FRAUDULENT CONVEYANCES AND OTHER QUESTIONABLE TRANSACTIONS: A Real Estate Lawyer s Duty to Ask Questions EMERGING ISSUES IN REAL ESTATE SEMINAR

Transcription

1 FRAUDULENT CONVEYANCES AND OTHER QUESTIONABLE TRANSACTIONS: A Real Estate Lawyer s Duty to Ask Questions EMERGING ISSUES IN REAL ESTATE SEMINAR Presented by: The Hamilton Law Association November 3, 2016 Prepared by: Cathy Buntain Jeske Wynne, Pringle, Jeske & Kovacs Unit B 231 Wilson Street East Ancaster, Ontario, L9G2B8 cjeske@anclaw.com

2 FRAUDULENT CONVEYANCES AND OTHER QUESTIONABLE TRANSACTIONS: A REAL ESTATE LAWYER S DUTY TO ASK QUESTIONS I. INTRODUCTION As real estate practitioners, we may be asked by our clients to assist in completing transactions that have potential negative legal consequences, challenge our ethical obligations as set out in the rules of practice, or even be illegal. We must always be aware of the legal implications of the transactions we are being asked to complete on behalf of our clients, and ensure that our actions are both in the best interests of our clients and are completed in accordance with our professional standards. This paper will primarily focus on the legal and ethical obligations of a lawyer when asked to undertake a transaction that could be viewed as a fraudulent conveyance, however, the legal reasoning and implications guiding us in determining whether to assist in the completion of such a transaction should be applied to all the transactions we are asked to complete. Although the scope of this paper is focused largely on fraudulent conveyances under the Fraudulent Conveyances Act, R.S.O. 1990, similar principles apply with respect to other forms of arguably improper transfers to defeat creditors, convey title fraudulently or prefer one creditor over another such as: a) Assignment and Preferences Act, R.S.O., 1990, c.a.33; b) Bankruptcy and Insolvency Act, R.S.C c. B-3; c) Companies Creditors Arrangement Act, R.S.C., 1985, c. C-36; and d) Criminal Code (R.S.C., c. C-46) (see sections 380 and 392). and as such, it is important for real estate lawyers to be generally aware of how conveyances and transactions may affect or be affected by such legislation. 1

3 II. WHAT IS A FRAUDULENT CONVEYANCE? A fraudulent conveyance is the transfer of title of real or personal property with the intent to defeat creditors or prefer one creditor over another. The concept was originally derived from an Act of the Parliament of England, being the Fraudulent Conveyances Act 1571 (13 Eliz 1, c.5). Since that time, most common law jurisdictions have adopted a similar form of statute, enacted to deter debtors from hiding assets from creditors by transferring the title out of the debtor s name to another party, and provide creditors with the means by which to recover property found to have been improperly conveyed. In Ontario, we have the Fraudulent Conveyances Act, R.S.O. 1990, (hereinafter the Act ), set out in Appendix A, that provides that a conveyance of either real or personal property with an intent to defeat, hinder, delay or defraud creditors or other persons who have a lawful action (not necessarily a judgement) against the conveyor, may be set aside as being void under section 2 of the Act, on action commenced by such creditor or such other person. The conveyance may be saved where the recipient received the property in good faith, and for good consideration, and without knowledge of the fraudulent intent of the conveyor. Much case law has evolved to provide guidance as to what makes a conveyance fraudulent and therefore voidable under section 2. In an action to set aside a fraudulent conveyance, the burden of proof is on the plaintiff, 1 and clear and sufficient proof is required. 2 The limitation period applicable to a claim under section 2 of the Act depends on whether the claim is to recover land, in which case the ten-year limitation period in the Real Property Limitations Act, R.S.O. 1990, c. 1 Bank of Montreal v. Peninsula Brothers Ltd CarswellOnt 2906 (Ont. S.C.J.). 2 CIT Financial Ltd. V. Zaidi 2006 CarswellOnt 1680, 24 R.F.L. (6 th ) 78 at paragraph 23 and 24 (Ont. S.C.J.) 3

