Special Compensation Fund claims relating to Martin Wirick
The Law Society's Special Compensation Fund Committee has now reviewed almost one-third of the dollar value of the claims arising from the actions of former Vancouver lawyer Martin Keith Wirick. The Committee has made a decision on most of the claims that have come before it and adjourned certain others pending receipt of more information.
As reported in the September-October, 2002 Benchers' Bulletin, Mr. Wirick wrote to the Law Society on May 23, 2002, resigning his membership and admitting to breaches of undertakings in several real estate transactions. Those breaches had resulted in money remaining unpaid to various parties and financial institutions. The Law Society immediately applied for appointment of a custodian of Mr. Wirick's practice by the BC Supreme Court and began a full forensic audit of his files. Mr. Wirick declared bankruptcy in July, 2002, listing contingent liabilities of about $52 million.
A Law Society discipline hearing panel found Mr. Wirick guilty of professional misconduct for breaching his undertaking to discharge mortgages and ordered that he be disbarred on December 16, 2002: see Discipline Case Digest 03/05.
Mr. Wirick's handling of trust funds in these transactions has led to numerous claims against the Special Compensation Fund.
The Law Society's investigation
The Law Society's audit is focusing on approximately 870 of the 3,700 files that the Law Society's auditors found in Mr. Wirick's office - those relating to his client Tarsem Singh Gill, a Vancouver-based property developer, to Mr. Gill's companies and to Mr. Gill's nominees. Mr. Gill was petitioned into bankruptcy in June, 2002. In addition to its audit of Mr. Wirick's records, the Law Society recently obtained a BC Supreme Court order permitting its auditors to review records held by Mr. Gill's trustee in bankruptcy.
The Law Society's staff auditors are being assisted in the Wirick investigation by forensic auditors from KPMG and Mackay and Co. Also involved in the case are Law Society staff investigators (who before joining the Society were senior members of the RCMP) and staff lawyers and paralegals who are working on the investigation and preparing claims for presentation to the Special Compensation Fund Committee.
In August, 2002, the lead auditor on the file estimated there were 22,000 line entries recorded in approximately 1,082 pages to be reviewed. The accounting documents, such as client ledger cards, cancelled cheques, cheque stubs, bank deposit books, bank reconciliations and bank statements, fill 64 large binders. Some of the transactions are very complex and, in one case, the forensic auditors traced the proceeds of a single conveyance to more than 40 other transactions.
Mr. Wirick's breaches of undertaking and misappropriations or wrongful conversion
In the claims reviewed by the Special Compensation Fund Committee up to early July, 2003, the typical scenario is that Mr. Wirick's client, Tarsem Singh Gill, either personally or through a company or nominee, purchased property and resold it. In some cases Mr. Gill redeveloped or contracted to redevelop the property.
The purchase and redevelopment were sometimes financed by a construction mortgage. Mr. Wirick received the sale proceeds from solicitors or notaries acting for the purchasers and mortgage lenders. Instead of paying off the prior encumbrances, as he undertook to do, Mr. Wirick misdirected the down payment and mortgage funds for the benefit of Mr. Gill, such as to a Gill nominee or a Gill company. In some cases, the money was used to make payments on mortgages that should have been discharged on other properties - thereby ensuring the scheme went undetected. Because mortgage lenders frequently take several months to issue discharge certificates, the new purchasers and their mortgagees did not know that the prior mortgages had not been discharged.
In the Special Compensation Fund cases considered so far, Mr. Wirick frequently took fees from the money that was subject to his undertaking, but there is no evidence that he otherwise profited personally from his misappropriations or wrongful conversion of funds.
Overlaps in the claims considered
The Law Society has encouraged any person or financial institution suffering a loss as a result of Mr. Wirick's actions to file claims and to provide whatever information they can to assist the forensic audit. This has resulted in a great many overlapping claims, but the Law Society believes it is necessary for the auditors to have complete information. Because of overlapping claims, it is impossible to gauge the potential aggregate dollar value of valid claims until the audit is completed and the claims are analyzed by Law Society staff and the Special Compensation Fund Committee.
