Court File and Parties
COURT FILE NO.: CV-20-00639516-00CL DATE: 20200603
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Yuk Shing Kan, Applicant AND: Yuk-Sum Kan, Kam-Yuk Chu and 1078063 Ontario Limited, Respondents
BEFORE: C. Gilmore, J.
COUNSEL: Stephen Barbier and Ben Tustain, Counsel for the Applicant Jeffrey Radnoff and Charles Haworth, Counsel, for the Respondents
HEARD: May 19, 2020
ENDORSEMENT on Motion
OVERVIEW
[1] On April 30, 2020 I allowed the ex-parte motion of the Applicant (“Shing”) for Mareva and Norwich orders in relation to the real and personal property of the Respondents. At that time, the court was persuaded that, based on the voluminous and detailed material filed, there was evidence that the individual Respondents (“Sum”) and (“Chu”) had mismanaged the Respondent corporation 1078063 Ontario Limited (“107”) in a manner oppressive to Shing’s interests as a shareholder and director and in violation of an alleged oral trust agreement.
[2] The Respondents Sum and Chu now bring a motion to set aside the April 30th Order (“the Order”) on the grounds that Shing did not make full and fair disclosure of all facts, that the evidence on the original motion did not meet the required evidentiary threshold, and that Shing does not have clean hands as he is attempting to enforce a Trust Agreement one of the purposes of which was to avoid paying taxes in Canada. Finally, the Respondents submit they should not have to pay costs associated with the Norwich order or a forensic accounting.
[3] Shing has brought a cross-motion requesting an amendment to the Order to allow him to use certain accounts of 107 in order to pay for obtaining bank records and the retainer for a forensic accountant.
BACKGROUND FACTS
[4] Shing and Sum are brothers. Chu is Sum’s wife. Shing resides in Hong Kong. Shing is director of 107 and owns 49% of its shares. Sum is also a director of 107 and owns 51% of its shares. Chu is a director of 107 but does not own shares.
[5] At the crux of this dispute is Shing’s contention that Sum’s shares in 107 are held by Sum in trust for him pursuant to an oral trust agreement (“the Trust Agreement”). Sum and Chu deny that any such Trust Agreement exists.
[6] Sum and Chu moved to Canada from Hong Kong in 1991. They have two children aged 27 and 24. The children have both received post-secondary education and reside with their parents. Shing remained in Hong Kong and was involved in running the family stationery business which was started in 1937 by his father. After their mother’s death in 2011, the shares of the stationery business were divided equally between Sum and Shing.
[7] When Sum and Chu came to Canada, they invested in a laundry and motel business funded with money from the sale of their home in Hong Kong. Their immigration record shows they came to Canada with $324,000. Shing denies that his brother could have had that much money and deposed that public records from Hong Kong show that Sum and Chu brought no more than $100,000 with them from Hong Kong as their home was encumbered by a sizeable mortgage when it was sold.
[8] Sum and Chu worked hard and later sold their laundry and motel businesses. They were able to purchase their own home and then another home while renting out their first home. Over time they were able to accumulate assets and investment properties. Sum and Chu’s position is that they accumulated those assets as a result of good investment management and hard work. Any money transferred to them from Shing for 107 actually belonged to Shing and Sum’s mother and came from the family business, not from Shing’s personal investments.
[9] Shing deposed that his brother advised him he was unhappy when he first came to Canada and struggled with the new culture and working in the laundry business. Shing decided to help his brother and used his Hong Kong investments to capitalize 107 by transferring over $1.5M to Sum. This money did not come from his mother but from the profits of Shing’s real estate investment firm, matured deposits, and securities. The family business did not have large profits and in any event, if his mother had wanted to transfer money to Sum she would have done so herself.
[10] According to Shing, the funding of 107 was done pursuant to the Trust Agreement in order to allow his brother to leave the motel and laundry business and become the day to day manager of 107’s investments and operations. Pursuant to the Trust Agreement, Sum was to manage the operations of 107, keep Shing advised of the progress of the investments and take Shing’s instructions with respect to new investments. In return Sum was entitled to take a reasonable management fee from the profits of 107 once all expenses were paid. The net profits were to be invested in the acquisition of new properties and paying down mortgages.
