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Law Times • November 28, 2011 Oklahoma frauds return as scam of choice seeking the recovery of $6.5 million in damages highlights a supposedly new form of mortgage fraud currently af- fecting lenders and, as is all too often the case, requiring vigilance from mort- gage lending lawyers. The particular fraud in the Cro- A atian Credit Union case was allegedly the work of the former manager and his accomplices, although the lawsuit also sweeps in no less than five law- yers and a real estate broker in multiple separate involving The matters millions of dollars in mort- gage advances made Dirt By Jeffrey W. Lem against collateral that was, in the aggre- gate, worth only about half a million dollars. None of the allegations have been proven in court. Although the manager and his accomplices allegedly defrauded the Croatian Credit Union through a supposedly new scam, it's only new because it hasn't been around for a while. Like most of these types of scenarios, the scam against the Cro- atian Credit Union is actually a very old form of value fraud that, as far as I'm aware, has always been referred to as an Oklahoma scheme. An example of a typical Oklahoma scheme goes like this: A fraudster pur- chaser buys a piece of vacant land for, say, $10,000 from a real vendor in an otherwise legitimate transaction. The fraudster immediately flips the land to an accomplice for an amount many times its original value like $500,000. The accomplice, armed with a recent transfer or deed and land transfer tax affidavit showing a purchase price of $500,000, then applies to a mortgage lender for a loan based on that value. Even if the mortgage lender advances a conservative 70 per cent of the value, based on the ostensible $500,000 amount, the accomplice makes off with $350,000 in mortgage proceeds. In some cases, the fraudsters make a few months of payments in advance. In more sophisticated matters, they make monthly mortgage payments to avoid any arrears and the added scrutiny that special loans attract. They then run the same scam repeatedly against a single mortgage lender in rapid succession before absconding with the aggregate mortgage proceeds, leaving the lender with one or more valid and enforceable mortgages but on collateral worth a small fraction of the principal amount secured by them. There are other variations of the Oklahoma scheme, but they all de- pend on somehow faking the value of the properties in order to dupe the lender into advancing far more than the underlying collateral is ac- tually worth. They generally don't work un- less there's some defective link in the mortgage lender's due diligence protocols, whether it's reliance on a fraudulent participant or a faulty sys- tem that doesn't require any evidence of value other than the last registered deed or an agreement of purchase and sale. Typically, it's a fraudulent appraiser, but in the Croatian Credit Union case, there was a manager who was allegedly in on the frauds and recent lawsuit brought by the liquidators of the Croatian (Toronto) Credit Union Ltd. who facilitated the mortgage loans on knowingly exaggerated values. Of course, once someone like a manager is actively involved in the frauds, there's really no stopping the Okla- homa scheme from running on. It certainly seems to be the case in the Croatian Credit Union matter that the frauds went on for a long time. In fact, the value frauds didn't come to light until the owners of neighbouring properties started to complain to the local tax assessment authorities about their outrageous new property tax re- assessments. They, of course, stemmed from the artificially inflated deed values of the nearby fraudulently mortgaged properties. The standard of care for mortgage lending lawyers caught up in Oklaho- ma files isn't that clear, but it's probably now incumbent upon lawyers to advise their lender clients of recent flips in the title to mortgaged property, especially in cases where the searches show sud- den and vastly escalating values. That said, it's hard to believe that it's now in- cumbent upon lawyers who find them- selves in the middle of an Oklahoma scam to actually advise of a pending fraud or alert the lender to anything more than the fact that a recent flip transaction shows up in the title search. I make a huge distinction between pointing out a peculiar circumstance, on the one hand, and alleging fraud every time a file has one. It's presumably still the lender's role to assess whether the flip with escalating prices is a legit- imate transaction or is part of a fraud. After all, there may be many legitimate explanations for why the price of a piece of collateral has gone up. Those are ap- praisal issues that a lawyer shouldn't be responsible for. It should be enough that the lawyer provided the client with the information in the title search. Nor should it be the responsibility of lawyers to blow the whistle above the client contact they would ordinar- ily have reported to. For instance, in the Croatian Credit Union case, there was a manager who was allegedly in on the frauds. It's hard to believe, then, that it would have been incumbent upon the lawyer to go above the manager. Of significant importance to the bar is the fact that Oklahoma schemes in most of their variations aren't title or mortgage frauds in the classic sense. The mortgage is typically valid and en- forceable in accordance with its terms. The property used as collateral exists and is usually duly charged as security for the mortgage loan. The lender can always sell the property under power of sale or foreclose. The only problem is that the mort- gaged property is worth significantly less than it was supposed to be. As such, Oklahoma schemes are typically not covered by title insurance. Lenders, not their title insurers, are fully exposed to the risks of these types of value frauds. Unfortunately, lawyers will face law- suits by these lenders when an Okla- homa fraud leaves them with signifi- cant deficiency judgments against the absconded fraudsters. Jeffrey W. Lem is a partner in the real estate group at Miller Thomson LLP. His e-mail address is jlem@millerthomson. com. on the Rights of the Child says that where children are directly affected in a proceed- ing, they have a right to express their views with the weight given to them based on their age and ma- turity. They should be able