Judge criticizes Law Society of Ontario’s handling of alleged real estate trust fund misconduct

A recent court order freezing the bank accounts of a lawyer accused of defrauding real estate clients also included emphatic criticism of the Law Society of Ontario, the self-regulating provincial body charged with investigating and punishing misconduct in the legal profession.

In an Oct. 14 ruling, Justice Sean Dunphy wrote that he felt he was “shouting into the wind” with his repeated requests for swifter and more co-ordinated action on lawyer misconduct.

Justice Dunphy granted the request for orders to freeze and trace about $5-million in funds entrusted to Anil K. Sharma, a Brampton-based real estate lawyer. Mr. Sharma faces allegations that in three real estate transactions in August and September, he simply kept the money from his clients instead of remitting the funds as directed.

Mr. Sharma could not be reached for comment, and the allegations against him have not been proven in court.

The judge noted that similar allegations have been made against lawyer and former Liberal MP Rajvinder Grewal.

The latter case – which is still being investigated, and includes allegations of mortgage fraud topping $17-million, along with more than $200-million in unpaid loans – has shocked the legal community, but also spurred criticisms that the LSO is not doing enough to prevent such incidents.

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Justice Dunphy wrote that the damage being done to the legal profession by allegations of another Brampton lawyer misusing trust funds intended for discharging mortgages was “as incalculable as the torpor of the Law Society in failing to take vigorous action to protect the integrity of trust accounts is incomprehensible.”

He ordered his ruling shared with the LSO, to remind the organization of “the pressing public interest in a well-regulated legal profession that has been confided in them.”

In an e-mailed statement, the LSO said it was “aware of this endorsement and is taking steps to respond to the allegations raised by the applicant and to protect the interests of all clients.” It declined to comment on Mr. Sharma specifically, and has issued no public notice of a hearing or other action against him since the ruling was forwarded to them more than a week ago.

Justice Dunphy renewed his critique of the LSO in an endorsement published Thursday, in a case involving Mr. Grewal’s law firm RSG Law, writing: “The evidence of misconduct involving this firm’s trust accounts before me has been jaw dropping and accumulating for months.”

He is far from the only legal mind to criticize the LSO for its perceived laggardly response to real estate fraud by lawyers.

“Focusing solely on bad actors misses a critical truth: Our current model for handling real estate transactions makes trust account fraud too easy to commit and too slow to catch,” Joseph Berljawsky, managing partner of Property Law Firm CB LLP, said in a statement. His firm specializes in real estate closings, processing more than 1,000 deals monthly.

In many real estate transactions, a lawyer accepts money into their trust bank account from one party – such as a bank extending a mortgage, or a buyer paying cash for a home – and makes an undertaking, or legal promise, to send that money to another party. Trust fraud happens when the lawyer keeps the money or moves it to other accounts for other unintended purposes. Parties that are owed money can take weeks or months to realize what has happened, since a lawyer simply lying or failing to execute their undertaking is still quite rare.

“I have watched systems fail up close and I have seen the impact it can have on clients,” Mr. Berljawsky said. “Behind every headline about missing trust money are real families facing devastating, life-altering consequences. Imagine selling your home, expecting the proceeds to pay off your existing mortgage, only to discover months later that the payout never occurred and that you are still on the hook for hundreds of thousands of dollars plus interest.”

One of Mr. Sharma’s alleged victims, Shermila Sidhu, hadn’t even heard of the case against him until she was contacted by The Globe and Mail. “Nobody has even called me, nobody has e-mailed me,” she said. “I’m trembling right now. You’re supposed to trust these people, I never had any issue in the past, you just trust they are going to do the right thing.”

To her dismay, Ms. Sidhu’s case is now part of a public record, exposing what she thought were personal financial details of an Aug. 21 $2.275-million refinancing loan from Wealth One Bank of Canada. According to court records, she directed Mr. Sharma to pay off a $2-million mortgage for her Caledon, Ont., home to Royal Bank of Canada, which he failed to do. She also gave him roughly $160,000 to pay three other banks for lines of credit; Ms. Sidhu is now unsure whether any of those lenders were paid, either.

“The whole reason we have a law society is if there’s a problem with your lawyer, you don’t need to sue them,” said Carl Irvine, a tax lawyer who has criticized the LSO’s record on disciplinary matters regarding trust fund misappropriation. He echoed Justice Dunphy’s concern that such trust issues strike at the heart of the legal profession’s role in Canadian society and the economy.

“I’ve been a lawyer for 20 years; from my perspective, not complying with an undertaking is unthinkable. It’s mind-boggling that people do it,” Mr. Irvine said.

He added, “A fair bit of our commercial activity does depend on believing that funds held in a trust account are safe. If that breaks down and people no longer have confidence that they are dealing with a reputable profession, transactions will get harder to do, and that triggers all sorts of downstream adverse consequences.”

Mr. Berljawsky offered a couple of suggestions that could help restore trust. The first is for the LSO to require two people to move money from trust funds, with enforcement by the banks. The second is for lawyers to send monthly trust fund reconciliation reports to the LSO, as is required in Alberta, for example.