CITATION: 1839206 Ontario Ltd. v. Canadian Dairy Manufacturing Inc., 2016 ONSC 3602

DIVISIONAL COURT FILE NO.: 69/16

COURT FILE NO.: CV-14-10694-00CL

DATE: 20160531

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: 1839206 Ontario Ltd. and 1435501 Ontario Inc., Plaintiffs/Moving Parties

AND:

Canadian Dairy Manufacturing Inc. and CDM Real Estate Development Inc., Defendants/Responding Parties

BEFORE: Thorburn J.

COUNSEL: Benjamin Salsberg, for the Plaintiffs/Moving Parties

Charles Wagman, for the Defendants/Responding Parties

HEARD: In writing

ENDORSEMENT

Overview

[1] This litigation arose out of a failed attempt to construct and operate a dairy manufacturing facility in Toronto. The Respondent, Canadian Dairy Manufacturing (“CDM”), was to operate the main business. That operation was placed in receivership in March 2015.

[2] Eaton Chen’s family members were directors and officers of CDM. The Moving Parties claim Eaton Chen was also a director and officer of CDM. The Respondents dispute this.

[3] Eaton Chen became aware of a development opportunity involving a property in Port Perry. He incorporated the Respondent, CDM Real Estate Development Inc. (“CDMRE”), and through CDMRE acquired the property. Eaton Chen is the sole shareholder, director and officer of CDMRE.

[4] The Moving Parties are shareholders of CDM. They claim the Port Perry development site was a CDM corporate opportunity and that CDMRE misappropriated funds from CDM to purchase the property.

[5] On October 27, 2014, the Moving Parties brought a motion for a worldwide Mareva injunction and Certificate of Pending litigation.

[6] The motion was dismissed on the grounds that there was no strong prima facie case that the property in question was a corporate opportunity for CDM, that CDM funds had been used to acquire the property or that the Respondents’ assets would be placed beyond the reach of the court.

[7] On January 29, 2016, the Moving Parties brought a second motion for a Mareva injunction with a more narrow scope. The Moving Parties sought to freeze the Respondents’ Ontario properties and prevent any change of ownership or distribution of shares of CDMRE and a related company, Canadian Milk Marketing Inc. (“CMMI”).

[8] The second motion for a Mareva injunction was also dismissed.

[9] This is a request for leave to appeal the January 29, 2016 Order.

[10] For the reasons that follow, the motion for leave to appeal is refused.

Test for Leave to Appeal

[11] The test for leave to appeal is a strict one. Rule 62.02(4)(a) provides two bases upon which leave may be granted. In each case, both aspects of the two-part test must be met before leave may be granted.

[12] Under the first branch of the test, the moving party must establish that there is a conflicting decision of another judge and it is, in the opinion of the judge hearing the motion, “desirable that leave to appeal be granted.” A “conflicting decision” must be with respect to a matter of principle, not merely a situation in which a different result was reached in respect of particular facts: Comtrade Petroleum Inc. v. 490300 Ontario Ltd. (1992), 7 O.R. (3d) 542 (Div. Ct.).

[13] Under the second branch of the test set out in Rule 62.02(4)(b), the moving party must establish that there is reason to doubt the correctness of the order and the proposed appeal involves matters of such importance that leave to appeal should be granted. It is not necessary that the judge granting leave be satisfied that the decision in question was actually wrong – that aspect of the test is satisfied if the judge granting leave finds that the correctness of the order is open to “very serious debate”: Nazari v. OTIP/RAEO Insurance Co., [2003] O.J. No. 3442 (S.C.); Ash v. Lloyd’s Corp. (1992), 8 O.R. (3d) 282 (Gen. Div.).

[14] In addition, the moving party must demonstrate matters of importance that go beyond the interests of the parties and involve questions of general or public importance relevant to the development of the law and administration of justice: Rankin v. McLeod, Young, Weir Ltd. (1986), 57 O.R. (2d) 569 (H.C.); Greslik v. Ontario Legal Aid Plan (1988), 65 O.R. (2d) 110 (Div. Ct.).

Issues Raised

[15] The Moving Parties claim there is good reason to doubt the correctness of the January 29, 2016 Order and the proposed appeal involves matters of general importance such that leave to appeal should be granted.

[16] The Moving Parties claim there are a number of conflicting decisions regarding the fraud exception to the general rule that there should be no execution of judgment before judgment. Clarification of this point of law is a matter of general importance.

The Nature of the Claim

Background Facts

[17] Wilson Lam and Gerard Lee are principals of the Moving Parties’ companies.

[18] The Moving Parties claim that,

a. CDM and Maple Dairy Inc. were incorporated to purchase a property to construct a manufacturing plant on the property, and

b. $75,000 to $145,000 of the approximate $3.5 million purchase price was improperly taken by the Responding Parties from CDM funds.

[19] The Respondents dispute this.

The First Order Dismissing the Request for a Mareva Injunction

[20] In his endorsement of October 27, 2014, Penny J. dismissed the motion for a Mareva injunction,

on the basis that shareholders and directors of CDM could not be said to have an interest in land claimed by CDM… Lee and Lam, through their companies, which own CDM shares now seek leave to commence a derivative action by CDM against Eaton Chen claiming, among other things, that the opportunity to acquire the Port Perry property was a CDM corporate opportunity that has been misappropriated by Chen who, as a director of CDM owes fiduciary duties to CDM.

