COURT FILE NO.: CV-22-00681030-00CL DATE: 20230117 SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: Shanghai Lianyin Investment Co., Ltd., Plaintiff AND: Zheng Yao Lu aka Charles Lu, Lichun Guo aka Guo Li Chun, 2564454 Ontario Inc., United Assets Management Inc., Woodbine United Centre Inc. and Woodland Developments Inc., Defendants

BEFORE: Conway J.

COUNSEL: Lincoln Caylor, Nathan Shaheen and Shaan Tolani, for Shanghai Lianyin Investment Co. Ltd. John Birch and David Kelman, for Lichun Guo

HEARD: January 10, 2023

REASONS FOR DECISION

[1] There are two motions before me. The first is the plaintiff’s motion for an interim preservation order under Rule 45.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 with respect to two Ontario properties registered in the name of the defendant Lichun Guo. The second is Ms. Guo’s motion for security for costs.

Background

[2] The plaintiff is Shanghai Lianyin Investment Co., Ltd. (“SLIC”). It holds an arbitral award (the “Award”) against the defendant Charles Lu, Ms. Guo’s husband. In 2016, SLIC agreed to subscribe for shares in UCAR Inc., a company founded by Mr. Lu. In a supplemental agreement, Mr. Lu provided a guarantee with respect to SLIC’s investment in UCAR. After UCAR’s share price collapsed, SLIC called on Mr. Lu for payment. SLIC then proceeded to arbitrate its claim before the China International Economic and Trade Arbitration Commission (CIETAC). Mr. Lu participated in the arbitration. In October 2020, CIETAC made the Award against Mr. Lu personally for CAD$233 million. The Award is against Mr. Lu only, not Ms. Guo.

[3] In May 2022, SLIC brought the underlying action against Mr. Lu, Ms. Guo, and four corporations indirectly owned by Ms. Guo. According to the statement of claim, the purpose of the action is to obtain recognition of the Award as a judgment of this court pursuant to the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5 and to enforce that judgment against six properties in Ontario registered in the name of the “non-Lu defendants”. SLIC has now settled with the corporate defendants and the four properties owned by them are no longer in issue. Ms. Guo has defended the action. Mr. Lu is challenging service and has not defended the action.

[4] In the statement of claim, SLIC also seeks a declaration that the two properties in Ontario registered in the name of Ms. Guo at 68 Cachet Parkway, Markham (the “Markham Home”) and 18766 Highway 48, Mount Albert (the “Mount Albert Farm”) (collectively, the “Properties”) are held for Mr. Lu and that they form part of his assets in Ontario. SLIC seeks a further declaration that it is entitled to enforce the Award (as a judgment of this court) against the Properties on the basis that they are owned by Mr. Lu or held by Ms. Guo for his benefit, including under a resulting trust. SLIC’s position is that Mr. Lu contributed funds to the purchase of the Properties and that Ms. Guo holds the Properties on a purchase money resulting trust for him.

[5] In July 2022, Justice Osborne granted an interim, interim order under Rule 45.01 preserving the Properties until this motion for an interim preservation order could be heard. SLIC seeks a continuation of that order. Ms. Guo submits that this motion is a de novo hearing, that any findings on the earlier motion were made on a different evidentiary record, and that I am not bound by that ruling. I agree and approach this as a de novo hearing: see Canpages Inc. v. Quebecor Media Inc., 2008 ONSC 26660, at para. 3.

SLIC’s Motion for an Interim Preservation Order

[6] Rule 45.01(1) states that “[t]he court may make an interim order for the custody or preservation of any property in question in a proceeding or relevant to an issue in a proceeding”. The order is a discretionary one.

[7] The first issue is whether SLIC is moving under the appropriate Rule. Ms. Guo’s position is that Rule 45.01 is not the appropriate Rule in this case. She submits that if SLIC seeks to prevent the dissipation of assets before judgment, it should be moving for a Mareva injunction under Rule 40 and applying the stricter test required for a Mareva order. Alternatively, since real estate is in issue, SLIC can seek a certificate of pending litigation (CPL) under Rule 42.

[8] SLIC’s counsel acknowledged at the hearing that SLIC could not meet the test for a Mareva. As set out below, SLIC acknowledges that it is not claiming a legal interest in the Properties and cannot obtain a CPL.