For example, in the first of the Special Compensation Fund decisions relating to Mr. Wirick - reported in the January-February, 2003 Benchers' Bulletin as "The East Vancouver properties" - the Committee considered 17 claims. Those 17 claims related to 15 separate mortgages involving two adjoining properties that had been subdivided into three separate properties. The total amount of those 17 claims was $5.5 million. The Committee, however, determined that it needed to pay out only $3.5 million on 11 of the 15 mortgages in order to put the parties in the same position they would have been in had Mr. Wirick honoured his undertakings.
As of August 1, 2003, the Law Society had received 521 claims totalling $73.4 million. The Special Compensation Fund Committee had considered 71 of these claims, totalling $23 million. Because of overlapping claims, however, the total payments approved by the Committee on those claims totalled $12.3 million. Summaries of these decisions have been or will be reported in the Benchers' Bulletin. It is not possible at this stage to determine whether this ratio of overlapping claims and dollar values will continue or will increase or decrease.
These claims can be very time-consuming for the Special Compensation Fund Committee. In a typical case, the Committee deals with all claims relating to an individual property at the same time. Often there are a number of claims relating to each property and between 150 and 700 pages of documentation, including details of the forensic audit, Land Title Office documents and financial documents, for the Committee to consider.
As noted, almost one-third of the monetary value of all claims received to date have either been decided or considered in a preliminary way and are awaiting further information for disposition. Many of the remaining claims are from owners of individual suites in condominium developments. In one of these condominium cases, there are 100 claims relating to a single development. The Special Compensation Fund Committee may decide it is most expeditious to consider all claims relating to that development at the same time.
In the claims approved so far, the Committee has generally authorized payment of the amount of interest stipulated in the mortgage to May 24, 2002 and the lesser of the mortgage rate or 6% thereafter to the date of the Committee's decision. Most financial institutions have provided the Law Society with information to assist in the forensic audit and are awaiting the outcome of the Special Compensation Fund process, rather than commencing foreclosure actions against innocent purchasers. Unfortunately, there are a few mortgage lenders that have not provided the Law Society with financial information and have started foreclosure actions - an approach that slows down the Special Compensation Fund process. When a mortgage lender has commenced foreclosure action against an innocent owner of a residential property who is in danger of losing the residence, the Law Society has provided counsel to represent that owner's interests.
Recoveries from the Wirick and Gill bankruptcy estates
To receive payment from the Special Compensation Fund, claimants must agree to a number of conditions, which generally include providing to the Law Society an assignment of any claims they may have against Mr. Wirick, Mr. Gill, Mr. Gill's nominees or Mr. Gill's companies. The Law Society will pursue these claims and expects to be able to trace some trust claims to money received by Mr. Gill's trustee in bankruptcy. Recoveries from Mr. Wirick's bankruptcy estate are uncertain as he appears to have few assets.
Paying for the Wirick claims
As noted by former Law Society President Richard Gibbs, QC in the September-October, 2002 Benchers' Bulletin, in the 15 years prior to the discovery of Mr. Wirick's misappropriations, the Special Compensation Fund paid out an average of $348,000 a year on claims for compensation.
In 2002, when the Law Society learned of the Wirick misappropriations, the Special Compensation Fund was insured for $17.5 million. Under the terms of the insurance policy, the Law Society is responsible for the first $2.5 million of all claims. The Fund, in 2002, had reserves of $8.5 million to cover the $2.5 million deductible and any claims over the insurance limits. All claims relating to Mr. Wirick's misappropriations fall within the 2002 insurance policy because evidence of the misappropriations was discovered in that year.
In recognition of the need to maintain public confidence, the Benchers in September, 2002 rescinded Law Society Rule 3-33 to remove the $17.5 million cap on payments that the Special Compensation Fund Committee can authorize in a calendar year. This step gave the Committee discretion to approve claims without the restriction of a pre-determined cap. It was yet another affirmation of the commitment of BC lawyers to public protection.