[11] 107 was incorporated on April 18, 1994. The first investment property purchased by 107 was 2574 Yonge Street in Toronto (“2574”). The second property was a pre-construction condominium located at 256 Doris Avenue, Toronto (“Doris”). Shing signed a Power of Attorney in favour of his brother on May 6, 1994 (“the POA”). The POA contained the usual provisions plus gave specific authority to Sum to deal with the purchase of 2574 including financing and any related documents. Shing’s evidence was that he provided very specific instructions to his brother regarding the purchase of both 2574 and Doris including what proportion of the purchase was to be financed through mortgages and the use of generated income. 107’s Articles of Incorporation permit 107 to borrow money and mortgage property but only on the authority of a special by-law.
[12] Shing submitted that he invested nearly $1.5M in Toronto real estate through 107. This is denied by Sum and Chu who claim that the evidence shows that Shing only had $883,629 to invest. Further, Sum alleges that a portion of those funds were loans from Shing to 107. Sum relies on a loan document (“the Loan Document”) which has both brothers’ signatures. The Loan Document, dated May 26, 2010 indicates that Shing agreed to lend Sum $500,000. Shing denies that the signature on the Loan Document is his and that he has never seen it before. He was not in Canada on May 26, 2010.
[13] 2574 was purchased by Sum “in trust”. Shing submits this is consistent with the oral Trust Agreement. Sum denies this and claims that 2574 was purchased “in trust” for a corporation (107) that had not yet been incorporated at the time of purchase. Further, it was Sum and not Shing who personally guaranteed the $1M mortgage registered against 2574 on June 8, 1999 and the $300,000 mortgage registered on May 19, 2017. Doris was also purchased by Sum “in trust for Mr. Yuk-Shing Kan.” 107 took title to Doris on completion of the purchase.
[14] Sum relies on various documents in support of his position that the Trust Agreement does not exist including an HSBC privacy document signed by Shing certifying he owned 49% of the shares in 107, lawyers’ letters from Hong Kong in relation to a dispute concerning their mother’s estate which confirm that 107 is owned jointly by the brothers, and Shing’s lack of interest in the operation of 107 over the last 25 years. Sum points out his excellent business management of 2574 which has only one mortgage of $91,000 (as of December 2019), is worth $6.5M and can be rented out for over $12,000 per month. Further, Shing does not account for the fact that Chu was a successful real estate agent whose income also contributed to the family resources. The evidence of Chu and Sum is that the net value of properties they have accumulated (including those owned by 107) is $8.5M.
[15] Shing’s response was that he signed the HSBC document as his brother asked him to. He does not speak English and, at the time, he trusted his brother. His grasp of English is insufficient to understand legal documents. He required an interpreter to explain the contents of the affidavits he has sworn in this proceeding.
[16] Shing has discovered through this court process that his brother purchased other properties through 107 including 4978 Yonge Street (“4978”), 28 Finch Avenue West (“28 Finch”). Shing did not authorize these purchases or their financing. 28 Finch was then sold without Shing’s authority and with no accounting as to the proceeds of sale.
[17] Of the $8.5M in properties accumulated by Sum and Chu, $2.871M of those properties are in the joint names of Sum/Chu. Shing alleges that his brother and sister-in-law misappropriated funds from 107 for their own use and purchased, sold and mortgaged properties over the last 25 years without his knowledge or consent.
[18] It was only through Sum and Chu’s affidavits that Shing discovered that The Gap (the former tenant of 2574) paid 107 $700,000 to break their lease. No information was given to Shing that the tenancy was ending or what happened to the lump sum payment. Shing was also shocked to learn that the Line of Credit secured against 2574 carried a balance of more than $600,000 in June 2019. Shing does not understand why the Line of Credit was needed when The Gap was paying rent of $30,000 per month. Shing alleges that the Line of Credit was being used to siphon money out of 2574 to allow Sum and Chu to purchase properties in their own name.
