Legal Blog

Paper

If lawyers do not paper their files, they will get themselves into trouble. Good paper can result in a disgruntled client not commencing an action. No paper or poor paper may result in an action, whose outcome may be very much in doubt. An example of no paper arose in Liorti v. Menzies, [2005] O.J. No. 5564 (SCJ).

Mortgage

Mother allowed a mortgage to be placed against her property for $75,000. The mortgage was secondary to a mortgage that was registered against the lands of son’s corporation; the mortgagees had been worried that the primary lands did not have enough equity to fully secure the mortgage.

The lawyers in the transaction acted on behalf of the mortgagors and the mortgagees. To ensure that there was no conflict, the lawyers arranged for the mortgagors, son and mother, to obtain independent legal advice. The certificate of ILA from the independent solicitor and the acknowledgement from mother and son made “it clear that the (mother) was a client of the (lawyers) when the loan funds were advanced.”

Dispute

The mortgagees advanced the loan funds to the lawyers in trust and the lawyers then paid the $75,000 to various people. Son disputed $55,000 of those payments; he said that the lawyers were to have simply held those monies in trust.

Ultimately, son’s corporation defaulted on its mortgage, the mortgagees sold the corporation’s land, mother paid the deficiency of $31,000, and the mortgagees discharged the mortgage on her land.

Mother sued the lawyers for $55,000. She claimed that she had never authorised the payments of the money that the lawyers had made and that these payments were therefore breaches of trust. For whatever reason, son was not a party to the action.

Trust

The judge concluded that mother was the lawyers’ client; he then looked for the following information:

1.   Documentation that son was mother’s agent regarding the disbursement of the money or, if no documentation was available, at least some oral evidence showing that the lawyers reasonably believed that son had authority to bind mother regarding the mortgage transaction and the disbursement of proceeds.

2.   Alternatively, a direction for funds that mother signed.

The lawyers did not provide any of this evidence. The lawyers, who had received all of their instructions from son, took the position that they never spoke to mother because the mortgage funds were not hers; her mortgage was just the secondary mortgage.

The judge took a different view of the matter. He concluded that since both son and mother were clients and since mother was liable for the full loan, the lawyers owed a duty to obtain her instructions; they did not do so and, accordingly, the payment of the proceeds was a breach of trust.

Damages

The judge felt that $75,000 was the proper award for damages. He reasoned that damages for breach of trust are equitable damages and that the object of these damages is to restore to the trust the loss that the trustee caused. This may be the technical view of a breach of trust, but it leads to an unjust enrichment. Why would mother get the benefit of the mortgage monies that she did not herself repay? After all, the other $44,000 came from the lands of son’s corporation. We feel that mother should have received only the $31,000 that she paid.

Mother had claimed only $55,000 regarding the disputed payments, but had reduced this amount to $50,000 to fall within the simplified rules procedures. Accordingly, regardless of his quantification of damages, the judge awarded only $50,000.

Hindsight

We would have thought that the lawyers had a number of options open to them at the start of the deal:

1.   Act only for the mortgagees. Obtain a certificate of independent legal advice and an acknowledgment that the lawyers do not act for the mortgagors. If they were not acting for the mortgagors, then like any solicitors for mortgagees, they would have obtained a direction for funds.

2.   Act for the mortgagors, if absolutely necessary, but obtain a direction for funds.

3.   Obtain an acknowledgment that son is agent for mother, not just for placing the mortgage, but also for disbursing the mortgage money.

Because the lawyers were acting on both ends of the transaction with an apparent conflict of interest, and assuming that LawPro was defending them, the lawyers may well have had to pay double the normal deductible.

Given that the trial took place in Toronto, we assume that the mortgagors and mortgagees resided in the GTA. Accordingly, the players were not situate in a remote community where there are few lawyers and it is difficult to obtain separate representation. Clearly, the lawyers wanted both ends of the deal and ended up getting into trouble because of it. It is far better to stay out of conflict situations and give up acting for both mortgagor and private mortgagee or for both vendor and purchaser.