4 L. 15. applies, or for personal property, in which case the general two-year limitation period in the Limitations Act, 2002, S.O. 2002, c. 24, Schedule B applies. 3 Courts have recognized that evidence of actual intent is rarely available, and intent is otherwise a difficult item to prove, particularly given there can likely be many reasons why a property may be conveyed other than to defeat creditors. As a result, the Courts have provided that intent need not be proved if there are certain badges of fraud which provide circumstantial evidence of intent. The presence of any of the badges of fraud shifts the evidentiary burden to the debtor to rebut the presumption of fraud. 4 While the burden of proof remains on the plaintiff, the existence of the badges of fraud place an evidentiary burden on the defendant to explain the purpose of the transaction. 5 The badges of fraud originated over four hundred years ago in the Twyne s Case 6, and have been interpreted by the modern courts to include: the donor continued in possession and continued to use the property as his own; the transaction was secret; the transfer was made in the face of threatened legal proceedings; the transfer documents contained false statements as to consideration; the consideration is grossly inadequate; there was unusual haste in making the transfer; some benefit was retained under the settlement by the settlor; the conveyance was undertaken prior to the conveyor embarking on a hazardous venture; and/or 3 Conde v. Ripley, et al., 2015 ONSC 3342 (CanLII) 4 Cambone v Okoakih 2016 ONSC 792 (Ont. S.C.J) 5 Conte Estate v. Alessandro (2002) CarswellOnt 4507 (Ont. S.C.J.), affirmed Conte Estate v. Alessandro (2004), 2004 CarswellOnt 3218 (Ont. C.A.) at paragraphs (1601) 77 E.R

5 a close relationship existed between the parties to the conveyance. 7 The presence of any one or more of the badges of fraud gives rise to an inference of fraudulent intent. If several badges of fraud are present, the Court may infer a fraudulent intent, in the absence of proof of actual intent. Courts have conversely determined that although several badges of fraud may exist, the conveyance may still not be considered fraudulent, particularly where the debtor has other means by which to satisfy obligations or if there were other laudable reasons for the conveyance which may explain the plaintiff s case away. 8 Judgements in this area are extremely fact dependant, and although case law may provide some guidance as to what may or may not be deemed a fraudulent conveyance, interpretation is going to vary based upon the case. For example, it is interesting to note that while a lack of adequate consideration is a badge of fraud, one Court has found that the debtor s conveyances to his wife were fraudulent notwithstanding that she paid consideration in the amount of $500, in satisfaction of the outstanding mortgages on title 9, which would appear to be good consideration. Therefore, it is possible that the payment of what is apparently valuable consideration may not be sufficient to overcome the presumption of a fraudulent conveyance. Another interesting case provides that where both spouses contributed to the purchase of a home with the husband taking title as to only a 1% interest, the wife was deemed to have taken title as to the husbands remaining 49% share by way of a deemed resulting trust. The failure of the husband to take his full registered 50% interest on title was found to be a transaction undertaken with the intent to defeat creditors Indcondo Building Corp. v. Sloan (2014), 2014 ONSC 4018 (CanLII), 121 O.R. (3d) 160 (S.C.J.) at paras. 52 and Koop v. Smith (1915), 51 S.C.R., 554 (SCC) as See Indcondo, note 7 10 See Cambone, note 4. 5

