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Mortgage fraud scheme manipulated 'puppet' purchasers

Norman Ave. is a two-block long street near St. Clair Ave. W., and Lansdowne Ave. Number 16A is a small row house that recently became the subject of an apparent mortgage fraud case in Ontario Superior Court.
A title search of the property shows that it was sold to Winchester Financial Corporation in November 2004, for $153,500. Just four months later it was "flipped" to Danny Meneses at the inflated price of $299,000, almost double the original cost. National Bank provided Meneses with high ratio financing of $293,230. The mortgage was guaranteed by Oldemiro Demeneses.
Default occurred under the mortgage, and in July 2007, National Bank sold the property under the power of sale in its mortgage for $212,000. After deducting expenses, real estate commission, property management fees, legal fees and realty taxes, the net proceeds of the sale were just under $192,000. The bank was left with a shortfall of $98,642.67, and sued the borrower and guarantor to recover its loss.
After receiving statements of defence from the defendants, the bank applied to the court for what is known as a summary judgment – in effect, a final decision in the bank's favour based on its assertion that there was no genuine issue for trial.
At the hearing before Master Andrew Graham in Superior Court in March, the defendants Meneses and Demeneses claimed that they were innocent victims of a fraud, and that the bank had a duty to exercise "due diligence" to prevent the fraud. (A master is a court official who makes judge-like decisions on procedural matters.)
The defendants claimed that they had been approached by a family friend who was interested in buying a property to renovate, lease and then resell, and that in return for signing the paperwork, Meneses would be paid $5,000. Meneses was told that mortgage payments would be made by a third party, and that he would have no personal liability.
Meneses admitted receiving payment of $5,000 for signing "the paperwork," but claimed that if the bank had taken more care and appraised or inspected the property, it would not have made the loan. In effect, he argued that the bank was the author of its own misfortune.
Meneses and Demeneses also argued that they were innocent victims of a fraud involving a property flip at an inflated price, and that their lawyer never explained to them the consequences of the documents they were signing.
It turns out that the facts in the case of National Bank v. Meneses are not unique. Twice in 2007 alone, the Ontario Superior Court heard cases involving the use of "puppet" purchasers in circumstances similar to the Norman Ave. case. Both cases were sent on for a full trial based on allegations of fraud against the lawyer involved in one case, and the lawyer's misrepresentations in the other case.
Analyzing these two cases, Master Graham noted that there was no allegation that the lawyer in the Meneses case made any fraudulent representations which could cancel the bank's right to recovery on the loan. The borrower and guarantor were not induced to sign anything by misrepresentations of the lawyer – even though the allegations against him, if proven, might amount to negligence.
The court concluded that the alleged negligence of the lawyer did not raise a genuine issue for trial, and it awarded judgment against the borrower and guarantor for $98,642.67.
Offering puppet purchasers a tempting sum of money to sign "some papers" is the latest development in the techniques of fraudsters in mortgage scams.
If anyone offers you or anyone you know to sign "some mortgage papers," consult an independent lawyer or call the police. If it sounds too good to be true, it probably is.
Bob Aaron is a Toronto real estate lawyer whose Title Page column appears Saturdays in The Toronto Star. He can be reached at , phone 416 364 9366, fax 416 364 3818. Visit the column archives on his website at