[19] It is not contested that Shing did not ask for an accounting from Sum until recently. His position is that his brother had previously assured him that all of his investments were doing well and being properly managed. Shing trusted his brother and did not think that further investigation was required. However, when his brother became non-responsive over the last year, Shing became suspicious and asked for more information. What he discovered, shocked him. As set out in his factum, Shing describes 107 as a deeply-indebted and overleveraged entity that functions as little more than a slush fund for his brother and sister-in-law. In response, Shing brought the within application seeking an accounting of 107’s operations for the last 25 years, and claiming relief against Chu and Sum on the basis of oppression and breach of trust.
[20] Sum advised the court that his counsel provided Shing an opportunity to review 107’s tax returns for the years 1995-2014 but Shing did not avail himself of this opportunity. Sum’s position is that he had no reason to report to Shing other than as a 49% shareholder and in any event, Shing never requested any reporting. Further, Sum and Chu did not keep records for longer than seven years. Shing’s response is that the offered tax returns do not answer the many questions that are raised by financial statements now provided by 107 through Sum.
ISSUE #1 – SHOULD THE MAREVA AND NORWICH ORDERS BE CONTINUED?
The Law
[21] The law is well settled with respect to the elements which must be demonstrated by a moving party in order to obtain a Mareva injunction as follows:
a. The moving party must make full and frank disclosure of all material matters;
b. The moving party must give particulars of the claim against the responding party, stating the grounds of the claim and the amount thereof, and the points that could be fairly made against it by the responding party;
c. The moving party must give grounds for believing that the responding party has assets in the jurisdiction;
d. The moving party must give grounds for believing that there is a real risk of the assets being removed out of the jurisdiction, or disposed of within the jurisdiction or otherwise dealt with so that the moving party will be unable to have a judgment satisfied; and,
e. The moving party must give an undertaking against damages. [^1]
[22] In addition, the moving party must demonstrate a strong prima facie case. This has been interpreted by the Supreme Court of Canada in R. v. Canadian Broadcasting Corporation to mean that the applicant will ultimately be successful in proving the allegations set out in the originating notice.[^2]
Did Shing Disclose All Material Facts Known to Him?
[23] On an ex-parte motion, the moving party has a clear duty to provide full and accurate disclosure of all facts known to them including facts or law which favour the opposing party. Failure to do so may result in a refusal by the Court to continue the injunction.
[24] Sum submits that Shing did not disclose certain relevant and material facts, which if known to the Court at the time of granting the Order, would have changed the outcome:
a. Counsel failed to advise the Court of binding precedent from the Court of Appeal prohibiting oppression claims beyond the two-year limitation period.
b. Counsel failed to advise the Court that the 15-year limitation period is applicable in this case to all conduct and omissions before April 15, 2005.
c. There was no disclosure of the fact that Sum personally guaranteed a $1M and a $300,000 mortgage against 2574. It would not make sense for Sum to guarantee the mortgages if he had no ownership interest in 107.
d. There was no disclosure of the May 26, 2010 loan agreement.
e. There was no disclosure of the fact that Shing had been sending Sum his share of profits from the family business between 1985 and 2013.
f. There was no disclosure of Mr. Radnoff’s letter offering access to 107’s corporate tax returns.
g. There was no disclosure of the fact that Chu was a real estate agent earning an income;
h. Shing failed to advise that his failure to formally inquire about 107 for 25 years is objective evidence contradicting his claim that he is a 100% shareholder of 107.
i. Shing failed to bring to the Court’s attention all of the correspondence between Hong Kong lawyers related to his mother’s estate which refers to the Canadian investments being jointly held by Sum and Shing.
[25] With respect to the two-year limitation period Shing submits this does not apply while acknowledging that some of the conduct occurred more than two years ago and some more than 15 years ago. In this case the limitation period does not run during any time in which those against whom the claim is made have wilfully concealed their wrongdoing. By providing Shing with feasible but vague updates, Sum and Chu purposely lulled Shing into thinking that all was well with his investments and there was no need to enquire further.