to express them either directly or through a representative or an appropriate body. I agree. Some people have interpreted this prin- ciple as giving children a right to speak to the judge hearing their case. I disagree. The focus should be on more appropriate op- tions to achieve this objective. I support the position of justices Claire T L'Heureux-Dubé and Rosalie Abella who wrote that the judicial interview should be a last resort. "The practice of interviewing children in chambers is not an ideal way to ascertain a child's wishes," they wrote in Family Law: Dimensions of Justice. "The interview is conducted in an intimidating environment by a person unskilled in ask- ing questions and interpreting the answers of children. In the relatively short time those interviews take, it is difficult to investigate with sufficient depth and subtlety those perceptions of a child that explain, justify or represent the child's wishes. Moreover, the interview may be perceived as a violation of the judge's role as an impartial trier of fact who does not enter the adversarial arena." Recent family law reforms encour- age parent education and triage to direct couples to less adversarial alternatives if appropriate or fast track high-conflict and complex cases to judges for their legal ex- pertise. There is widespread agreement that the process for managing family cases needs repair. However, other reforms are more worthy of our attention. First is the establishment of a unified family court with specialist judges assigned on the basis of one judge for one family. Judges today are not necessarily family specialists and couples may appear before a series of them, a fact that further complicates judicial interviews. I agree that children should have an op- portunity to have a voice in the parenting decisions that affect them. But I also believe there should be an obligation to determine the child's interest in participating before choosing a methodology. For example, is the child seeking an opportunity to encour- age the parents to reach an amicable resolu- tion? Does the child want clarification and understanding of the court process? Or is the child looking for an opportunity to par- ticipate in the decision-making process by having a voice, a chance to raise concerns about physical or psychological safety or the right to decide as a party to the proceedings? I also feel there should be a number of options for matching the child's interest to the process, including video, an informa- tion session, a meeting with a mediator or an assessor, a booklet, a meeting with a chil- dren's lawyer, Internet programs, a written submission or a meeting with the judge. I compare the issue to patients entering a hospital emergency department. They might prefer to see the chief surgeon. How- ever, someone does a triage assessment to determine the most appropriate process. We need similar reasoning on this issue. I have a number of questions and www.lawtimesnews.com COMMENT PAGE 7 Should judges interview kids in custody cases? BY BARBARA LANDAU For Law Times here is a movement to give children a voice in contested custody cases. The United Nations Convention Speaker's concerns about children speaking with the judge. First, what is the judge's objective in meeting with a child? Does the judge's ob- jective match the child's? Does the judge, for example, want to form an impression of the children, gather evidence about their views and preferences or clarify the court process? Who will de- Corner cide if the object- ives coincide? How much time would the judge allocate to each child? How will the court determine who wishes such a meeting? Also, the manner in which the child exercises a voice should take into account the age, stage of development, communica- tion skills, and any parental pressure. Most children do not ask questions about the law. They express concerns about being caught in the middle of the conflict and have practical questions about their future. Will they have to move or change schools? These are not questions that require judicial expertise. Most children want their parents to co-operate, minimize conflict, and make appropriate parenting decisions. In the meantime, parents who are litigat- ing custody or access should have to attend an additional parent information session on the possible impacts on children. Both Al- berta and British Columbia require parents to attend two three-hour sessions. They're contemplating a third session. In addition, the parties should explore other less adversarial options before a trial proceeds. Many mediators are trained and willing to meet with children. Some juris- dictions assist parents by covering some of the costs. This is cheaper and likely more ef- fective as demonstrated in Australia. In high-conflict cases, custody assess- ments are a logical option. Children are seen individually, together, and with each parent. Other relevant professionals gather information about the children's needs. The assessor summarizes the information in a report that provides a history of the family, an assessment of the personality, significant background of the family members and rec- ommendations for a parenting plan. One obstacle is that assessors today are reluctant to accept assessments because law- yers have taken a litigious approach that at- tacks them by filing complaints with their regulators in order to prevent presenting reports to the court. Also, the cost of as- sessments has risen significantly as assessors take exceptional steps to protect themselves. Overall, my chief concern is that judges are not trained to interview children. Also, mediators, assessors, and mental-health pro- fessionals are less costly and better trained and do not have a conflict of roles. Children have complex motives for stat- ing a preference on who they wish to be with: protecting a vulnerable parent, choos- ing the one who sets minimum limits or punishing the one who separated. The task of sorting through a child's motives requires time and training. A significant concern is that many judges hearing family cases are not family specialists and there is no continuity in case assignments. A properly funded and re- sourced unified family court could address all of these objections. Barbara Landau is a psychologist, law- yer, mediator, arbitrator, and president of Cooperative Solutions in Toronto. The firm's web site is coop-solutions.ca.