FRAUDULENT REAL ESTATE PRACTICES

Transcription

1 FRAUDULENT REAL ESTATE PRACTICES 'Fraud' is a very broad concept. It is found in virtually all Criminal Code sections involving the taking or infringement of property rights - s. 283 (theft); s. 287 (theft telecommunication); s. 320 (obtaining credit by fraud); s. 322 (obtaining food & lodging by fraud); s. 338 (defrauding a person of money, property, or valuable security); s. 355 (fraudulently making a false entry); s. 350 (defrauding creditors); s (fraudulently obtaining computer service) - are but a few examples. Apparently, it is becoming a not infrequent practice for purchasers to obtain or attempt to obtain credit by fraudulent practices. The methods involved are various, but have a common basis in that there is an inflation of the true purchase price. This can be accomplished by insertion of an inflated purchase price in the agreement of purchase and sale, with the true purchase price being stated in a side agreement providing for a rebate of part of the purchase price on closing, or the giving of a promissory note which is never intended to be enforced and is, of course, later forgiven. By these methods, the financing that is available to the purchaser is affected. Either the purchaser is able to avoid having to have a high ratio mortgage or, by these artifices, is able to obtain a mortgage at all. In any event, the financial institution may be caused to alter the amount or terms of the financing it would otherwise be willing to grant. Individuals who carry out or assist in the carrying out of these practices, be they the purchaser, real estate agent, or solicitor, commit crimes by this type of conduct. Section 320(1) sets out the various specific prohibitions 1 against the obtaining of credit by false pretences or fraud:

2 (1) Every one commits an offence who (b) obtains credit by a false pretence or by fraud; (c) knowingly makes or causes to be made, directly or indirectly, a false statement in writing with intent that it should be relied upon, with respect to the financial condition or means or ability to pay of himself or any person, firm or corporation that he is interested in or that he acts for, for the purpose of procuring, in any form whatever, whether for his benefit or the benefit of that person, firm or corporation, (i) the delivery of personal property, (ii) the payment of money, (iii) the making of a loan, (iv) the grant or extension of credit, (v) the discount of an account receivable, or (vi) the making, accepting, discounting, or endorsing of a bill of exchange, cheque, draft, or promissory note; or (d) knowing that a false statement in writing has been made with respect to the financial condition or means or ability to pay of himself or another person, firm or corporation that he is interested in or that he acts for, procures upon the faith of that statement, whether for his benefit or for the benefit of that person, firm or corporation, anything mentioned in subparagraphs (c)(i) to (vi). (3) Every one who commits an offence under paragraph (1)(b), (c), or (d) is guilty of an indictable offence and is liable to imprisonment for ten years. It is useful first to consider the main or general prohibition of obtaining credit by a false pretence or fraud provided for in s. 320(1)(b). From the law surrounding that section, it is clear that the conduct prohibited by s. 320(1)(c) and (d) are but more specific examples of the same type of conduct as it relates to the obtaining of credit and there is really very little difference in the elements the Crown has to prove on charges under paragraphs (c) or (d), other than the requirement that the offence can only be committed by reason of 'a false statement in writing'. 2 Under s. 320(1)(b), the offence can be charged of obtaining credit