[26] Section 4 of the Real Property Limitations Act (“the RPLA”), is specifically exempted by the Limitations Act. The RPLA establishes a 10-year limitation period for a proceeding to recover land. This has been interpreted to apply to claims of a constructive trust over land that was never owned by the claimant.[^3] Further, in cases of concealed fraud, the ten-year period under the RPLA does not begin to run until the fraud is discovered.
[27] While Shing provides cogent reasons why there should not be a limitation period applied to his claim, it is this Court’s view that those reasons should have been set out in his materials and the issue of any possible limitation period addressed.
[28] With respect to Sum guaranteeing the mortgages on 2574, Shing submits that Sum was able to do this with the POA and there was little risk to him given that he had an excellent tenant paying $30,000 per month in rent.
[29] It is not clear to the Court whether Shing knew that Sum had guaranteed the mortgages on 2574 although he certainly knew that a mortgage was obtained, as the POA gave Sum the authority to take such steps. There is no mention of Sum guaranteeing any mortgages on 2574 in Shing’s material. As such, the Court can make no finding with respect to whether this was a material fact which ought to have been disclosed, as Shing may not have known about it until receiving Sum’s court material.
[30] With respect to the 2010 Loan Agreement, Shing deposed that he did not know what it meant and does not recall signing it. His evidence was that he was not in Canada on May 28, 2010. Again, if Shing did not know what he allegedly signed and was not in Canada at that time, it is difficult for the Court to find that Shing should have referenced the Loan Document in his materials.
[31] Sum alleges that Shing ought to have disclosed that he was sending his brother funds from the family business between 1985 and 2013. However, Shing’s affidavit sworn April 14, 2020 at paragraph 18 does disclose that he sent his brother transfers totalling $125,000 from the Family Business over the years.
[32] Sum submits that Shing should have advised the Court of Mr. Radnoff’s letter dated March 3, 2020 in which he invites Shing’s counsel to inspect 107’s tax returns. Shing’s response is that this information was of little use with respect to his allegations of fraud and misappropriation. While Shing is likely correct in that regard, there is no reason why that correspondence could not have been disclosed as an indication of a gesture of cooperation from the Respondents.
[33] Sum complains that Chu’s employment as a real estate agent should have been disclosed by Shing as a further source of funds in support of Sum and Chu’s contention that they funded the purchase of their joint properties from their own resources. I accept Shing’s evidence that the relationship between he and his brother has been strained due to the conflict related to their mother’s estate and that while he knew that Chu had a real estate license, his knowledge went no further than that. That is, he was not aware that she was actually working as a real estate agent or what she might be earning. I do not find that the non-disclosure is of such significance that it would have affected the outcome of the ex-parte motion. Shing had no information about Chu’s actual income until he received the Respondents’ court material.
[34] Sum submits that his brother ought to have disclosed all of the correspondence between their Hong Kong lawyers as some of that correspondence refers to the brothers’ joint ownership of Canadian properties. Shing included with his ex parte materials, a letter from his Hong Kong lawyer dated July 19, 2019 which relates to negotiations to settle their mother’s estate (“the Yau Estate”). That letter offers to buy out Sum’s share of the family business. The formula includes setting off by way of credit to Shing the transfer to Sum of a “portion of dividends of 1078063 Ontario Limited (“the Company”) which your client holds 51% share capital in trust for our client.” The letter goes on to state that “the money for the formation of the Company and the purchase of the Gap Property were remitted by our client to yours in 1993 and 1994.”
[35] Chu included 24 letters as Exhibit “F” to her affidavit sworn May 7, 2020. The letters begin in January 2019 with Chu’s counsel writing to Shing’s counsel asking when Shing intends to wrap up the Yau Estate as the mother died in 2011 and all of the assets of the Estate had not yet been dealt with. Shing’s Hong Kong counsel replied that as Shing is the sole Estate Trustee he was complying with his mother’s wish to retain the family business as long as possible as a way of keeping the family together. Sum’s counsel responded in March 2019 that Shing must either sell the family business or buy out Sum’s interest. If no action was taken, Sum would commence court proceedings.