[9] I agree that Rule 45.01 is not the appropriate Rule for several reasons. First, what SLIC is really seeking on this motion is an order to prevent Ms. Guo from dissipating her assets pending this court’s determination of whether she holds the Properties in trust for Mr. Lu. The case law supports the use of a Mareva injunction, not a preservation order, as the means of restraining defendants from dissipating their assets before judgment: Hadaro v. Patten, 2019 ONSC 4574, at para. 14; Campbell v. Campbell, 2018 ONSC 6336, at para. 64; Sunlodges Ltd. v. The United Republic of Tanzania, 2020 ONSC 8201. The higher test applicable to a Mareva order recognizes that execution before judgment constitutes a serious interference with the defendant’s property rights. That is precisely what SLIC wishes to do here. It should be required to meet the higher test to justify interference with Ms. Guo’s property rights prior to judgment.

[10] Second, the case law on Rule 45 motions makes it clear that despite the broad wording of the Rule, it is to be used for more limited purposes such as preserving evidence prior to trial or where the plaintiff asserts a legal right to the asset it is pursuing in its litigation: BMW Canada Inc. v. Autoport Limited, 2021 ONCA 42, at paras. 41, 43-45; Taribo Holdings Ltd. v. Storage Access Technologies Inc., [2002] O.J. No. 3886; Progressive Moulded Products Ltd. v. Great American Group, 2007 ONSC 12205; Meade v. Nelson Resources Ltd., 2005 ONSC 44818. It is in those circumstances that the court justifies the use of the lower test for a preservation order. The Court of Appeal has described interim preservation of property orders under Rule 45 as “a limited exception to the law’s deep-seated aversion to providing a plaintiff with execution before trial”: Sadie Moranis Realty Corporation v. 1667038 Ontario Inc., 2012 ONCA 475, at para. 17.

[11] In Sadie Moranis, [1] the court observed at para. 17, citing Robert Sharpe in Injunctions and Specific Performance, 4th ed., looseleaf (Toronto: Canada Law Book, 2012) (my emphasis added):

Clearly, pre-trial execution of any kind poses definite problems. Attachment of assets or interference with disposition of assets will often constitute a serious interference with the defendant’s affairs. That interference may be more readily justified where the plaintiff’s right is specifically related to the asset in question. However, where the plaintiff asserts a general claim and looks to the assets only as a means of satisfying a likely or possible monetary judgment against the defendant, interference with the defendant’s assets is more difficult to justify.

[12] In this proceeding, the interference with Ms. Guo’s assets is more difficult to justify. SLIC is not asserting any legal right to or interest in the Properties. For example, it is not claiming an ownership right, beneficial interest or contractual right. It does not seek specific performance or suggest that the Properties are unique. SLIC’s claim against Mr. Lu is for money. It seeks to have the Award recognized as a judgment against Mr. Lu and to collect on that judgment. It wishes to use the resulting trust doctrine to establish that the Properties are Mr. Lu’s assets and available to satisfy that judgment. Our courts have recognized the distinction between asserting a legal right to specific assets and looking to those assets as a means of satisfying a judgment: Sadie Moranis, at para. 21, citing Assante Financial Management Ltd. v. Dixon, 2004 ONSC 9759, at para. 28; Campbell, at para. 64. Rule 45 has been applied to the former, not to the latter.

[13] SLIC relies on the Court of Appeal’s statement in BMW that the only precondition in Rule 45.01 is that the property is “in question in a proceeding or relevant to an issue in a proceeding”. In BMW, the court was considering an issue of preserving evidence for trial and whether the Taribo test sets out all of the factors the court is to consider. It was not addressing the issue of whether Rule 45 can be used to restrain a defendant from dissipating assets prior to judgment. I do not read the court as suggesting that a plaintiff can use Rule 45 where it otherwise would be required to seek a Mareva injunction under Rule 40.

[14] Third, Rule 45.01 cannot be used in a case simply because the plaintiff is unable to meet the requirements for a Mareva injunction or a CPL under the other Rules. That would circumvent the scheme of the Rules of Civil Procedure and undermine the case law that has developed under each specific Rule.

[15] Finally, in my view, it would be problematic for Rule 45.01 to be invoked solely on the basis that a plaintiff pleads that property owned by one defendant is held on a resulting trust for another defendant. I agree with Ms. Guo’s submission that it would be too easy for a plaintiff to raise the ownership issue as between the defendants, seek to restrain the party allegedly holding the property in trust from disposing of it through a preservation order, and avoid the need to meet the test for non-dissipation of assets required for a Mareva injunction. That would undermine the limited exception recognized at law to restrain a defendant from dealing with its assets prior to judgment.

[16] Rule 45.01 is not the appropriate Rule. I decline to exercise my discretion to apply it in this case.

[17] SLIC’s motion for a preservation order is dismissed.

[18] Each side claimed partial indemnity costs for the two preservation motions of approximately $100,000 in total. I consider that a reasonable amount and within the reasonable expectations of SLIC. I order that SLIC pay $100,000 in costs to Ms. Guo on a partial indemnity basis, all inclusive.

