COURT FILE AND PARTIES

COURT FILE NO.: CV-13-10382-00CL
DATE: 20150715

SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST

RE: Chunxiang Yan and Zhenhua Wang, Plaintiffs

AND:

Xi Chen aka Quixi Chen aka Jessica Chen aka Jessi Chen aka Xi Chan, Chi Leung Szeto aka Chileung Szeto aka Louis Szeto, Jim Jia aka Jian Jun Jia, Jinhua Chen, Hongmei Zhao, Mixculture Capital Management Group Inc., Mixculture Tourism & Technology Co., Ltd., China Canada Business Times Ltd., 2380523 Ontario Inc., American Visiontech Co. Ltd. and Max Carrier Limited Defendants/Moving Parties

BEFORE: L. A Pattillo J.

COUNSEL: Christopher P. Goldson, for the Plaintiffs

P. James Zibarras and D. Meirovici, for the Defendants/Moving Parties

HEARD: June 25, 2015

ENDORSEMENT

Introduction

[1] On December 20, 2013, D.M. Brown J. (as he then was) issued a Mareva injunction restraining the defendants, including Xi Chen aka Quixi Chen aka Jessica Chen aka Jessi Chen aka Xi Chan (“Chen”), Chi Leung Szeto aka Chileung Szeto aka Louis Szeto (“Szeto”) from, among other things, dealing with any of their assets, wherever situate (the “Mareva Order”).

[2] Paragraph 5 of the Mareva Order provides that the bank account of the plaintiff Chunxiang Yan (“Yan”) at the Thornhill branch of the Korea Exchange Bank of Canada (the “Account”) is frozen and no assets or monies were to be removed from the account pending further order of the court.

[3] Yan and her husband, the plaintiff Zhenhua Wang (“Wang”) move for an order varying paragraph 5 of the Mareva Order to, among other things, unfreeze the Account at the Korea Exchange Bank to release $1.5 million to enable the plaintiffs to pay their legal costs, both incurred and to be incurred. The defendants oppose the plaintiffs’ motion on the grounds that the plaintiffs have failed to meet the test for access to funds frozen under a Mareva injunction.

[4] The defendants also move for an order to vary the Mareva Order to release $534,000 to them for legal fees. Not surprisingly, the plaintiffs oppose the defendants’ motion also on the ground that they have failed to meet the required test.

[5] For the reasons that follow, I allow both motions in part, subject to certain conditions. Most importantly, it is imperative that the parties stop engaging in collateral legal actions against each other and proceed to have the issues in the action determined as soon as possible.

Background

[6] The plaintiffs are foreign nationals and citizens of China (natural) and the Dominican Republic (2012). They have been detained in custody by the Canada Border Services Agency since March 7 2014, when they were arrested on allegations they had entered Canada using false identities and were wanted in China for fraud.

[7] The defendants Chen and Szeto are also Chinese citizens. They are married and have two young children. They moved to Canada in 2010 and have lived here since then.

[8] By way of overview, Yan and Wang allege that during 2012 and 2013, they transferred about $30 million to Chen and Szeto for investment in various companies, including the corporate defendants and some properties. A dispute arose between the couples in November 2013. Yan and Wang allege that Chen and Szeto defrauded them of $11 million.

[9] In turn, Yan and Wang allege that the plaintiffs orchestrated a massive Ponzi scheme involving the promoting and selling of shares in various companies. Based on misrepresentations by the plaintiffs, they transferred $7.5 million to the plaintiffs for the purchase of shares and other investments. In total the plaintiffs obtained $300 million from 60,000 victims. When in mid-2013, the defendants discovered that the plaintiffs had perpetuated a scam, they confronted them. The plaintiffs offered to help them get their investment back if they would in turn help them immigrate to Canada. Although the plaintiffs returned some of their investment, in November 2013 the relationship broke down between them and the defendants reported the plaintiffs to the police.

[10] The plaintiffs respond that Chen and Szeto’s allegations against them are “false and defamatory” and are perpetrated on them in order to prevent them from recovering the millions of dollars that they have misappropriated from them.

[11] The initial Mareva Order of December 20, 2013 was obtained on short notice but the defendants were represented by counsel. The proceeding was adjourned on terms to January 21, 2014 and then January 31, 2014.

[12] On January 21, 2014, A. Farber & Partners Inc. was appointed monitor of the defendants Mixculture Capital Management Group Inc. (“Mixculture Capital”) and China Canada Business Times Ltd. (“CCBT”).

[13] On January 31, 2014, the defendants, who were again represented by counsel, consented to the Mareva Order continuing to trial. The defendants also abandoned their counter motion against the plaintiffs for a Mareva Order.