In 2003, the Law Society increased the Special Compensation Fund assessment paid by each practising lawyer by $350 - from $250 to $600. This increase was needed to cover audit and investigation costs, to pay claims and to increase the Special Compensation Fund reserves. Based on current information, this assessment is not expected to increase in 2004 and may possibly decrease by as much as $200.
At present, all claims approved by the Special Compensation Fund Committee have been paid without the need for additional financing. If the total of approved claims goes beyond the Fund's reserves and insurance as a result of the Wirick-related claims, the Benchers anticipate borrowing money to pay the claims. This will allow the Law Society to finance claims over time, rather than imposing a large assessment on BC lawyers.
In addition to providing financial compensation to those who have suffered loss as a result of misappropriation or wrongful conversion by Mr. Wirick, the Law Society has worked on conveyancing reforms to ensure greater public protection through enhanced transparency over mortgage discharges.
New Law Society Rules now require a lawyer to report to the Law Society the failure of a mortgagee to provide a registrable discharge of mortgage within 60 days of a transaction that closes March 1, 2003 or later. The new rules, recommended by the Law Society Conveyancing Practices Task Force, also oblige a lawyer to report to the Law Society the failure of another lawyer or a notary to provide satisfactory evidence that he or she has filed a registrable discharge of mortgage as a pending application to the Land Title Office within that 60-day period.
The Law Society is collecting this information to learn more about the business processes of financial institutions, whether there are certain institutions unable to discharge mortgages within a given timeframe and whether there are situations that require Law Society assistance or intervention.
The Conveyancing Practices Task Force is also encouraging lawyers to use the newly revised CBA standard form undertakings in real estate conveyances. These undertakings now include transparency provisions respecting mortgage discharges. Specifically, the new undertakings require a vendor's lawyer to provide the purchaser's lawyer within five business days of completion copies of specific documents that demonstrate that the vendor's lawyer has made payments to existing chargeholders.
For more information on the reporting requirements and the CBA undertakings, see the May-June, 2003 Benchers' Bulletin.
In the near future, BC lawyers will also see a revised form of trust accounting report to replace the current Form 47 accountant's report. Mr. Wirick's actions emphasized the need for the Law Society to improve the regulation of trust accounts. As a result of consultation with both lawyers and accountants, the Society is developing a new trust accounting form that will require lawyers to provide more detailed information about their practices. The focus of the new form is risk assessment, along with cost effectiveness for both the Law Society and lawyers.
Funding future misappropriation claims
The financial implications of Mr. Wirick's actions have led the Benchers to reflect on whether there are ways to compensate the public for losses caused by lawyer misappropriation other than through a Special Compensation Fund.
The Benchers are now considering the potential for coverage through an insurance vehicle, rather than a discretionary fund. The Benchers have asked Law Society staff to investigate the feasibility of innocent insured coverage as part of the compulsory professional liability policy, which might be funded through a fee on trust accounts opened for clients. The work on this issue is at a preliminary stage and will be presented to the Benchers at a later date and reported to the profession in the Benchers' Bulletin.
The Law Society's duty, pursuant to section 3 of the Legal Profession Act, is "to uphold the public interest in the administration of justice." Compensating Mr. Wirick's victims and ensuring that lawyers carry out their duties honestly and ethically is a demonstration of the profession's commitment to that duty.
The Special Compensation Fund ... an overview
The Law Society has maintained a Special Compensation Fund since 1949, funded entirely through annual assessments paid by all practising lawyers in BC, to compensate people who lose money through the misappropriation or wrongful conversion of funds by a lawyer acting in his or her capacity as a lawyer. The Fund is one way BC lawyers demonstrate their collective commitment to the public and illustrates why, despite actions such as those of Mr. Wirick, members of the public can have confidence in the legal profession.
Claims to the Special Compensation Fund are governed by s. 31 of the Legal Profession Act and by Part 3, Division 5 of the Law Society Rules. All claims are first reviewed by Law Society staff who verify their accuracy. A staff lawyer then presents the claims to the Special Compensation Fund Committee (chaired in 2003 by Law Society Second Vice-President Peter Keighley, QC), which determines whether the claim should be paid. Payment from the Fund is discretionary.