[36] In attempting to resolve matters, Shing’s counsel in a letter dated April 2, 2019 makes reference that “we are instructed that our respective clients manage different joint assets in Hong Kong and Canada” and provides proposed Minutes of Settlement. The resolution proposed by Shing’s lawyer includes having the brothers list all of their jointly owned properties and then decide which properties should be transferred solely to one brother or the other and which properties should be sold. There is also a reference in the February 25, 2019 letter from Shing’s lawyer to Sum’s lawyer that “your client, having emigrated to Canada in the early age, did not take part in the said family business but instead concentrates on investments in Canada jointly owned by our respective clients.” There is also reference to the brothers’ joint assets in Shing’s lawyer’s letter of December 30, 2019.
[37] Part of the series of letters provided by Chu includes the July 19, 2019 letter included in Shing’s materials which makes reference to Sum holding 51% of the share of 107 in trust for Shing. Of note, is that this letter is marked “Without Prejudice.” The July 19, 2019 letter does not mention a Trust Agreement and the premise of the proposed settlement of the mother’s estate is a form of transfer or sale of the joint assets.
[38] I agree that all of these letters should have been disclosed by Shing and not simply the selected letter from July 2019. There are several references in this series of letters from Shing’s own lawyer concerning assets which are jointly owned by the brothers in Canada and Hong Kong. The overall tenor of these letters is in direct contradiction to Shing’s contention about the Trust Agreement. Shing submits that he did not submit all of the letters due to the communication being “without prejudice.” Fairness dictates that if Shing chose to disclose a letter marked “without prejudice” any privilege which may have attached to the other letters is waived. In my view this series of letters should have been fully disclosed in Shing’s ex-parte materials.
[39] Finally, Sum complains that his brother failed to advise the court that he had not made enquiries about 107 for 25 years thus contradicting his evidence that he was a 100% shareholder of 107. The letters at Exhibit “F” to Chu’s affidavit referenced above do allude to a breakdown in communication between the brothers. Specifically, in the January 20, 2020 letter from Shing’s Hong Kong lawyer he references “the relationship between our respective clients was always good until a couple of years ago when your client started to avoid our client.” This is consistent with Shing’s position in his ex-parte affidavit material that prior to 2019 he had no reason to believe his brother was doing anything but managing his assets in accordance with the alleged Trust Agreement. I find that Shing adequately disclosed his reasons for not taking steps for 25 years.
Does Shing have a Strong Prima Facie Case of Oppression or Breach of Trust?
[40] The question to be addressed by the Court on this issue is whether the Court could decide the allegations in the Application based on the evidence before it.[^4] The short answer to this question is no. Looking at the available material, there is clear contradictory evidence with respect to the existence of the Trust Agreement. Issues of credibility are therefore engaged.
[41] There are also other arguments in relation to the Trust Agreement which need to be explored further including, if it is found to exist, whether it was intended for an illegal purpose or whether it is unenforceable by reason of vagueness including any evidence of Sum’s management obligations and Shing’s instructions. The HSBC document signed by Shing on December 11, 2018 confirms his 49% interest in 107. Shing’s evidence that he did not understand what he was signing would also need to be explored and credibility findings made on that issue.
[42] In short, there is contradictory and insufficient evidence to conclude that Shing has a strong prima facie case that 100% of 107’s shares are owned by him. Evidence that establishes credibility issues is not sufficient to establish a strong prima facie case.[^5]
[43] There are also limitation period issues. Various of the omissions complained of may be statute barred by either a two year or 15-year limitation period including the purchase of 33 Sheppard Avenue East, 4978 Yonge Street (Unit 3505), 28 Clairtrell Road, 51 Trolley Crescent (unit 707), 89 Dunfield Avenue. The Court would have to accept that Shing’s alleged lack of interest in his investments related to his faith that his brother was abiding by the Trust Agreement and not because he was simply a minority shareholder.
[44] As I have already found insufficient evidence for a strong prima facie case there is no reason to add more, but Sum and Chu raised other issues. They include Shing’s alleged lack of standing given that losses sustained by 107 and the fiduciary and reporting obligations owed by Chu and Sum are owed to 107 and not Shing personally. Those issues remain outstanding but need not be addressed at this point given my findings above.
