Fraudster's house 'sale' ends up costing bank

Bob Aaron in Legal

The fallout from mortgage fraud cases in recent years continues to occupy the attention of lawyers, judges and the innocent parties involved.

Back in 2006, Paul Reviczky rented out a house he owned on Sheppard Ave. W. to a person who turned out to be a fraudster. Using a forged power of attorney in favour of Reviczky's non-existent grandson, the bogus tenant listed the property for sale on the Multiple Listing Service.

The house was eventually sold to Pegman Meleknia without the knowledge of the true owner, and the "tenant" disappeared with the sale proceeds.

Real estate lawyer Satwant Singh Khosla had acted for Meleknia, the innocent purchaser. HSBC Bank Canada financed the transaction by giving Meleknia a first mortgage that was title-insured by Stewart Title Guaranty Company.

On closing, HSBC advanced the mortgage money to Khosla, who deposited it into his trust account at the Royal Bank of Canada. Khosla then drew a certified cheque in favour of Paul Reviczky for $429,861.06, representing the balance of the purchase price.

The cheque was certified by RBC and handed over to the fraudster on closing. He forged the signature of Paul Reviczky on the back of the cheque, and deposited it into an account at the Korea Exchange Bank of Canada (KEBOC) in the name of Aaron Paul Reviczky, the fictitious grandson. He then disappeared with the money.

It took two separate court hearings last year for Reviczky to get clear title restored to his own name. Last December, a court ruled that the HSBC mortgage, which financed Meleknia's purchase, was invalid because the bank failed to scrutinize the bogus power of attorney. Following that ruling, Stewart Title paid off and discharged the HSBC loan. At the same time, it also reimbursed Meleknia for his losses in purchasing a house that the seller didn't own.

To my surprise, the story did not end with that ruling. Another court case was waiting in the wings.

At the conclusion of last year's litigation, Stewart Title was out-of-pocket all of the money it had paid to HSBC and Meleknia.

Khosla, representing Stewart Title's interest in recovering the money, sued the Korean bank to recover its losses. In the lawsuit, Khosla alleged that by clearing the cheque on the basis of a forged and unauthorized endorsement, KEBOC was liable for damages of $429,481.26 for conversion – in other words, wrongfully taking the money.

KEBOC denied that improper conversion of the funds had taken place. Instead, it pointed the finger at Khosla, the lawyer who wrote the cheque in the first place.

Last May, Khosla applied to the Superior Court for what is known as a summary judgment on its claim against the bank, without having to go to trial.

Khosla argued that the act of conversion is one of "strict liability," which means that the bank would be responsible for cashing the cheque with the forged endorsement, no matter what actions it took or how careful it was.

Earlier this month in Toronto, Justice Frances Kiteley released her decision and agreed with Khosla. KEBOC was held responsible for conversion and was ordered to pay Khosla $429,481.26 plus interest since May, 2006, and costs of $6,000.

Those funds will be paid over to Stewart Title, which had reimbursed HSBC for its losses due to the fraudulent sale of the property and the invalid mortgage from the innocent buyer.

This means that the big loser in the case is not Reviczky, Meleknia, Khosla, HSBC or Stewart Title, but instead the bank which cashed the lawyer's trust cheque on the basis of a forged endorsement.

Since the fraudulent sale of the Reviczky property, the Ontario government has made it much more difficult to use a power of attorney in real estate transactions. Hopefully, in future, the occurrence of this type of fraud will be greatly reduced.

Bob Aaron is a sole practitioner at the law firm of Aaron & Aaron in Toronto.  Bob specializes in the areas of real estate, corporate and commercial law, estates and wills and landlord/tenant law. His Title Page column appears Saturdays in The Toronto Star and weekly on Move Smartly.  E-mail

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