[14] The defendants subsequently brought a motion to set aside the Mareva Order, this time acting on their own behalf. Their motion was heard by D.M. Brown J. on March 13, 2014 and dismissed on May 22, 2014 and the Mareva Order, as extended by the consent order of January 31, 2014, was continued until trial against Chen and Szeto, among others.

[15] The evidence filed by both the plaintiffs and the defendants in the Mareva proceedings was canvassed in some detail by D.M. Brown J. in his lengthy reasons for decision continuing the Mareva Order to trial (2014 ONSC 3111).

[16] In paragraph 88 of his May 22, 2014 reasons, Brown J. notes that serious credibility issues characterize the dispute between Yan and Wang on the one hand and Chen and Szeto on the other.

[17] In addition to the Mareva injunction action, the dispute between the plaintiffs and the defendants has given rise to multiple criminal, quasi criminal and civil proceedings. In particular:

a) Action CV-13-10382-00CL (this action) commenced by the plaintiffs by notice of action on December 20, 2013, statement of claim delivered March 18, 2014.

b) Action CV-14-502179 commenced by the plaintiffs by statement of claim dated April 14, 2014 alleging credit card misappropriation and conversion of funds. Although the action was administratively dismissed on December 8, 2014, that order was set aside by order dated December 16, 2014.

c) On June 24, 2014, the plaintiffs commenced a private criminal prosecution against Chen and Szeto alleging the commission of 17 criminal charges.

d) Action CV-14-510635 commenced by the plaintiffs by statement of claim dated August 20, 2014 claiming damages for alleged fraud in respect of immigration services

e) Action CV-14-491920 commenced by the plaintiffs by statement of claim dated October 31, 2014 and relating to purchase of a property in Tweed, Ontario.

f) Action CV-15-529015 commenced by Chen and Szeto by notice of action dated May 26, 2015, statement of claim delivered June 24, 2015 claiming, among other things, damages of $10 million for fraud, breach of contract, fraudulent misrepresentation, negligent misrepresentation, unjust enrichment, breach of trust, breach of fiduciary duty, conversion, conspiracy, abuse of process, malicious prosecution and defamation.

[18] The parties have already received substantial monies from the frozen funds. The Mareva Order provided that the defendants Chen and Szeto receive, among other amounts, $150,000 for legal fees. On January 9, 2015, Penny J. ordered that $50,000 be released from the frozen funds to pay legal fees and the costs of Chen and Szeto to return to Canada to be cross-examined. On April 29, 2015, McEwen J. ordered that $75,000 be released from the frozen funds to pay the defendants legal costs for the motion before me.

[19] Chen and Szeto seek the release of a further $534,000, made up of $250,000 on account of the civil proceedings; $175,000 in respect of the criminal proceedings initiated by the plaintiffs and $109,000 to pay an outstanding cost award to the plaintiffs.

[20] The plaintiffs, on the other hand, received $500,000 from the Account which was released pursuant to the order of Hainey J. dated August 20, 2014, which was unopposed. The plaintiffs have further stated that they have exhausted the monies received from the sale of their residence in Ontario.

[21] Initially the plaintiffs sought $900,000 to pay legal fees. Before me the amount was increased to $1.5 million based on the following legal fees incurred or to be paid by retainer: their immigration lawyer ($340,000 - $140,000 owed and $200,000 as a retainer); a retainer to their solicitor to assist immigration counsel ($350,000); a criminal lawyer in Hong Kong (approximately $100,000); a retainer for a lawyer to commence an action against the Canadian Boarder Services Agency ($250,000); payment of fees owing to their prior counsel in this action ($85,000) and a retainer to their current counsel ($300,000). It is proposed that the monies be paid to the plaintiffs’ solicitor, in trust, to only be paid for legal fees.

Discussion

[22] The test to be applied in varying a Mareva injunction to permit frozen funds to be used for living and legal expenses is set out in Canadian Imperial Bank of Commerce v. Credit Valley Institute of Business & Technology, 2003 12916 (ON SC), [2003] O.J. No. 40 (SCJ) and adopted by the Court of Appeal in Waxman v. Waxman, 2007 ONCA 326 (C.A.). The test to be applied, as summarized by Newbould J. in Royal Bank v. Welton, [2009] O.J. No. 3675 (SCJ) at para. 22 is as follows:

i. Has the defendant established on the evidence that he has no other assets available to pay his expenses other than those frozen by the injunction?

ii. If the answer to i is yes, has the defendant established on the evidence that there are assets caught by the injunction that are from a source other than from the plaintiff?

iii. The defendant is entitled to use assets not belonging to the plaintiff to pay reasonable living and legal costs. Such assets must be exhausted before the plaintiff is entitled to look to the plaintiff’s assets.

iv. If the defendant has met the above three tests and still requires funding for legitimate living fees and/or legal fees, the court must balance the competing interests of the plaintiff in not permitting the defendant to use the plaintiff’s money for his own purposes and the defendant in ensuring that he has a proper opportunity to present his defence in the action. In weighing the interests of the parties, the court should consider the strength of the plaintiffs’ case, as well as the strength of the defendant’s defence.

