January 10, 2004
Lawyer suspended for role in house flips
Homes sold twice to inflate their value before applying to bank for mortgage
The Law Society of Upper Canada has censured a lawyer who was involved in a
series of 27 property flips, which cost the Royal Bank of Canada more than
Between December, 1996 and January, 2000, Toronto lawyer Alexander Havrlant,
66, acted in a series of what's known as "Oklahoma" property flips where a
property is bought from an innocent vendor at market price and then resold
at an inflated price.
(In a typical Oklahoma property flip, a middleman buys a property and
immediately resells it to a "dummy" purchaser at an artificially higher
value. A bank finances the second purchase without knowing about the first
transaction, and ends up holding a mortgage in an amount higher than the
true value of the property. The purchaser effectively buys the property for
no money down and pockets the difference between the true (lower) purchase
price and the inflated bank mortgage.)
The facts in all but one of the Havrlant transactions are similar, and were
admitted in a signed statement the lawyer provided to the law society.
According to Havrlant's statement, real estate agent Daniel Scott and
associate Haywood Welton would buy, or find an associate to buy, a property
from an unsuspecting vendor. Acting as a middleman, that person would then
resell the property to an ultimate purchaser, also found by Scott or Welton.
Both transactions would close the same day. Former lawyer Peter Maloney
would act for the ultimate purchaser and mortgagee, with Havrlant acting for
the middleman, who would be a buyer and seller simultaneously.
Here's how it worked with a property on Woodfield Rd. Back in 1996, the
innocent owner named Li sold the house to Jones for $104,000. Scott was the
real estate agent for Jones, the purchaser, and Havrlant was his lawyer.
On the same day, Jones flipped the property to Banwell for $137,000. Without
knowing about the $104,000 deal, the Royal Bank gave Banwell a 95 per cent
mortgage on the higher value. Peter Maloney acted for Banwell and the Royal
Bank. He did not advise the bank of the original $104,000 purchase and has
since been permitted to resign from the Law Society. (See Title Page, May
31, 2003, at http://www.aaron.ca.)
When the smoke cleared, there was a profit of more than $25,000, which
Havrlant paid to 1600 Pacific Place Holdings Ltd. Welton was one of the
directors of the company.
Two and a half years later, the same thing happened again. Banwell sold the
same property to Bradshaw for $168,000. CMHC provided mortgage financing of
about $155,000, and the profit on that deal was about $24,000.
The Law Society file makes no reference to whether the Royal Bank conducted
appraisals or inspections when it advanced both mortgages.
In November, 2000, a court-appointed receiver sold the Woodfield Rd.
property, leaving the Royal Bank with a loss of almost $56,000.
This scenario was repeated on 26 other properties.
The essence of the Law Society's charges against Havrlant (which he
admitted) was that he "aided and assisted in a scheme, orchestrated by ...
Welton," involving the purchase and sale of properties and the payment of
the profits resulting from mortgage financing to Welton's company.
Strangely, there is no allegation that the transactions were fraudulent, or
that the bank was duped.
The Society also alleged, and Havrlant admitted, that he failed to disclose
to the intermediate owners the risks of participating in these transactions.
This, too, is a puzzling allegation, as the "flipper" clients were
presumably in on the bank scams, and wouldn't have been interested in such
Three other charges against Havrlant related to a property on Sibley Ave. In
this case, the Royal Bank knew about the original legitimate purchase
because it provided financing for it.
The Royal advanced a 75 per cent mortgage based on the first sale price of
$115,000 in December, 1997. Six weeks later, the property was flipped for
$147,000 a jump of almost 28 per cent.
Knowing of the original deal (because it held a mortgage on the property)
the Royal Bank provided the purchaser with 90 per cent financing insured by
Havrlant acted for the intermediate and final purchaser, as well as the
Royal Bank. He was charged by the Law Society with two counts of
professional misconduct for failing to disclose to the bank that the
property was being flipped for a profit.
While I do not condone his conduct, it is clear that Havrlant could not
possibly have concealed anything since the bank held both the smaller and
larger mortgage on the same property.
Properties are legitimately flipped for a profit all the time, but there is
no allegation in the two Law Society charges against Havrlant that the
Sibley Ave. flip was improper or fraudulent or at an inflated price. Nor is
there any explanation of why it was misconduct for Havrlant to fail to
disclose to the bank that it already had a mortgage on the property.
On April 14, 2003, a Law Society discipline panel chaired by Clayton Ruby
suspended Havrlant from the practice of law for a period of nine months.
The Royal Bank now instructs lawyers acting on their mortgage transactions
to alert them if the property has increased in value over a short time.