The world of real estate, like our universe, is filled with celestial bodies of all kinds.. There are supernovae, quasars, suns, planets, moons and… black holes. This article will focus on real estate black holes.
There are people in the industry, whether professionals or consumers, who still believe today that using fraudulent means is the best way to get rich quick when, in fact, fraud is invariably the guarantee of getting a multi-year prison sentence. Of all the places in North America, British Columbia is arguably the place where fraudulent real estate practices of any kind are least tolerated. Section 380 of PART X (FRAUDULENT TRANSACTIONS RELATED TO CONTRACTS AND COMMERCE) of the British Columbia Penal Codein fact, it says the following:
“380(1)_ Any person who, through deceit, misrepresentation or other fraudulent means, whether or not a false pretense within the meaning of this Law, defrauds the public or any person, whether or not found out, of any personal property, goods real estate, money or valuable securities or any service,
(a) is guilty of an indictable offense and may be punished by a term of imprisonment not to exceed fourteen years, when the object of the offense is a probate instrument or the value of the object of the offense exceeds five thousand dollars.
380(2)_ Anyone who, by deceit, falsehood or other fraudulent means, whether or not under a false pretext within the meaning of this Law, with intent to defraud, affects the public market price of shares, participations, real estate, merchandise or anything offered for sale to the public is guilty of an indictable offense and liable to imprisonment for a term not to exceed fourteen years.”
In general terms, fraud occurs when a misrepresentation is false and is made knowingly, without believing in its veracity, or recklessly, that is, regardless of whether it is true or false. The person committing fraud, unlike negligent misrepresentation, does not need to be an expert to be liable. Given the circumstances, it would seem that it is quite suicidal to commit fraud in British Columbia considering that the courts tend to apply the law quite literally. And yet, from time to time, we hear of someone who wants to imitate Beau Geste and try their hand at s.380, with very unfortunate consequences, as the following real cases can confirm.
A real estate developer exercised his sense of ‘financial creativity’ by allegedly soliciting funds from various private investors and an institutional lender, with the intention of developing a shopping center on three contiguous parcels of commercial-retail land, which he owned. In the context of a fraud trial, the defendant was the head of a company involved in construction. Contracts were made and funds were taken from private investors based on a false representation by the defendant that the funds were insured. The developer subsequently applied for a construction loan from an institutional lender, intentionally and knowingly misrepresenting to the lender that the funds so deceptively collected were, in fact, his. In due course, the company became insolvent, the project was not completed, and most investors lost their money, partly because insurance was not available as represented.
The trial judge, whose sense of ‘creativity’ was virtually non-existent, found the developer in breach of s.380(1) and convicted him of five counts of fraud with a combined total jail term of 7 years. In addition, a $25,000 fine was imposed to cover general and exemplary damages and the subject property was ordered to be forcibly sold to repay the investors and institutional lender for lost funds.
In a different scenario, a real estate agent acting in a dual agency capacity concocted a scheme so devious it would no doubt have made Houdini green with envy. Having listed a $1.2 million villa, the agent found a buyer ready, willing and able to purchase at full price. The buyer, however, did not meet the requirements to receive financing. The agent then drafted a ‘letter of intent’ in which it was agreed between the parties that: 1) the asking price of the property would be reduced from $150,000 to $1,050,000; 2) that seller and buyer were going to enter into a contract to transfer the property for $1,050,000; 3) that upon completion the buyer would grant the seller an unsecured promissory note of $150,000. The agent then proceeded to file a price reduction form duly signed by the seller with the MLS, and shortly thereafter, a new sales contract was entered into between seller and buyer for a transfer price of $1,050,000.
In introducing the buyer to his own banker, the agent failed to disclose the ‘letter of intent’. Having obtained the necessary financing, the buyer completed the deal and all would have been fine… except that, about a year later, the buyer defaulted on the mortgage and on the secret promissory note. The seller then tried to enforce payment on the unsecured note, so the whole scheme came to light.