3 -3 either by false pretence or by fraud, but not by both. 3 There have only been a handful of cases in Canada dealing with this offence. The case of R v. Dyke and Dyke (1976), 33 C.C.C. (2d) 556 (NfId.Dist.Ct.) is on point in relation to the practice of artifically inflating the purchase price for purposes of increasing mortgage financing. In Dyke and Dyke, supra, the two accused were jointly charged under s. 320(1)(b) of obtaining credit by a false pretence. The false pretence alleged was their advising the agent for Nova Scotia Savings do Loan Company that the selling price of a property they were purchasing was $13,500.00, when in fact the true selling price was $9, Section 319(1) defines false pretence: 319. (1) A false pretence is a representation of a matter of fact either present or past, made by words or otherwise, that is known by the person who makes it to be false and that is made' with a fraudulent intent to induce the person to whom it is made to act upon it. Steele D.C.J..found that in order to constitute the offence of obtaining by false pretences, the following four essentials were necessary: (1) There must be a representation, by words or otherwise, that something exists which does not exist, or a representation as having happened or having existed, something which has _not happened or has not existed; (2) The offender must have known, at the time of making the false statement or representation, that it was false; (3) The goods or money in question must have been parted with in consequence of and through the false representation; (4) The false statement or representation must have been made with intent to defraud. (p The accused admitted all the facts surrounding the commission of the offence, but raised a number of defences. They argued that since Nova Scotia Savings do Loan was secured by the mortgage, that the accused did not obtain "credit" and that the mortgage company had not parted with their funds due to the false representation as to the purchase price, but relied

4 -4 instead on their independent property appraisal, and that the representation with respect to the purchase price was not made with intent to defraud because the loan was secured by a mortgage which was more than covered by the mortgagee's own property appraisal. After reviewing a number of authorities, Steele D.C.J. held that: "In my view, a "credit" is obtained when the money is advanced by way of a loan (thus incurring liability in an actionable debt), notwithstanding the fact that the loan was secured by a mortgage on realty. A mortgage taken is simply a conveyance of property as security for the debt until the money is repaid. When the debt is repaid, the mortgage is discharged. If there is default, the mortgagee may either foreclose or take an action for the outstanding balance. The indenture of mortgage is in itself evidence of the liability and the indebtedness. It seems to me that the taking of security by way of a mortgage does not alter or affect the nature of the "credit" obtained. A loan advanced by a mortgage is, in my opinion, a "credit obtained" within the meaning of the term in s. 320 of the Code." (p. 564) The loan actually advanced to the accused was based on 95% of the stated purchase price of $13,500.00, plus $3, intended for renovations. After adding on the 1 % high ratio insurance fee, the mortgage loan was $15, The independent appraisal carried out by Nova Scotia Savings be Loan indicated the property had a fair market value of $18, Steele D.C.J. brushed aside the defence arguments by finding that the independent appraisal carried out by the mortgage lender was simply to ensure that its loan was adequately secured by the encumbrance on the realty. Mortgage amounts are calculated not on appraised fair market value, but on the purchase price. By working backwards, if the purchase price had been correctly stated as to be $9,500.00, then the mortgage loan that would have been advanced would have been some $3, less than the funds that were obtained by the accused. The classic definition of defraud referred to by the Court is that given by Buckley J. in Re London and Globe Finance Corp Ltd, [1903) 1

5 Ch. 728 at p. 732: To deceive is, I apprehend, to induce a man to believe that a thing is true which is false, and which the person practising the deceit knows or believes to be false. To defraud is to deprive by deceit: it is by deceit to induce a man to act to his injury. More tersely, it may be put, that to deceive is by falsehood to induce a state of mind; to defraud is by deceit to induce a course of action. Steele D.C.J. had no difficulty concluding that the accused had made the statements with intent to defraud Nova Scotia Savings do Loan irrespective of their bona fide intentions to repay the funds and dispite the fact that the loan had since been fully repaid and the mortgage discharged. 4 FRAUD IN GENERAL Conduct in obtaining loans can equally be charged under the general prohibition against fraud found in s Section 338(1) is the general section dealing with fraudulent conduct. It provides: (1) Everyone who, by deceit, falsehood, or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money, or valuable security, (a) is guilty of an indictable offence... The offence may be committed in three ways: (a) by deceit defrauding; (b) by falsehood defrauding; (c) by other fraudulent means defrauding. The standard definition of deceit is that set out in Re London and Globe Finance Corp. Ltd., supra. Falsehood needs no definition. Following the judgment of the Supreme Court of Canada in R v. Olan, Hudson and Hartnett (1978), 41 C.C.C. (2d) 145, both the law with respect to "defraud" and what constitutes "other fraudulent means" were substantially changed. Dickson J. for the Court stated:

6 -6 Courts, for good reason, have been loathe to attempt anything in the nature of an exhaustive definition of "defraud", but one may safely say, upon the authorities, that two elements are essential, "dishonesty" and "deprivation". To succeed, the Crown must establish dishonest deprivation. (p. 150) Deprivation was further defined by Dickson J. in Olan, supra, as follows: "The element of deprivation is satisfied upon proof of detriment, prejudice or risk of prejudice to the economic interest of the victim. It is not essential that there be actual economic loss as to the outcome of the fraud." Mr. Justice Dickson went on to expressly adopt the views of the English Court of Appeal in R v. Allsop (1976), 64 Cr.App.R. 29: Generally the primary objective of fraudsmen is to advantage themselves. The detriment that results to their victims is secondary to that purpose and incidental. It is"intended" only in the sense that it is a contemplated outcome of the fraud that is perpetrated. If the deceit which is employed imperils the economic interest of the person' deceived, this is sufficient to constitute fraud even though in the event no actual loss is suffered and not withstanding the deceiver did not desire to bring about an actual loss. We see nothing in Lord Diplock's speach in (Scott) to suggest a different view. "Economic loss" may be ephemeral and not lasting, or potential and not actual; but even a threat of financial prejudice will exist, it may be measured in terms of money. (p. 150) The actus reas then of fraud boils down to one of doing an intentional act, that is, a voluntary act, in the circumstances which make that act a deceit, falsehood, or other fraudulent means. "Other fraudulent means" being anything that can be found to be dishonest, and a detriment occurs as a consequence of the doing of the act in the given circumstances. The test as to how to judge conduct to be "dishonest" or not has

7 not yet been finalized. (t is, of course, a question of fact, but how the trier of fact is to determine or resolve the issue is still not clear. It has been argued that the test is one of viewing the conduct objectively, while others argue that it must carry a subjective standards There must, of course, be some causal connection between the dishonest means and the detriment. But, the dishonesty doesn't have to be the sole cause of the parting of property or other deprivation.? Of course fraud, as with all other "true criminal offences" requires that there must not only be the doing of prohibitive conduct, but that it be done with a "guilty mind" or mens rea. This mens Lea, or culpable mental state, applies both with respect to the circumstances that an accused must have knowledge of, or be reckless, or be willfully blind $ -with respect to, the facts which are considered to constitute the dishonest circumstances, and the accused must desire or forsee the bringing about of the facts which constitute the deprivation (i.e., the risk of economic loss or prejudice). The general law in relation to fraud applies equally to the conduct of clients in obtaining loans, or in carrying out real estate or business transactions. The wide impact of the Olan decision can been seen in the case of R v. Knowles (1979), 51 C.C.C. (2d) 237. The accused was there president of a company which franchised hardware stores. It was a policy of the corporate structure that he was a member of, that he was forbidden to operate a franchise. Knowing this, he concealed his purchase of a franchise and then caused the parent company of his company to advance a loan to his franchise (as it would ordinarily do for any franchisee). It was not disputed that the loan was used for its intended purpose and that it was fully secured. The parent company therefore suffered no economic loss, indeed, arguably there could even be no risk of economic loss since any abuse by the accused of his position could only benefit his franchise. However, it was also clear that the parent company would not have advanced the loan to the franchise had it known that the accused owned the franchise. The accused was acquitted at trial. On appeal, a new trial was ordered. Martin J.A. held:

8 _8_ In those circumstances, the dishonest deprivation consists in inducing the complainant to its detriment to make the loan which it would not have made if it had not been deceived of the true state of affairs. The deceit practiced by the respondent placed him in a position where his personal interest might conflict with the interest of his employer, Alexander Wood Limited, a subsiduary of the complainant, and imperiled the complainant's economic interests. (p. 241) Knowles can be interpreted as standing for the proposition that deprivation can be said to exist where 'the victim' is caused to take action having economic consequences even where that action carries no actual risk of loss and entails no financial loss. From this, it can be seen that even if a high ratio mortgage loan is fully insured, that the offence of fraud may still be committed if the high ratio mortgage is obtained through dishonest means. Support for this interpretation can be found in _R v. Abramson (Unreported Decision, B.C.C.A., October 11, 1983, 11 W.C.B. 179). The accused caused the victims to make deposits on land which he was never in a position to sell. The funds paid by the victims were put into the accused's lawyer's trust account. The funds were eventually refunded to the victims. The accused was convicted at trial. In upholding the conviction, the Court of Appeal held: In fact, of course, there was deprivation in the sense that the victims paid their money over to [the lawyer's] trust account; they did not have the use of that money while it was sitting in the trust account. It was the false statements that caused them to lose possession of their money. It would seem that this could be seen as simply a loss of opportunity - that is, the loss of use of the funds. There was detriment simply by the transfer of the possession of the victims' property. LIABILITY OF REAL ESTATE AGENT AND/OR SOLICITOR Naive and anxious first-time perspective homeowners may be

9 _9_ convinced by an agressive real estate agent to carry out or become involved in structuring the agreement of purchase and sale to allow them to obtain the necessary financing. This could entail not only the schemes earlier mentioned, but also may include the arrangement of a vendor take-back mortgage without notification to the financial institution. 9 If faced with a real estate transaction in which you are aware there has been an artificial inflation of the purchase price or other devices being utilized which, if known to the financial institution (or other individuals), would cause them to alter their position on the provision of financing, then you are faced with not only a question of what you ought to do from an ethical point of view, but also one in which your client, others, and yourself may face criminal charges and conviction. Criminal liability attaches to all persons who are "parties to an offence". The distinction between principals (either in the first or second degree) and accessories were done away with in the first codification of the criminal law in Canada (1894). The provisions in place today are substantially the same as those contained in the original Code. They are as follows: 21. (1) Every one is a party to an offence who (a) actually commits it, (b) does or omits to do anything for the purpose of aiding any person to commit it; or. (c) abets any person in committing it. (2) Where two or more persons form an intention in common to carry out an unlawful purpose and to assist each other therein and any one of them, in carrying out the common purpose, commits an offence, each of them who knew or ought to have known that the commission of the offence would be a probable consequence of carrying out the common purpose is a party to that offence. Liability in relation to a real estate agent or a solicitor would most likely fall under s. 21(l)(b) or (c). Although it is common to hear the phrase that someone has aided and abetted a crime, it is clear that there are two distinct and separate avenues of liability under s. 21(1).19

10 -10 To "aid" has no technical meaning. Courts have simply used the common or dictionary meaning. In R v. Stevens (1984), 11 C.C.C. (3d) 443 (N.S.S.C.A.D.), the Court stated: "To aid means simply to assist or help." It is clear that to attract liability the assistance provided need not actually assist or have the effect of assisting another to commit an offence. However, the assistance must have been provided for the purpose of aiding a person in committing the offence. 11 A person may also be a party to an offence not only by doing something, but by omitting to do something for the purpose of aiding the commission of the offence. It is still generally true that passive acquiesence is not sufficient to constitute a crime. However, when a person has a duty or a right to do something and has failed to do it, then that omission can be sufficient to attract criminal liability. Liability has routinely been found in cases where parents of children failed to intervene to prevent assaultive conduct towards their children 12 and where owners of motor vehicles fail to intervene or control individuals driving their cars while impaired or in a dangerous manner. 13 A nice question arises - whether or not a solicitor has a duty to intervene where he is aware of a fraudulent scheme. 14 It seems obvious that when the lawyer acts for the purchaser and the financial institution providing mortgage financing, then he or she is in a situation of a potential conflict of interest. Some mortgage companies even require the solicitor to agree to put their interest ahead of the 'mortgagors. Rule 5 of the C.B.A. Code of Professional Conduct permits a lawyer to act when there is or may be a conflict provided there has been full disclosure and consent by both clients, 15 including that no information received in connection with the matter can be treated as confidential so far as the other client is concerned. 6 Of course, a solicitor is obliged to give to his client not only his professional advice and opinion, but also his knowledge. 17 To "abet" a crime and thus come within the provisions of s. 21(1)(c) of the Code, requires only acts or conduct which encourages or promotes the conduct amounting to fraud. 18 Again, passive acquiesence in certain