Ms. Guo’s Motion for Security for Costs

[19] Rule 56.01(1) provides that, on a motion by the defendant in a proceeding, the court may make such order for security for costs as is just where it appears that,

(a) the plaintiff or applicant is ordinarily resident outside Ontario; or […] (d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent.

[20] The initial onus is on the defendant to show that the matter comes within one of the circumstances enumerated in Rule 56.01: Friction Co. Ltd. v. Novalex Inc., 2021 ONSC 7714, at para. 25. There is no dispute in this case that SLIC is not ordinarily resident in Ontario and that it does not have sufficient assets in Ontario to satisfy a costs award.

[21] Once the defendant meets that onus, the court has the discretion to grant or refuse an order for security, and to determine the quantum: Novalex, at para. 25. The approach the court should take on a security for costs motion was described in Novalex, at paras. 26-27:

It is well recognized that when deciding a motion for security for costs, “judges are obliged to first consider the specific provisions of the Rules governing those motions and then effectively to take a step back and consider the justness of the order sought in all the circumstances of the case, with the interests of justice at the forefront”, see Yaiguaje v. Chevron Corp., 2017 ONCA 827, para. 22. Moreover the Rules explicitly provide that an order for security for costs should only be made where the justness of the case demands it. “Courts must be vigilant to ensure an order that is designed to be protective in nature is not used as a litigation tactic to prevent a case from being heard on its merits, even in circumstances where the other provisions of Rules 56 and 61 have been met.” Yaiguaje, at para. 23.

Factors relevant to the determination of the justness of a security for costs order include the merits of the case, delay in bringing the motion, and the public importance of the litigation, Yaiguaje, at para. 24. This list of considerations is not intended to be static or rigid; rather, the judge must take a holistic approach, examine all of the circumstances of the case and be guided by the overriding interests of justice to determine whether it is just that the order be made.

[22] The plaintiff will not be required to post security where its claim has a “good chance of success” on the merits: Active Security v. Rogers Communications, 2019 ONSC 5074, at para. 4. That term has been defined as higher than the requirement of establishing a genuine issue for trial but not at the level of proof on a balance of probabilities: Platinum Infrastructure Inc. v. Powerline Plus Ltd., 2018 ONSC 6891, at para. 25. The court needs only to be satisfied that at least some elements of the claim appear to be based on a real grievance for which there may well be a legal remedy: Kymbo International Inc. v. Teskey, 2004 ONSC 33023, at para. 10.

[23] SLIC argues that Ms. Guo should not receive security for costs because Mr. Lu himself would not be entitled to security for costs in an action seeking to enforce an arbitral award against him: see Novalex, at paras. 30-31. SLIC argues that the court can presume that Mr. Lu is paying Ms. Guo’s legal fees based on the evidence that she gave in her bankruptcy proceeding in 2020. In response, Ms. Guo’s evidence in her answers to undertakings is that her legal fees are not being funded by Mr. Lu or his companies or from his business activities. Given the conflicting evidence before me, I do not place much weight on this factor.

[24] SLIC argues that Ms. Guo has provided limited evidence on this motion as to the source of funds used to purchase the Properties. SLIC also takes issue with the number of refusals made by her counsel on cross-examination. In response, Ms. Guo’s counsel argues that she provided affidavit evidence, submitted to cross-examination, made proper refusals (as the questions were overly broad or irrelevant), and answered undertakings. I do not place much weight on this factor.

[25] With respect to the merits of the case, there are complex factual and legal issues to be tried. Given the issues at play, I cannot say at this stage of the proceeding that SLIC meets the “good chance of success” threshold. Each of the Properties was purchased prior to SLIC’s transaction with Mr. Lu in 2016. Ms. Guo’s evidence is that she purchased the Mount Albert Farm in 2015 and paid the $1.68 million purchase price with her own funds. She testified that she purchased the Markham Home in 2009 for $2.75 million in 2009 with a combination of her own funds and gifts from her husband. She used distributions from her family trust to make the mortgage payments to 2019 and discharged the mortgage using funds from Haode Investment Limited, of which she is the sole shareholder.

[26] SLIC submits that Ms. Guo’s evidence is refuted by her own evidence in her bankruptcy proceeding in 2020, before the ownership of the Properties was in issue. Her evidence was that her husband was the driver and directing mind behind all business activities, that she placed her faith in him to manage the family business, and that she devoted her time to raising her family. Ms. Guo argues that this evidence is from 2020 and does not relate to the periods when the Properties were purchased. She says the bankruptcy proceeding involved different corporations. SLIC argues that Mr. Lu deliberately set up this complex international structure to protect his assets from creditors and that he and Ms. Guo should be treated as a single financial unit.