6 Bearing in mind the general understanding of the Act, and the case law that has evolved with respect to the interpretation of the Act, what then is a real estate lawyer s role and obligation when asked to undertake a conveyance that appears to have elements that make a transfer look as though it could come within the purview of the Act? Some guidance can be obtained from our rules of practice. III. RULES OF PROFESSIONAL CONDUCT The Rules of Professional Conduct, (the Rules ) adopted by the Law Society of Upper Canada ( LSUC ), 11 are designed to assist lawyers in making appropriate and ethical decisions in carrying out their professional duties. The Rules do not dictate how we are to carry our role in every instance and are not definitive. For the purposes of our discussions, the pertinent Rules that provide the most guidance when dealing with situations where we are being asked to provide services that appear to be fraudulent are attached and set out in Appendix B and are essentially the Rules that fall under Chapter 3 Relationship with Clients Subsection 3.2-7, Dishonesty, Fraud, etc. by Client or Others, although there is no doubt that there are likely other portions of the Rules and related Commentary that would apply as well (such as the Rules as set out in Chapter 2 generally pertaining to Integrity, Section 3.1 pertaining to Competence, and Subsection 3.2-8, Dishonesty, Fraud, etc. when Client an Organization. To paraphrase the provisions of Subsection 3.2-7, a lawyer shall not: Knowingly assist in any dishonesty, fraud, crime or illegal conduct or encourage such conduct (Rule 3.2-7); 11 Note: The Rules were revised and amended October 1, 2014, to reflect the Federation of Law Societies of Canada Model Code of Professional Conduct. 6

7 Allow themselves to be used by a client to facilitate dishonesty, fraud, crime or illegal conduct (Rule ); and A lawyer shall make reasonable efforts to ascertain the purpose and objective of the retainer (Rule ). In addition to the Rules themselves, the LSUC provides Commentary which sets out in further detail the intent of the Rules and in the instance of Rule 3.2-7, confirms that a lawyer must be on guard against becoming a tool or a dupe of an unscrupulous party, and cannot be wilfully blind and reckless. It is no longer acceptable to simply not ask the purpose or the intent of the transaction. This Commentary largely evolved because of the case of Law Society of Upper Canada v. Kazman 12, where the Law Society Hearing Panel found that the solicitor s wilful blindness in a series of mortgage fraud transactions was akin to knowledge, and his disbarment was therefore appropriate. This decision was upheld by the Ontario Divisional Court on review 13. The commentary for Rule was amended in October 2012 to explicitly provide that knowledge for the purposes of the Rules could be either actual or inferred through wilful blindness and recklessness. Rule was additionally expanded to provide that if a lawyer knew or ought to have known, his or her actions would result in a dishonest or fraudulent act, such failure to inform himself or herself could result in a breach of the Rules. On an even deeper level, the LSUC provides Red Flags in Real Estate Transactions (set out in page 2 of Appendix B and Appendix C ) which have been drafted to provide additional guidance and direction to lawyers as to specific indicators that should cause a lawyer to make further enquiries. Such Red Flags include: purchase price manipulations; a nominal role for one or more parties; the purchaser contributing no funds or only a minor amount; non-arm s length determination of the purchase price; suspicious or repeated 3 rd party involvement, and proceeds ONLSHP ONSC

8 being directed to a 3 rd party that is unrelated to the transaction. The Red Flag list is not exhaustive and should be supplemented by lawyers on a regular basis as information concerning real estate fraud is received. According to the statistics provided by the Lawyers Professional Indemnity Company ( LAWPRO ) 14, real estate law accounts for the second highest number of malpractice claims in Ontario (with civil litigation having the highest), yet real estate law has a higher percentage of claim costs than litigation, with an average cost per claim of $34,500. From , the types of claims against real estate lawyers can be summarized as follows: 41% Communication errors failing to advise clients regarding title issues, etc.; 27% Inadequate investigation misreading or not reading documents; failing to properly advise clients accordingly; 8% - Clerical and delegation not meeting with client and/or not properly reviewing clerk s work; 12% - Conflicts of Interest and Other 6% - Errors in law not understanding the Planning Act; not being aware of the type of searches to be completed; and 6% - Fraud. During the period of , while fraud claims accounted for 8% of the claims, they accounted for 15% of the costs. The most common types of frauds during that time were fraudulent discharges, value frauds (where a series of phoney sales take place resulting in an artificial increase in the value of the property), identity theft, bogus drafts and shelter fraud (where one person does not qualify for a mortgage so someone else takes title and gets stuck with the mortgage). While adherence to the Rules, Commentary and keeping up on the Red Flags may not avoid every form of fraud, being mindful of these tools, and not allowing yourself to be used as a tool or a dupe by being wilfully blind will certainly provide you with a higher level of protection. 14 LAWPRO Real Estate Claims Malpractice Fact Sheet (April, 2016) and Lawpro Magazine December 2010 (Vol. 9, no 4). 8