Chen told [Lam] that CDMRE would have the same shareholding structure as CDM, such that Lam’s company 183 would hold 18% of CDMRE. This is in dispute. Chen says Lam never put up any money and resigned as a director of CDMRE. No shares were ever promised or contemplated for Lam or for 183. In any event, Lam was aware and did not object to the acquisition of the Port Perry property by CDMRE at the time.

Lam’s argument… is that Lam’s consent to allow CDMRE, as opposed to CDM, to purchase the Property was premised on the promise that he would be a shareholder of CDMRE. The breach of that promise, he says, vitiated his consent, giving rise to a claim that the opportunity to acquire the property was diverted to CDMRE by Chen in breach of his fiduciary obligations to CDM.

I do not, at this stage, find Lam’s argument credible. He too was a director of CDM. If the Property was a corporate opportunity of CDM, he too owed fiduciary obligations with respect to it.

[21] He concluded that,

in any event, none of this establishes a direct interest in land. At this point, the evidence is so vague as to be meaningless on how the mere fact that the Property was for sale was a CDM corporate opportunity. If there was a corporate opportunity, it seems, on the evidence currently available, to have been, not in the particular Property in Port Perry itself, but in the idea of a residential development connected to the immigration and the hiring of employees at the CDM production facility. That would be claim in damages for the loss of whatever economic benefit the scheme would produce.

[22] In 2014, Penny J. was not satisfied that the money to purchase the Port Perry property came from CDM or the Moving Parties or that there was reliable evidence that assets could be removed from the jurisdiction or otherwise placed beyond the reach of the court.

The Second Order Dismissing the Motion for a Mareva Injunction

[23] In 2016, the Moving Parties brought a second motion for a Mareva Injunction on the grounds that there were several material changes that warranted the grant of a Mareva injunction:

a. A preliminary report of the forensic accountants Crowe-Soberman;

b. CDMRE remortgaged the Port Perry property, placing additional mortgages on the property in the amount of approximately $1.8 million;

c. CDMRE took that money and used it to buy a second Ontario property in the name of CMMI. The first mortgage in the first property is in default. The mortgage on the second property expired without renewal. The Moving Parties assert that Chen may bring in new investors into CMMI who may become bona fide purchasers for value without notice.

[24] The Crowe Soberman Report was commissioned by the Moving Parties, and the information contained in it was provided only by the Moving Parties. The authors of the report were not given access to the audited financial statements of CDM. In any event, the information contained in the report is said to be “preliminary”.

[25] In respect of the other two issues that dealt with the dissipation of assets, Penny J. further held that “the use of CDM funds is contentious and, in the scheme of things ($75,000) is almost de minimus.” Moreover,

the [Moving Parties] seem to have taken almost as much out of the CDM venture as they allege Mr. Chen did.

The best evidence that Mr. Chen does not seek to put assets beyond the reach of the court is that when he refinanced the Port Perry property, he invested, transparently I might add, in additional Ontario real estate.

I am unable to conclude that the use of mortgage funds on Port Perry to buy the Brockville property is either evidence of fraud or misappropriation or evidence of a genuine risk that Mr. Chen is trying to put his assets beyond the reach of the court. (Emphasis added.)

[26] Because he did not conclude that there was fraud or that the Responding Parties were trying to take their assets beyond the reach of the court, he dismissed the second motion for a Mareva injunction.

Analysis and Conclusion

[27] A Mareva injunction can be granted only where there is a strong prima facie case, meaning there is evidence of a real risk that assets will be removed from the jurisdiction or dissipated such that they will not be available by the time of trial.

[28] The Moving Parties claim the proposed appeal involves matters of general importance namely, the fraud exception to execution before judgment.

[29] I do not agree.

[30] There is no merit to the Moving Parties’ arguments on the fraud exception because there was no finding of fraud by the motions judge and no inference of fraud can be made out since Penny J. held that he was unable to conclude on the evidence before him that there was fraud. As such, the fraud exception is not made out and cannot form the basis of a strong prima facie case in favour of the Moving Parties.

[31] Secondly, the Moving Parties have not been able to demonstrate that there is a real risk that the Responding Parties are about to move assets out of the jurisdiction to avoid the possibility of a judgment or otherwise dissipate assets in a way that is distinct from their ordinary course of business so as to render the possibility of future tracing of the assets remote or impossible. (Aetna Financial Services Ltd, v. Feigelman, [1985] 1 S.C.R. 2, at para 29. Penny J. found there was no evidence of dissipation of assets given that the money allegedly taken from one Ontario property was spent on another property within the jurisdiction.

[32] Penny J. applied the correct test for a Mareva injunction, and he made findings of fact in respect of the allegations of fraud. There is no reason to doubt the correctness of Penny J.’s order, and the proposed appeal does not involve matters of such importance that leave to appeal should be granted.

[33] For these reasons, the motion for leave to appeal is denied.

[34] The Responding Parties seek substantial indemnity costs in the amount of $4,129.73 on the basis that the Moving Parties improperly reargued issues already decided by Penny J. in the first Mareva injunction and because their motion was based on a finding of fraud although no finding of fraud was made by Penny J.

[35] I have considered the factors set out in Boucher v. Public Accountants Council (Ontario) (2004), 71 O.R. (3d) 291 (C.A.), including the reasonable expectations of the parties, the material filed, the complexity of the matter and importance of this matter to the parties. Costs of $4,000 are reasonable given the material filed.

Thorburn J.

Date: May 31, 2016