[27] At this stage, the evidence is conflicting. This court will have to assess credibility and weigh the evidence to determine whether Mr. Lu was indeed the ultimate source of the funds used to purchase the Properties and whether Ms. Guo holds the Properties in trust for him.

[28] With respect to the law, SLIC’s position is that the Award will be recognized as a judgment of this court against Mr. Lu. SLIC argues that in Ontario, the presumption of advancement between spouses has been abolished. Since Mr. Lu was the ultimate source of funds for the purchase of the Properties, Ms. Guo holds them on a resulting trust for him. SLIC says that as a creditor of Mr. Lu, it will be able to enforce its judgment against Mr. Lu’s interest in the Properties.

[29] Ms. Guo argues that the law does not permit a creditor to enforce a judgment against property held by one spouse on a resulting trust for the other where the spouses are still married and there has been no fraudulent conveyance. It relies on the case of Vandokkumberg v. H. Meyer Construction Ltd., 2007 BCSC 1341 in which the court dismissed the claim of a judgment creditor that sought to enforce its judgment against property legally owned by the spouse of the judgment debtor. The court held that in the absence of a fraudulent conveyance, it would be against public policy for a creditor to step into the shoes of a judgment debtor where no triggering event under family law legislation had occurred.

[30] SLIC submits that Vandokkumberg is an outdated case from another province and is distinguishable because the asset in question was a matrimonial home, which is not the case here. SLIC relies on Moody v. Ashton, 2004 SKQB 488, in which a creditor was permitted to have recourse to property held by a spouse of the judgment debtor on a resulting trust. Ms. Guo submits that Moody is distinguishable because it involved a fraudulent conveyance, which SLIC is not alleging in this case.

[31] SLIC relies on the commentary in Donovan W.M. Waters, Waters’ Law of Trusts in Canada, 5th Ed. (Toronto: Thomson Reuters, 2021) at 10.II (my emphasis added): “It is also possible that a creditor of a spouse will be able to use the doctrine of resulting trusts to show that this debtor spouse has beneficial interest in assets held by the other spouse, thus allowing the creditor to have access to that interest for the realization of his or her claim.” SLIC also relies on the case of Lad v. Marcos, 2020 ONSC 6215, at para. 74 in which the judge on a pleadings motion concluded that the issue of whether a creditor could enforce against property held by a spouse in trust for the judgment debtor was not yet determined in Ontario. SLIC’s counsel acknowledges that there is no case in Ontario in which a creditor has been able to enforce a judgment against property on this basis.

[32] In my view, it is not settled or clear as to whether this relief is available to SLIC as a matter of law in Ontario.

[33] Looking at the case holistically, and considering all the circumstances, I am prepared to award security for costs in favour of Ms. Guo and consider it just to do so.

[34] In terms of quantum, Ms. Guo seeks $371,502 on partial indemnity scale for her estimated costs up to the conclusion of oral examinations for discovery. SLIC submits that the quantum should be $115,000.

[35] I am deducting $100,000 from Ms. Guo’s bill of costs with respect to the preservation motions as I have now made a cost award in her favour. I am also making a deduction to reflect the settlement that SLIC says it has reached with the four corporate defendants, which will simplify the action going forward.

[36] I am fixing security for costs to the end of discovery at $225,000 on a partial indemnity basis. I consider this reasonable in the context of this litigation and the significant time and expense that has already been incurred to date.

[37] Counsel agreed that a reasonable costs award for Ms. Guo’s security for costs motion is $15,000. I order SLIC to pay the sum of $15,000, all inclusive, to Ms. Guo in costs for this motion.

Summary of Decision

[38] SLIC’s motion for a preservation order is dismissed. SLIC shall pay Ms. Guo costs of the two preservation motions in the amount of $100,000, all inclusive, on a partial indemnity basis.

[39] Ms. Guo’s motion for security for costs is granted. SLIC shall pay into court the amount of $225,000 in security for costs for this proceeding up to the completion of oral discoveries. SLIC shall further pay Ms. Guo costs of the security for costs motion in the amount of $15,000, all inclusive, on a partial indemnity basis.

Conway J.

Date: January 17, 2023

[1] In Sadie Moranis, the court was dealing with the applicable law for preservation of a specific fund under Rule 45.02. The courts have recognized that there is overlap between the various Rule 45 provisions: Sadie Moranis, at para. 17; BMW, at para. 44. The general principles articulated in Sadie Moranis are applicable to preservation orders under Rule 45.01.