held personally liable under the mortgage; • Hanson failed to provide Kaddoura with any or any proper legal advice;

• Hanson failed to advise Kaddoura of the nature of the agreement and legal obligations Kaddoura was assuming when he signed the documents prepared by Hanson; • Hanson failed to advise Kaddoura to get independent legal advice; • Hanson acted for Kaddoura when he had a conflict of interest not explained to Kaddoura; • Hanson failed to disclose to Kaddoura all of the material and relevant information known to Hanson relating to the transaction; • Hanson failed to supervise his employee Zarmeen Zubair. [ 14 ] Mr.

Hanson’s defence to third party notice contains the following assertions: • it was the practice of Hanson’s office that all clients meet with either Hanson or Zubair; • Kaddoura was advised of the potential conflict and encouraged to obtain separate legal counsel; • Kaddoura was provided with full advice as to the nature of the mortgage agreement he was signing including his personal liability due to it being a CMHC mortgage; • Kaddoura provided written confirmation to Hanson that Kaddoura was to become the registered owner of the property, that the down payment was made from his own resources and that he intended to use the property as his principal residence; • Hanson believed the transaction involving Kaddoura and the Royal Bank was in accordance with standard mortgage practices; • Kaddoura never advised Hanson that Kaddoura was taking advice with respect to the transaction from Mr.Sran [the mastermind or agent of the mastermind] or Kolleen Langlois [a representative of the Royal Bank]; • Hanson never obtained information about the true nature of the transaction that was known to Mr.

Kaddoura, Mr. Sran and Ms. Langlois so as to indicate that Kaddoura was providing false information to Hanson regarding the real estate transaction; The Pleadings between Travis Eade and Linda Anderson [ 15 ] Mr. Eade’s statement of claim against Ms. Anderson contains the following assertions: • over a period of years commencing in 2004 Duc Bao Lam (“Duc”) developed a scheme to defraud lenders, CMHC and straw buyers; • the fraudulent scheme as it related to Eade commenced in 2006.

Eade’s investment adviser, Rivard, made the following false representations to Eade: • Duc had a business involving bringing immigrant workers to Canada; • Duc needed additional housing for these workers; • if Eade would purchase the “Birkdale Property” then Duc would repurchase it from Eade in 3 to 4 months; • in due course Duc would be reselling the Birkdale property to the immigrant workers; • all funds, including the downpayment, for the Birkdale property would be supplied by Duc. • Rivard and Duc then made arrangements with RBC’s representative, Desantis, for Eade to be provided mortgage financing; • Duc advised Eade that Duc’s lawyer, Anderson, would prepare the paperwork; • when Eade met Anderson he told her that he had no intention of living in the Birkdale Property; • Anderson confirmed with Eade that all deposits, fees, disbursements and monies required to be paid had been paid by someone other than Eade and his co-purchaser; • Anderson assured Eade that the transactions were “legal”; • Anderson did not reasonably disclose to Eade her conflict or potential conflict in acting concurrently for Eade, the co-purchaser, RBC and Duc; • Anderson did not disclose or explain her relationship with Duc or the fact that she had previously acted for Duc on other transactions. [ 16 ] Ms.

Anderson’s statement of defence to Eade’s claim contains the following assertions: • Anderson had no knowledge of the fraudulent scheme alleged in the claim; • Anderson denies acting recklessly or with willful blindness, and denies concealing the ‘true facts’ from Eade and the other plaintiffs; • Anderson had no knowledge of the ‘immigrant worker’ scheme alleged in the statement of claim;

• Eade signed a ‘purchaser’s acknowledgment’ confirming that Anderson had explained to him that he could be held personally liable for any deficiency under the mortgage.

The relevance and materiality of previous transactions conducted by the lawyer involving the same mastermind, agent of the mastermind, or loans officer of the lender [ 17 ] As the pleadings between the straw buyers and the lawyers referred to above show, a key issue is “who knew what” as between the lawyer and the straw buyer. [ 18 ] Did the lawyer have reasonable grounds to believe that the transaction was other than a standard real estate transaction, so as to reasonably require the lawyer to make enquiries of the straw buyer, such as: • did you know you are paying significantly more for this property than the vendor, who just recently acquired it? • who is providing the down payment for this property?

If it is someone else, why is this occurring? • do you in fact intend on residing in this property? Do you have an existing house that you are planning to sell in order to do that? [ 19 ] Alternatively, was it the straw buyer who was in the know and deceiving the lawyer? Patterns arising in previous transactions [ 20 ] The lawyer conducting a real estate file will first acquire a copy of the existing certificate of title. It will show, in cases such as this, that the property was recently acquired by the vendor for far less than it is being sold to the straw buyer.