11 circumstances can amount to evidence of abetting and thereby become a sort of "culpable acquiesence".19 One may also become a party to an offence by counselling another person to be a party to an offence. Section 22 of the Code provides as follows: 22. (1) Where a person counsels another person to be a party to an offence and that other person is afterwards a party to that offence, the person who counselled is a party to that offence, notwithstanding that the offence was committed in a way different from that which was counselled. (2) Every one who counsels another person to be a party to an offence is a party to every offence that the other commits in consequence of the counselling that the person who counselled knew or ought to have known was likely to be committed in consequence of the counselling. (3) For the purposes of this Act, "counsel" includes procure, solicit, or incite. It is obvious that there can be considerable overlap between s. 21 and s. 22. If a real estate agent suggests to a purchaser how to get the necessary financing in a fraudulent manner, then he may be charged as a party either as abetting the commission of the offence, or as counselling the offence. One important difference is that under s. 21, to be guilty as a party to the offence, the offence must have been actually committed 20 However, a person may be guilty as counselling an offence even when the offence counselled, or another like it, is not in fact committed. Section 422 of the Code provides: 422. Except where otherwise expressly provided by law, the following provisions apply in respect of persons who counsel other persons to commit offences, namely (a) everyone who counsels another person to commit an indictable offence is, if the offence is not committed, guilty of an indictable offence and is liable to the same punishment to which a person who attempts to commit that offence is liable; The counselling need not have had any effect or influence on the

12 person counselled. The offence is complete on simply proof of the counselling of the commission of the offence The usual rule that ignorance of the law is no defence is equally applicable to persons who are said to be parties to any particular offence. The Crown need not show that the persons who aided, abetted, or counselled conduct which was in fact criminal knew that the conduct that they were aiding, abetting, or counselling was an offence. The Crown need only show that they aided, abetted, or counselled conduct which was in fact criminal. Reference has already been made to the actus reas not only of fraud, but also in relation to a person who is a party to the principal committing that fraud. Mens rea in relation to fraud has also been outlined. The mens _rea requirement for a person who is alleged to be a party to the offence by virtue of aiding or abetting the offence is that of knowledge and intention. The Crown must prove that the accused party intended to assist in or encourage the commission of the acts which constituted the crime. Further, if the crime is one of specific intent, as fraud is, the Crown must prove that the aider or abetter knew of the existence of the requisite intent by the principal or that the accused aider or abetter had himself the requisite intent.22 The Crown need not prove that the accused party knew the precise crime (i.e., in this case which type of fraud) that the principal was going to commit. Liability for an aider or abetter attaches if the crime committed was one of a type which the aider or abetter had knowledge that the principal was going to commit. 23 SUMMARY The law is clear that fraud can be committed despite the best of intentions by an accused to repay a loan and, indeed, can be committed even though the loan has been fully repaid. The distinction between acts which amount to merely actionable conduct in a civil context and acts which can attract criminal charges has virtually disappeared. It is hard to conceive