[23] In opposing the plaintiffs’ motion for payment of monies from the Account for legal costs, the defendants submit that their motion should fail because they have not put forward any evidence to satisfy the first branch of the test.

[24] I agree that the plaintiffs have not put forward any evidence that they have no other assets from which they can draw to pay legal expenses. In fact, Yan states in her affidavit filed in support of the plaintiffs motion that while they are wealthy individuals, their liquid resources have been significantly drained to fund their legal expenses.

[25] It is clear that the Credit Valley test applies in circumstances where a defendant seeks to obtain release of frozen funds for reasonable living and legal fees. In my view, however, different considerations apply when the plaintiff with a Mareva injunction seeks to access frozen funds. While a Mareva injunction does not require the plaintiff to show any ownership interest in the property, where a plaintiff seeks to have the frozen monies released, he or she must first establish a proprietary right to the funds. Further, even when a proprietary right has been established by the plaintiff, in my view the court retains discretion to restrict access to those funds depending on the circumstances. Factors to be considered include why the monies were frozen in the first place; the status of the action; the proposed use of the funds; and any competing claims to the funds.

[26] In this case, the Account is in the name of Yan. The plaintiffs say that prior to seeking the Mareva Order, and thanks to the due diligence of the Bank they were alerted to a proposed transfer of monies from the Account to a company owned by Szeto. While they cancelled that transfer, they were concerned that because the defendants had electronic access to the Account further transfers could have been initiated. To ensure that didn’t occur, they included the Account as part of the Mareva Order.

[27] Chen and Szeto have alleged from the outset that the plaintiffs engaged in wrongful conduct against them and others. Specifically they allege that the plaintiffs orchestrated a large Ponzi scheme of which they were victims to the extent of $7.5 million. Justice Brown referred to these claims of wrongdoing as “bald allegations”. Chen’s affidavit in support of the defendants’ request for funds does not add any substance to the claims. Most of it is directed to the alleged loss of their $7.5 million investment which the plaintiffs deny. Although Chen and Szeto have asserted no claim to the monies, apart from a claim for return of their monies, it is submitted on their behalf that all of the monies originating from the plaintiffs were obtained by the plaintiffs through the Ponzi scheme.

[28] At the motion before me, in addition to the many volumes of motion records, reply motion records and supplementary motion records filed by the parties, the defendants counsel handed up an affidavit of a law clerk in his office attaching what is alleged to be an Interpol Red Notice published April 23, 2014 relating to Wang and a report prepared by Chinese authorities in respect of the plaintiffs. The information concerning the plaintiffs appears to have come from Chinese authorities. The documents were allegedly exhibits in the plaintiffs’ immigration proceedings.

[29] Apart from the issues arising from the way in which these documents were tendered in evidence on the motions, they at best establish allegations by Chinese authorities of fraudulent conduct on the part of the plaintiffs and that criminal proceedings have been commenced against Wang in China.

[30] In his reasons for decision on May 22, 2014, Brown J. noted at paragraph 93 that while the detention of the plaintiffs under the Immigration and Refugee Protection Act was of little weight in deciding whether the Mareva Order should be set aside, “the reasons given by the presiding members [of the Immigration and Refugee Board] no doubt would be a most important factor a Court would take into account should the plaintiffs seek the release of any of the funds frozen by the Mareva order prior to trial”.

[31] Since their detention, the plaintiffs have had six detention review hearings, the last one on February 15, 2015. In reasons dated April 2, 2015, the Immigration and Refugee Board ordered the continued detention of the plaintiffs on the ground that they are unlikely to appear for removal. Numerous factors were considered including the prosecution in China. At paragraph 19, the Board refers to the proceedings by Chinese authorities against them in China and notes that Chen and Wang deny the allegations and allege they are a complete fabrication and that they are being persecuted for their religious beliefs. The Board was of the view that Chen and Wang had no desire or intent to return to China to face prosecution which “weighted heavily in favour of finding them unlikely to appear for removal.” When the decision is read in its entirety, it is clear that the detention of the plaintiffs is not because of any outstanding charges against the plaintiffs in China.

[32] The evidence in the Mareva proceeding has established that the monies advanced to Chen and Szeto and the companies they controlled originated from the plaintiffs. The defendants are correct that Brown J. made no finding in his May 22, 2014 reasons that the plaintiffs owned the funds. But he did not have to. It was sufficient that the plaintiffs establish a prima facie case that monies they gave to Chen and Szeto to invest had been misused by them. Whether the funds were derived by the plaintiffs through illegal means was not relevant. Nor, in my view, can it be established on the record before me.