What would this indicate to the lawyer handling the transaction? [ 21 ] If it happens once, perhaps the vendor just got lucky and acquired the property for less than fair market value, or perhaps the purchaser was ignorant, and was paying too much for the property. [ 22 ] But if this happens two or three or four times, the chances of an innocent explanation diminish.

The pattern indicates something may be amiss and the lawyer may well be put on notice to ask more than the usual enquiries of the straw buyer. [ 23 ] Take another example: what if the down payment has been provided by someone other than the purchaser?

If this happens once, perhaps the innocent explanation is that some relative of the purchaser is simply assisting the purchaser to acquire a house. [ 24 ] But if this happens two or three or four times, all in files involving the same mastermind, agent of the mastermind, or loans officer, the chances of an innocent explanation diminish. [ 25 ] Documents regarding previous transactions, if they exist, are in my view relevant and producible under

Part 5 of the Rules of Court. Whether they ultimately persuade a trial judge that the lawyer had been put on a heightened duty of enquiry, and whether the straw buyer would have responded honestly to such enquiry, is something a trial judge will have to ascertain after hearing the evidence in full at trial.

At the pre-trial stage these documents should be produced so that the trial judge will have access to the complete story when making this decision at trial. [ 26 ] I have given just two examples of types of patterns which may arise from previous files and do not mean to restrict the other types of patterns disclosed in previous transactions which may shed light for a trial judge on “who knew what” as between the straw buyer and the lawyer. [ 27 ] In my view, the lawyers in question, Mr. Hanson and Ms.

Anderson, should be required to disclose (subject to solicitor and client privilege) the existence of previous purchase and mortgage transactions which involve either the same mastermind or agent of the mastermind or loans officer. These files may disclose patterns which would indicate that the lawyer in question should have been put on a duty of enquiry to ask more than the usual questions typically posed to a client purchaser. Procedural Issues [ 28 ] Mr. Poole’s office represents Mr. Kaddoura and Mr. Eade. Mr. Armstrong’s office represents Mr. Hanson and Ms. Anderson.

Both of their offices filed written arguments concerning whether prior files handled by Mr. Hanson or Ms. Anderson involving the same mastermind, agent or loans officer, were relevant and material to these actions. Those submissions were made in the context of objections to questioning. [ 29 ] At the hearing of these applications, I indicated to counsel that I believed the first issue to be addressed was whether these files were producible under Rule 5.5. I indicated to Mr. Armstrong that, if this approach took him by surprise, I would be happy to adjourn the application for him to consider that.

He did not take me up on this offer and so we proceeded. [ 30 ] The reason for the approach I took is this: production of documents occurs prior to questioning. The lawyers being sued should not be able to take the position that the straw buyers are engaging in a ‘fishing expedition’ in asking about prior files when in fact it is the obligation of those lawyers to produce those prior files (subject to solicitor and client privilege) prior to questioning.

Solicitor Client Privilege [ 31 ] The parties filed written submissions regarding the issue of whether any prior files would be subject to solicitor and client privilege. I decline to consider this topic in the abstract. [ 32 ] If there are no prior files, this issue does not have to be engaged.

[ 33 ] If there are prior files, counsel for the lawyers needs to include those files in a supplementary affidavit of records indicating what portions are being claimed as non-producible pursuant to solicitor and client privilege. Then the issue of privilege can be engaged based on specific files and not on a hypothetical basis. Conclusion [ 34 ] Pursuant to Rule 1.4(2)(c), counsel for Mr. Hanson and Ms. Anderson are directed to cause their clients to file supplemental affidavits of records consistent with these reasons.

Questions of solicitor and client privilege will be considered in the future in the context of specific claims for privilege if and when asserted with respect to specific documents. Costs [ 35 ] If counsel cannot agree as to the costs of this application they may seek a ruling from me within 30 days. Heard on the 13 th day of September, 2013. Dated at the City of Calgary, Alberta this 23 rd day of October, 2013. J.T. Prowse M.C.C.Q.B.A. Appearances: Jeffrey D. Poole Matthew Parsons Larry Wu Poole Lawyer LLP for Ali Kaddoura (Defendant) and Travis Eade (Plaintiff) Rob W.

Armstrong Erin Baker Jensen Shawa Solomon Duguid Hawkes LLP for the Harris Hanson (Third Party) and Linda Anderson (Defendant)