In legal proceedings brought by the lender and the seller against the buyer and the dual agent, the trial judge convicted the buyer on one count of fraud and found the agent guilty of negligence and fraudulent misrepresentation. The buyer was sentenced to two years in prison and a fine of $20,000 for general and exemplary damages, as well as a forced sale order of the property. The agent was found in violation of s.380(1) and convicted of four counts of fraud. A sentence of 6 years in prison and a $20,000 fine for general and exemplary damages were imposed, and the case was transferred to the Real Estate Superintendency for disciplinary proceedings. The Superintendent of Real Estate (another guy with no sense of ‘creativity’ at all) imposed a fine and hearing costs totaling about $10,000, cancellation of the agent’s real estate license, and a lifetime ban from practicing.
Lawyers are not exempt from predatory tactics, as the following example illustrates. One of the reasons that real estate fraud in British Columbia is the least tolerated is the title registration system. British Columbia operates under the Torrens systemthrough which the Provincial Government guarantees the integrity of the title through a principle called infeasibility, subject to certain legal exclusions. Title or escrow insurance is not required in British Columbia, although both can be purchased separately if desired. Under the Torrens System, the Government also maintains the Guarantee Fund intended to compensate people who have lost the right to recover land. Needless to say, the Provincial Government really dislikes having to use the Guarantee Fund, as this former lawyer could well attest.
The attorney in question acted on behalf of buyers and mortgagees in transactions involving real estate. They involved “switches” in which an arm’s length transaction was immediately followed by a non-arm’s length transaction such that ownership did not effectively change hands. The stated purchase price to mortgagees was significantly higher than the amount actually paid for the properties, resulting in mortgagees advancing more funds than they otherwise would have approved. The details on which fraud and deception determinations were made against this attorney involved serious issues including: failure to serve his mortgagee clients by failing to disclose facts; act on behalf of sellers in direct contravention of the instructions of their mortgage customers; acting in a conflict of interest and preferring other clients to its mortgage clients; put your own interest above the interests of customers; delegate work to an assistant, in order to deceive their mortgagee clients; commission false affidavits; and enter into an agreement with his assistant to share the profits.
The Court took a very serious view of misconduct. In his Reasons for Judgment, the trial judge found all of the real estate “changes” to be false and made solely for the purpose of receiving mortgage funds. The Honorable Lady Justice further discovered that the defendant was beyond careless and thoughtless. She knowingly misrepresented her clients. She did not follow the specific instructions of her lending clients; she deliberately sought to mislead some of those customers; and she engaged in the use of false affidavits.
The trial judge further found that these actions were not consistent with those of an ethical attorney, that the defendant had repeatedly and willfully breached his fiduciary duty to lending clients, and had demonstrated a gross lack of professional integrity. These aggravations differentiated his conduct in that he was a member of the Law Society and, as such, had an imposed duty to uphold the law at all times, and to set an example and guide all members of the Law Society. same. public and that, in fact, he had breached both this duty and this service.
Finding the defendant in patent violation of s.380(1) and s.380(2) and assessing a full 14-year prison sentence, the trial judge opined that such conduct of ‘moral turpitude’ on the part of a legal could not be tolerated, and such a practitioner deserved an exemplary disciplinary punishment in the present case. In addition, the Government was ordered to keep the victims safe and harmless and to cover their losses in full by reimbursing them to the last penny with funds from the Guarantee Fund.
The best blog I’ve seen so far that covers the subject of real estate fraud is The Mortgage Fraud Blog with URL at http://www.mortgagefraudblog.com, written by Ms. Rachel M. Dollar. This is a great place to learn about mortgage scams and to find out how consumers and professionals can put themselves at risk by participating in the schemes. Ms. Dollar is a recognized expert in the mortgage lending industry, having brought her litigation experience to industry-sponsored forums across the country. She also frequently teaches in-house seminars on mortgage fraud issues for lending professionals, quality assurance and QA management, and general counsel.
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