[33] For the above reasons therefore, given that the monies in the Account originated from the plaintiffs, I am prepared to hold for the purposes of the plaintiffs motion that they have established a proprietary right to the monies in the Account. I am not prepared to find from the evidence that the monies in the Account originated from the plaintiffs criminal activities in China. However, given the circumstances arising from the evidence and particularly the significant credibility issues in respect of both the plaintiffs and Chen and Szeto, I am not prepared to release the entire amount requested. While I acknowledge that the plaintiffs have been engaged in immigration proceedings that does not excuse their failure to set the Action down for trial no later than December 31, 2014 as directed by Justice Brown in his reasons of May 22, 2014.

[34] As Brown J. noted at paragraph 97 of those reasons, it is incumbent on the plaintiffs, having been granted interlocutory injunctive relief, to move the Action to a final determination on the merits with reasonable dispatch. The plaintiffs have had access to significant funds to pay legal expenses. Rather than proceeding with the Action to enable resolution of the issues, including the credibility issues, the plaintiffs have launched a series of actions, both civil and criminal, incurring significant legal fees as a result and necessitating motions similar to the two before me to fund legal fees. Left to their own devices, I see no reason why that circle will not continue, particularly given the substantial amount of money that has been frozen.

[35] I am also of the view that a determination of the issues in the Action will result in a determination of the issues in many of the other actions. The multiplicity of actions has ramped up the legal costs significantly. As a result, all of the civil actions between the parties shall be stayed pending a determination of the issues in the Action, subject to further order by me. Once the entitlement to the funds is resolved, the parties can proceed with the stayed actions if desired.

[36] While immigration counsel has provided a cost estimate, in the absence of a cost outline from the plaintiffs’ counsel, it is difficult to determine the costs to be incurred to take the Action through to trial. As a result of the proceedings relating to the Mareva Order, much work has already been done. I can only estimate what I consider to be a reasonable amount given the issues.

[37] I conclude, therefore that the plaintiffs are entitled to receive from the Account a further amount of $450,000 for legal fees incurred and to be incurred, allocated $250,000 in relation to their immigration issues and a further $200,000 to proceed with the Action through to and including trial. As proposed, the monies should be paid to the plaintiffs’ solicitor in trust and released by him only to pay for the plaintiffs legal fees.

[38] Turning to Chen and Szeto’s request for funds, the evidence upon which the Mareva Order is based establishes that Chen and Szeto received substantial funds from the plaintiffs and have failed to provide adequate explanations or an accounting as to what they did with a large portion of those funds. Further, there is evidence that after the Mareva Order was issued, Chen and Szeto withdrew at least $650,000 in funds from the frozen accounts. While Chen has attempted to explain one of the withdrawals and disavow any knowledge of the others, her explanations lack credibility.

[39] Notwithstanding, Chen and Szeto say that as a result of the Mareva Order they have no funds to pay legal fees.

[40] Chen and Szeto still have a house in the Toronto area in which they purchased before they became involved with the plaintiffs and in which they have equity. Their house has been frozen by the Mareva Order.

[41] As noted, there are significant credibility issues in relation to Chen and Szeto’s evidence too. To deny their request for funds while at the same time allowing the plaintiffs will result in an inequity in that Chen and Szeto will not be able to defend the Action. Accordingly, and having considered the factors set out in Credit Valley, I am prepared to allow Chen and Szeto a further $200,000 for legal fees to defend the Action. The monies shall be taken from monies frozen other than in the Account. In the circumstances, I am not prepared to allow them the monies to pay the cost order to the plaintiffs. In my view, it is simply not appropriate to use monies originating from the plaintiffs to enable the defendants to pay the plaintiffs’ cost order. Further, any fees in respect of the defence of the private prosecution must be taken from the monies granted.

Conclusion

[42] The Mareva Order is amended to permit the plaintiffs to obtain $450,000 from the Account payable to Wen Wu, the plaintiffs’ solicitor, in trust to pay for the plaintiffs’ legal costs.

[43] The Mareva Order will be further amended to release $200,000 to the defendants’ counsel from an account to be agreed to by the parties or ordered by the court. The monies are to be held in trust for payment of legal fees only.

[44] The actions listed in paragraph 17 herein save and except for this action are stayed until the conclusion of this action or further order by me.

[45] In the event that either the plaintiffs or Chen and Szeto wish to apply for further funds to pay legal costs, they must account for the use of the monies granted herein.

[46] Counsel are directed to meet and establish a timetable to ensure that the Action will be set down for trial by December 31, 2015. Any issues in that regard should be dealt with at a 9:30 a.m. appointment to be arranged through the Commercial List office.

[47] In light of my decision, each party shall bear their own costs of the motions. No order as to costs.

L. A. Pattillo J.

Released: July 15, 2015