The recent arrest and Law Society of Upper Canada discipline case involving Meerai Cho is a truly cautionary tale over absconded condominium deposits. Ontario has a statutory consumer protection scheme designed to protect the deposit moneys of prospective purchasers buying preconstruction condominiums. That said, most real estate lawyers believe this deposit protection is simply the $20,000 coverage automatically available for all new construction condominiums from Tarion Warranty Corp. under the Ontario New Home Warranties Plan Act.
This Cho case reminds real estate lawyers the Tarion warranty is but one source of statutory deposit protection. Section 81 of Ontario’s Condominium Act also provides an additional form of deposit protection coverage by requiring the payment of all deposit moneys directly to a lawyer who, in turn, must keep the funds in a trust account until closing. Regulations promulgated under the Condominium Act also permit a very limited number of non-lawyer professional escrow agents to act as deposit holders. But the deposit holder under s. 81 of the Condominium Act is almost invariably a lawyer who then usually holds the money until deposit insurance is in place.
Odysseas Papadimitriou, a condominium lawyer with Miller Thomson LLP’s condominium law group in Toronto, notes s. 81 “does not operate as supplemental insurance for the deposits but rather seeks to insulate these deposits from any potential developer insolvency by placing the deposits into a lawyer’s trust account ab initio.” In theory, the deposits would then be safe from the developer and its creditors until the deal closes. If the deal doesn’t close (other than through a default of the purchasers, of course), the lawyer would then return the deposits to the relevant purchasers. The s. 81 deposit trust requirements apply to both commercial and residential condominiums.
But along comes the Centrust Development Group, a development company headed up by Yo Sup (Joseph) Lee. Centrust had ambitious plans for a mixed-use condominium project on Yonge Street at the north end of Toronto. Centrust retained a local lawyer, Cho, to act as deposit trustee under s. 81 of the Condominium Act for all of the commercial presales at the Centrium development. She collected upwards of $15 million in such deposits and deposited them into her bank account. As these stories all too often go, Centrust then ran into financial difficulties with the Centrium project eventually sold under power of sale.
When the relevant Centrium purchasers turned to Cho for the return of their respective deposits, they were shocked to learn that Cho had prematurely released the funds to Lee, who had by that time already skipped town and was presumably living the life of Riley in Korea.
Since Law Times first reported on this matter on Aug. 25, police have arrested Cho and charged her with 75 counts including fraud and breach of trust. The disciplinary actions against Cho to date have all been interlocutory in nature and presumably further details and explanations will come out in the substantive discipline actions that are likely to follow. Regardless of what the outcome of any disciplinary proceedings brought against her may ultimately be, her treatment of the Centrium deposits has already resulted in relatively dire professional consequences for her. As of last week, she had just lost an interlocutory motion seeking to bar her from the practice of law and she had already lost a much-earlier motion preventing her from dealing with bank trust accounts.
Nevertheless, s. 81 of the Condominium Act has left the prospective purchasers of the Centrium units holding the bag. Cho has since declared bankruptcy and there’s presumably no prospect of recovery for any of the purchasers from the bankrupt’s estate. The law society may eventually discipline Cho, but anything that happens to her personally and professionally will be relatively cold comfort to the many local purchasers whose life savings were in those deposits. According to Brian Kwan, a well-known local solicitor with a busy practice near the ill-fated Centrium project, “many of the victims are from the local Chinese-Canadian and Korean-Canadian communities, and most of them can ill afford the loss of these deposits.”
There are lessons the real estate bar can take away from the mess. The trust requirements under s. 81 of the Condominium Act create a fiduciary relationship between the developer’s own lawyer and the slew of purchasers who are otherwise technically adverse in interest to the builder. In fact, this dual role creates an inherent conflict for solicitors: on the one hand, they have the usual duty of loyalty to the developer who retained them; but on the other hand, the lawyer also has a fiduciary duty to the purchasers as deposit trustee under s. 81. Where the two fiduciary obligations collide (as they presumably did when Lee reportedly instructed Cho to transfer the $15 million in accumulated deposits to him), then the statutorily imposed fiduciary obligations under s. 81 are paramount.
Another direct result of the Cho case may be a flight to legal quality by developers. While any solicitor can act as a deposit holder under s. 81, Cho’s actions in this case may have driven developers away from lesser-known lawyers for condominium projects. More sophisticated purchasers will now likely be more aware of the fragility of the protection actually offered by solicitors’ trust accounts and developers will probably seek out better-known solicitors merely for their reputational values in order to accommodate more discriminating buyers.
For more, see "Actions against Cho proliferate," "Lawyer under fire after $15M in condo deposits goes missing," and "Boosting public protection."
Jeffrey Lem is an editor-in-chief of Real Property Reports and a certified specialist in real estate law.