9 Pursuant to Section 3.7 Withdrawal from Representation (excerpts of which are set out in Appendix B ), if while representing the client, the lawyer receives information that causes a loss of confidence between the lawyer and the client, the lawyer may either decline the retainer, or withdraw his or her services, upon providing the client with reasonable notice. A lawyer shall withdraw services if the client s instructions require the lawyer to act contrary to the Rules or bylaws under the Law Society Act, R.S.O. 1990, c.l.8. IV. RELEASE OF TRUST FUNDS The Rules also provide guidance with respect to trust funds, and it is incumbent upon real estate lawyers to fully understand their commitments when it comes to holding funds in trust. Commentary 3.2 provides: [3.2] A client or another person may attempt to use a lawyer's trust account for improper purposes, such as hiding funds, money laundering or tax sheltering. These situations highlight the fact that when handling trust funds, it is important for a lawyer to be aware of their obligations under these rules and the Law Society's by-laws that regulate the handling of trust funds. In real estate transactions, lawyers (generally vendor s lawyers) are often asked to hold deposit funds pending the completion of the transaction. These deposits are not the vendor s money until the transaction has been completed and are not to be released to the vendor except in accordance with the agreement under which the funds have been paid. You may recall that in 2014, Toronto lawyer Meerai Cho released $14.9 million in purchaser deposits to her developer client who failed to complete the condominium project and apparently absconded with the funds. It is not clear at this time if Cho was a willing participant or negligent. Cho is now facing more than 500 criminal charges and as well has been suspended by 9

10 the LCUC pending further disciplinary action for knowingly assisting her client in dishonesty, fraud, crime or illegal conduct. She has also been sued civilly and has declared bankruptcy. 15 Real estate lawyers can often be faced with situations where the vendor client may aggressively insist that trust funds are to be released by the lawyer because the client claims to need the funds to complete the construction of the real estate project, or the purchaser has defaulted under the agreement of purchase and sale and the vendor assumes an automatic entitlement to the release of the deposit. Although the purchaser may not be the client of the lawyer holding trust deposits, there is often a fiduciary relationship created between the lawyer and purchasers by virtue of the agreement of purchase and sale, and/or legislation such as the Condominium Act. 1998, S.O. 1998, c 19. A real estate lawyer must understand his or her obligations with respect to these trust funds and when it is appropriate to release such funds. V. WHAT IS A SOLICITOR TO DO? Armed with the Rules, our understanding of the law, and the knowledge of the potential exposure we face with respect to fraud or other questionable transactions, what are we as real estate practitioners to do? In regards to fraudulent conveyances themselves, it appears clear from the Rules and Commentary that we are not to counsel our clients to credit proof themselves by conveying title to real or personal property in an effort to hide assets from known creditors. If we are approached by a client and asked to complete a conveyance, we do have a positive obligation to make enquiries regarding the purpose and intent of the transaction and to counsel our clients regarding the laws in this regard and the risks of a transaction being set aside. This obligation would extend to both the 15 The Toronto Star, September 10,