13 -13- of a fraudulent representation which gives rise to a civil action that does not also amount to a "dishonest deprivation". Real estate agents, vendors, purchasers, and solicitors all can face potential criminal liability if they participate in or encourage fraudulent practices in real estate transactions - such as obtaining credit by false pretences or by fraud. Solicitors, in particular, may face a wider prospect of criminal liability in light of a positive duty to advise the financial institution of information that has come to him or her in the course of the transaction. Failure to pass on that information may well amount to an omission for the purpose of aiding a purchaser to obtain credit by fraud. Conduct which at one time may have only been considered to have been 'questionable' practice by a businessman could well amount to a criminal practice if the practice is 'dishonest' and results in a risk or prejudice to economic interests, and anyone who participates in carrying out or assisting those practices may well face not only civil action or disciplinary action, but criminal charges. Duncan R. Beveridge BURKE BEVERIDGE

14 It is generally accepted that conduct which would be a contravention under s. 320(1)(b), (c), or (d) could equally be charged under the more general fraud section, s Section 320(1)(b) is a broader category since the offence can occur by 'fraud' and fraud can be committed even by material nondisclosure (Ewert, Criminal Fraud (1986), p ) or by conduct alone - R v. Gregg (1964), 44 C.R. 341; and of course representations amounting to fraud need not be in writing as required under s. 320(1)(c) or (d). 3. R v. Reid (1940), 74 C.C.C. 156 (B.C.C.A.); R v. Godfrey (1972), 9 C.C.C. T2-d) see also, R v. Cohen (1985), 15 C.C.C. (3d) 231 (Que.C.A.) 5. R v. Knowles (1979), 57 C.C.C. (2d) 237 (Ont.C.A.); _R v. Wa man (1981), 60 C.C.C. 2d) 23 (Ont.C.A.); R v. Rosen (1979), 55 C.C.C. 2d) see Ewert, Chap. 4, supra, for a full discussion as to what constitutes "dishonesty"; also A. Gold, Annual Survey of Criminal Law (1982) at p R v. Hillard (1975) 28 C.C.C. (2d) 566; Ewert, supra, p see R v. F. W. Woolworth (1974), 18 C.C.C. (2d) 23 (Ont.C.A.) at p. 34 re knowledge; see Sansregret v. The Queen (1985), 18 C.C.C. (3d) 233 (S.C.C.) for a recent restatement of what constitutes "recklessness" and "willful blindness" 9. Nondisclosure can, in some circumstances, amount to dishonesty: see Mackrow v. R, [1967) 1 C.C.C. 289 (S.C.C.); Ewert, supra, p R v. Meston (1975), 28 C.C.C. (2d) 497 (Ont.C.A.) 11. R v. Barr (1975), 23 C.C.C. -(2d) 116 (Ont.C.A.) 12. R v. Po en (1981), 60 C.C.C. (2d) 232 (Ont.C.A.) 13. _R v. Halmo (1941), 76 C.C.C. 116; Du Cros v. Lambourne, [1907) 1 K.B C.B.A. Code of Professional Conduct, p. 9, pgh ibid. Chap. V, p. 17, pgh ibid, p. 17, pgh ibid, p. 16, pgh. 2; citing Sector v. Ageda, [1971] 3 All E.R. 417 at 430 (Ch. D.)

15 R v. Sala ko (1969), 9 C.R.N.S. 145, at p. 147; R v. Stevens (1984), 11 C.C.C. 3d 442 at p see Rose, Parties to an Offence, p A party could also be guilty if the full offence is not committed, but only an attempt. 21. _R v. MacLeod and Georgia Straight Publishin Ltd. (1971), 1 C.C.C. (2d) 5 (B.C.C.A. ; R v. Glubisz 1979, 47 C.C.C. 2d 232 (B.C.C.A.) 22. Stephens Digest of the Criminal Law 9th Ed., at p R v. Chapin (1978), 3 C.R. (3d) 337 (A1ta.C.A.), p. 343; R v. Bainbridge X959), 43 C.R.App.R. 194; D.P.P. v. Maxwell (1978), 68 C.R.App.R. 128; R v. Stevenson (1984), 11 C.C.C. (3d) 443 N.S.C.A.).t. 3.