11 conveyor, and the recipient of such property (if the recipient is a related party and/or your client as well). LAWPRO advises there have only been one or two claims each year over the past 10 years against lawyers with regards to fraudulent conveyances. LAWPRO has not had to indemnify anyone with respect to any of these claims, but still had to pay the cost to investigate and/or defend the claims. It should be noted however that in the event a lawyer has been found to have participated in a fraud, no payout would have been made. Ray Leclair, Vice-President of Public Affairs at LAWPRO and a former real estate practitioner advises that lawyers should at minimum discuss the issues with the clients and advise of the potential for the transaction to be set aside or for someone to attempt to do so. He also advises that there are essentially two schools of thought on the issue: those lawyers who refuse to act on a transaction if there is a potential issue, and those who believe that it is the lawyer s job to assist the client if the client has a legal right to transfer the property. He further indicates that this question used to be in the LSUC bar admission exam where it was considered that there was more that one correct answer. In terms of specific suggestions on how to spot a fraudulent conveyance, it is suggested that we use the tools that we have for identifying other red flags for real estate frauds, which comes down to taking the time to adequately investigate the client s matter and ask the right questions. It is also important to document what discussions you have had with your client and confirm the advice that was provided. This is going to be your best defence moving forward. With respect to all other real estate transactions, adhering to your obligations under the Rules may not be able to help you prevent all frauds, but can help you from being used as the tool or dupe of unscrupulous clients or others. Also, we are to be mindful of the fact that if an institutional 11

12 lender has asked that we act on its behalf as well, the lawyer must disclose to the lender all material information relevant to the transaction prior to the advance of mortgage funds. The Rules and Commentary place a positive obligation on the lawyer to make enquiries in unusual situations. If you are not asking questions to protect yourself from being used as a pawn in the fraudster s game, then the allegation is going to be made that you were in on the fraud (which can be the difference between being insured and not). It should be noted that while a breach of the Rules could expose a lawyer to disciplinary proceedings, including potential sanctions, restriction of practice, suspension, fines or disbarment, there is nothing in the Rules that imposes a specific civil liability upon a lawyer, particularly to a non-client. Although there may be an ethical duty in some cases, this does not equate to a legal duty. 16 The Rules, Commentary, Red Flags, and LAWPRO publications, provide us with many valuable tools that we can use to properly assess whether we are prepared to accept a retainer to act, or continue to act in the face of receiving information that may be disturbing. If a lawyer is suspicious about whether he or she is being asked to assist the client in a fraud or illegal conduct, the lawyer cannot simply choose to not ask further questions. We are obligated to make all reasonably enquiries to understand the transaction fully. Because of our professional and ethical obligations, we may have to decline a retainer or withdraw from representing a client. Set out below is a summary of the items you may want to consider when dealing conveyances that could come to fall within the scope of the Act: a) Do not counsel clients to take steps to credit proof themselves; b) Ask questions and fully inform yourself with respect to the circumstances surrounding the transfer; 16 Budrewicz v. Stojanowski, (1999) 41 O.R. (3d) 78 (Ont.Ct.Gen.Div.) 12

13 c) Provide clients with the necessary information they will require to make an informed decision about the potential consequences of the transfer (that is, the future risk of litigation, harm and embarrassment to family members to whom a conveyance is being made, potential criminal consequences); d) Keep up on the current law with respect to fraudulent conveyances and improper asset transfers that could be caught by the provisions of the Act, or other related legislation; e) Make notes of your discussions with the client and the motive for the transfer; f) Assume others will be looking at your conveyance to judge and consider this in the context of the badges of fraud ; and g) Either terminate your retainer with your client or do not take on the retainer at all if you believe that you are not able to assist the client for reasons related to your professional ethics. With respect to all forms of real estate transactions generally; a) Take the time to review each file and ensure that you have met with the client at least once have obtained all the relevant information; b) Be mindful of who your clients are, particularly when you are acting on behalf of both the borrower and lender in a mortgage or purchase transaction; c) Ask questions, particularly when faced with unusual circumstances; d) Know your client and take steps to verify that the person retaining you is who they say they are; e) If you are acting for a corporation, make sure that you are taking instructions from the person authorized to act for the corporation; f) Keep yourself aware of the types of title and mortgage fraud transactions and inform yourself on disciplinary proceedings where lawyers have been sanctioned; g) Do not end up being a participant in the questionable act and decline or terminate retainers as may be appropriate; h) Do not release trust funds received from a third party to your client unless you are clear on your authority to do so; and i) When in doubt, contact the LSUC Practice Management Helpline

14 APPENDIX A Fraudulent Conveyances Act R.S.O. 1990, CHAPTER F.29 Consolidation Period: From December 31, 1990 to the e-laws currency date. No amendments. Definitions 1. In this Act, conveyance includes gift, grant, alienation, bargain, charge, encumbrance, limitation of use or uses of, in, to or out of real property or personal property by writing or otherwise; ( cession ) personal property includes goods, chattels, effects, bills, bonds, notes and securities, and shares, dividends, premiums and bonuses in a bank, company or corporation, and any interest therein; ( biens meubles ) real property includes lands, tenements, hereditaments and any estate or interest therein. ( biens immeubles ) R.S.O. 1990, c. F.29, s. 1. Where conveyances void as against creditors 2. Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns. R.S.O. 1990, c. F.29, s. 2. Where s. 2 does not apply 3. Section 2 does not apply to an estate or interest in real property or personal property conveyed upon good consideration and in good faith to a person not having at the time of the conveyance to the person notice or knowledge of the intent set forth in that section. R.S.O. 1990, c. F.29, s. 3. Where s. 2 applies 4. Section 2 applies to every conveyance executed with the intent set forth in that section despite the fact that it was executed upon a valuable consideration and with the intention, as between the parties to it, of actually transferring to and for the benefit of the transferee the interest expressed to be thereby transferred, unless it is protected under section 3 by reason of good faith and want of notice or knowledge on the part of the purchaser. R.S.O. 1990, c. F.29, s. 4. When fraudulent conveyances declared void as against purchasers 5. Every conveyance of real property heretofore or hereafter made with intent to defraud and deceive the purchaser shall be deemed to be void only as against that person and the person s assigns and all persons lawfully claiming under that person or the person s assigns who have purchased or hereafter purchase for money or other good consideration the same real property or a part thereof. R.S.O. 1990, c. F.29, s. 5. Where s. 5 does not apply 6. Section 5 does not apply to and shall not be construed to impeach, defeat or make void a conveyance of real property made in good faith and for good consideration. R.S.O. 1990, c. F.29, s. 6. Conveyances made revocable 7. (1) If a person makes a conveyance of real property with a clause, provision, article, or condition of revocation, determination or alteration at that person s will or pleasure, and after such conveyance bargains, sells, demises, grants, conveys or charges such real property or a part thereof to a person for money or other good consideration paid or given, such first conveyance not being revoked, made void or altered according to the power and authority so reserved or expressed therein, then such first conveyance as touching the real property so after bargained, sold, conveyed, demised or charged is void against the bargainees, vendees, lessees, grantees, their heirs, successors, and their assigns and against every person lawfully claiming under them. R.S.O. 1990, c. F.29, s. 7 (1). Saving as to mortgages (2) No lawful mortgage made in good faith, and without fraud or covin, and upon good consideration shall be impeached or impaired by force of this Act, but it has the like force and effect as if this Act had not been passed. R.S.O. 1990, c. F.29, s. 7 (2). Validity of voluntary conveyance, etc., executed in good faith and duly registered 14

15 8. (1) Nothing in section 5, 6 or 7 extends to a conveyance that is executed in good faith and duly registered in the proper land registry office before the execution of the conveyance to, and before the creation of any binding contract for the conveyance to a subsequent purchaser from the same grantor of the same real property or a part thereof, nor is such a conveyance merely by reason of the absence of a valuable consideration void as against such purchaser or the heirs, executors, administrators or assigns of the purchaser or any person claiming by, from or under any of them. R.S.O. 1990, c. F.29, s. 8 (1). Effect of subs. (1) (2) Nothing in subsection (1) has the effect of making valid an instrument that is for any reason, other than or in addition to the absence of a valuable consideration, void under section 5, 6 or 7 or otherwise, nor has the effect of making valid an instrument as against a purchaser who had before the 28th day of February, 1868, entered into a binding contract for or received a conveyance upon such purchase. R.S.O. 1990, c. F.29, s. 8 (2). 15

16 APPENDIX B Rules of Professional Conduct Excerpts from Chapter 3 Relationship with Client Dishonesty, Fraud, etc. by Client or Others A lawyer shall not knowingly assist in or encourage any dishonesty, fraud, crime, or illegal conduct or instruct a client or any other person on how to violate the law and avoid punishment. [Amended - October 2014] A lawyer shall not act or do anything or omit to do anything in circumstances where he or she ought to know that, by acting, doing the thing or omitting to do the thing, he or she is being used by a client, by a person associated with a client or by any other person to facilitate dishonesty, fraud, crime or illegal conduct. [New - April 2012] When retained by a client, a lawyer shall make reasonable efforts to ascertain the purpose and objectives of the retainer and to obtain information about the client necessary to fulfill this obligation A lawyer shall not use their trust account for purposes not related to the provision of legal services. [Amended - April 2011] Commentary [1] Rule which states that a lawyer must not knowingly assist in or encourage dishonesty, fraud, crime or illegal conduct, applies whether the lawyer's knowledge is actual or in the form of wilful blindness or recklessness. A lawyer should also be on guard against becoming the tool or dupe of an unscrupulous client or persons associated with such a client or any other person. Rules to speak to these issues. [2] A lawyer should be alert to and avoid unwittingly becoming involved with a client or any other person who is engaged in criminal activity such as mortgage fraud or money laundering. Vigilance is required because the means for these and other criminal activities may be transactions for which lawyers commonly provide services such as (a) establishing, purchasing or selling business entities; (b) arranging financing for the purchase or sale or operation of business entities; (c) arranging financing for the purchase or sale of business assets; and (d) purchasing and selling real estate. [3] To obtain information about the client and about the subject matter and objectives of the retainer, the lawyer may, for example, need to verify who are the legal or beneficial owners of property and business entities, verify who has the control of business entities, and clarify the nature and purpose of a complex or unusual transaction where the purpose is not clear. The lawyer should make a record of the results of these inquiries. It is especially important to obtain this information where a lawyer has suspicions or doubts about whether he or she might be assisting a client or any other person in dishonesty, fraud, crime or illegal conduct. [3.1] Lawyers should be vigilant in identifying the presence of "red flags" in their areas of practice and make inquiries to determine whether a proposed retainer relates to a bona fide transaction. Information on " Red Flags in Real Estate Transactions" appears below. [3.2] A client or another person may attempt to use a lawyer's trust account for improper purposes, such as hiding funds, money laundering or tax sheltering. These situations highlight the fact that when handling trust funds, it is 16

17 important for a lawyer to be aware of their obligations under these rules and the Law Society's by-laws that regulate the handling of trust funds. [4] A bona fide test case is not necessarily precluded by rule and, so long as no injury to the person or violence is involved, a lawyer may properly advise and represent a client who, in good faith and on reasonable grounds, desires to challenge or test a law and the test can most effectively be made by means of a technical breach giving rise to a test case. In all situations, the lawyer should ensure that the client appreciates the consequences of bringing a test case. [Amended - October 2014] Red Flags in Real Estate Transactions [4.1] A lawyer representing any party in a real estate transaction should be vigilant in identifying the presence of "red flags" and make inquiries to determine whether it is a bona fide transaction. Red flags include such things as (a) purchase price manipulations (revealed by, for example, deposits purportedly paid directly to the vendor, price escalations and "flips" in which a property is sold and re-sold within a short period of time for a substantially higher price, reductions in the balance due on closing in consideration of extra credits or deposits not required by the purchase agreement, amendments to the purchase price not disclosed to the mortgage lender, the acceptance on closing of an amount less than the balance due, a mortgage advance which approximates or exceeds the balance due resulting in surplus mortgage proceeds, and so on); (b) a nominal role for one or more parties (fraud is sometimes effected through the use of "straw people", who may not exist or whose identities have either been purchased or stolen, as well as through the suspicious use of powers of attorney); (c) the purchaser contributes no funds or only a nominal amount towards the purchase price or the balance due on closing; (d) signs that the parties are concealing a non-arm's length relationship or are colluding with respect to the purchase price; (e) suspicious or repeated third-party involvement (for example, giving instructions, supplying client directions or identification, and providing or receiving funds on closing); and transaction. (f) the proceeds of sale are disbursed or directed to be paid to parties who are unrelated to the [4.2] The red flags listed above are not an exhaustive list. Further information regarding red flags is available from many sources, including the "Fighting Real Estate Fraud" page within the "Practice Resources" section of the website of the Law Society. Fraudulent real estate schemes and the red flags associated with such schemes are numerous and evolving. Lawyers who practise real estate law have a professional obligation therefore to educate themselves on an ongoing basis regarding the red flags of real estate fraud. [New - October 2012] 17

18 SECTION 3.7 WITHDRAWAL FROM REPRESENTATION Withdrawal from Representation A lawyer shall not withdraw from representation of a client except for good cause and on reasonable notice to the client. [Amended - October 2014] Commentary [1] Although the client has the right to terminate the lawyer-client relationship at will, the lawyer does not enjoy the same freedom of action. Having undertaken the representation of a client, the lawyer should complete the task as ably as possible unless there is justifiable cause for terminating the relationship. [2] An essential element of reasonable notice is notification to the client, unless the client cannot be located after reasonable efforts. No hard and fast rules can be laid down about what will constitute reasonable notice before withdrawal and how quickly a lawyer may cease acting after notification will depend on all relevant circumstances. Where the matter is covered by statutory provisions or rules of court, these will govern. In other situations, the governing principle is that the lawyer should protect the client's interests to the best of the lawyer's ability and should not desert the client at a critical stage of a matter or at a time when withdrawal would put the client in a position of disadvantage or peril. [3] Every effort should be made to ensure that withdrawal occurs at an appropriate time in the proceedings in keeping with the lawyer's obligations. The court, opposing parties and others directly affected should also be notified of the withdrawal. [4] When a law firm is dissolved or a lawyer leaves a firm to practise elsewhere, it usually results in the termination of the lawyer-client relationship as between a particular client and one or more of the lawyers involved. In such cases, most clients prefer to retain the services of the lawyer whom they regarded as being in charge of their business before the change. However, the final decision rests with the client, and the lawyers who are no longer retained by that client should act in accordance with the principles set out in this rule, and, in particular, should try to minimize expense and avoid prejudice to the client. The client's interests are paramount and, accordingly, the decision whether the lawyer will continue to represent a given client must be made by the client in the absence of undue influence or harassment by either the lawyer or the firm. That may require either or both the departing lawyer and the law firm to notify clients in writing that the lawyer is leaving and advise the client of the options available: to have the departing lawyer continue to act, have the law firm continue to act, or retain a new lawyer. [Amended - October 2014] Optional Withdrawal Subject to the rules about criminal proceedings and the direction of the tribunal, where there has been a serious loss of confidence between the lawyer and the client, the lawyer may withdraw. Commentary [1] A lawyer may have a justifiable cause for withdrawal in circumstances indicating a loss of confidence, for example, if a lawyer is deceived by their client, the client refuses to accept and act upon the lawyer's advice on a significant point, a client is persistently unreasonable or uncooperative in a material respect, there is a material breakdown in communications, or the lawyer is facing difficulty in obtaining adequate instructions from the client. However, the lawyer should not use the threat of withdrawal as a device to force a hasty decision by the client on a difficult question. [Amended - October 2014] 18

19 Mandatory Withdrawal Subject to the rules about criminal proceedings and the direction of the tribunal, a lawyer shall withdraw if (a) discharged by the client; (b) the client's instructions require the lawyer to act contrary to these rules or by-laws under the Law Society Act; or (c) the lawyer is not competent to continue to handle the matter. [Amended - March 2004, October 2014] 19

20 APPENDIX C RED FLAGS 20

21 RED FLAGS CONTINUED 21