[45] While this Court has found that a case is not made out for a Mareva, there are concerns raised by Shing that must be addressed.
[46] Shing’s counsel raised a number of questions about Sum and Chu’s actions which emanated from the 2016 to 2019 Financial Statements disclosed by Chu in her responding material. Some of these concerns are listed below:
a. The purchase of 4978 Yonge Street by 107 with a mortgage with no authority from Shing for the purchase or associated mortgage;
b. The purchase and sale of 28 Finch by 107 without any authority from Shing;
c. The Line of Credit, Overdraft and Lease Buyout on 2574 which were not known to Shing until he read his sister-in-law’s affidavit;
d. Chu received a commission of $27,300 for the sale of 28 Finch. Shing was never made aware of this self-dealing (or in fact that 107 owned 28 Finch);
e. The bank overdrafts vary wildly year to year from a high of $631,000 in 2019 to a low of $207,000 in 2016;
f. The corporate bank loan also vary greatly year to year from a low of $207,000 in 2016 to a high of $477,000 in 2018;
g. The Financial Statements disclosed show significant retained earnings which do not appear to have been used to pay down debt;
h. Why are the salaries paid so high when 107 is simply a corporation that manages two real estate investments?
i. Why are the accounts payable at $200,000 when there are only two properties to manage?
j. The HSBC account statement disclosed does show rental deposits to 107 but it also discloses large withdrawals (i.e. $99,000 on June 17, 2019, $5,900 on June 11, 2019). During the month of June 2019 the account was in an overdraft position of over $600,000 as of June 12th. Funds from the sale of 28 Finch (which Shing did not know 107 owned) in the amount of $375,743.97 went into the account to reduce the debit position to just over $308,000 by the end of that month.
[47] Shing submits that the reason why Chu and Sum have been able to accumulate a significant portfolio of their own jointly owned real estate investments is because they have been using funds from 107’s Line of Credit, mortgages and loans which they have siphoned out over the years for their personal gain. As such, even if Shing is unsuccessful in proving the existence of the Trust Agreement, there should be a mechanism for determining if there has been any misappropriation with respect to the brothers’ respective shareholding interests.
[48] While there is insufficient evidence to support the continuation of the Mareva and Norwich orders as originally granted, I find that there is evidence to support that funds were transferred from 107 and used by Sum and Chu to fund their purchases of what is now a large jointly held real estate portfolio. Shing should be given appropriate relief in order to investigate this serious allegation. He must receive the answers to his questions by way of a proper forensic accounting and some security over Sum and Chu’s real property assets pending the result of that investigation. The forensic accounting will negate the necessity for the continuation of the Norwich Order.
ORDERS AND COSTS
[49] The Order of April 30, 2020 is set aside and replaced with the following order:
a. The current assets of 1078063 Ontario Limited (“107”) may not be further encumbered except by court order or by the passage of a Special By-Law in accordance with its Articles of Incorporation.
b. The Respondents Yuk-Sum Kan and Kam-Yuk Chu shall not encumber, sell, pledge, or mortgage any real property in their sole or joint names pending further court order, resolution or disposition of this Application. This Order may be registered on title to the subject properties (the properties set out in Schedule A to the April 30, 2020 Order). If necessary, counsel may speak to me regarding any additional Order in the form required by the Land Registry Office.
c. The Applicant may engage the services of a certified forensic accountant of his choosing to complete a forensic accounting in relation to the operation of 107 and the Applicant’s allegations of any misappropriation of funds from 107 by the individual Respondents. The retainer for the forensic accountant and the cost of any document production shall be paid from 107’s bank account and the Line of Credit registered on title to 2574 Yonge Street.
d. The Respondents shall provide complete access to any and all documents requested by the forensic accountant. In the event of any dispute with respect to the production of documents or any other Case Management issue, the parties may book a conference with Justice Gilmore.
e. The individual Respondents shall cooperate fully with the forensic accountant by providing such consents and authorizations as may be required to access any documentation in the possession of third parties required by the forensic accountant.
f. Upon completion of the report of the forensic accountant the parties may attend before Justice Gilmore for a Case Management Conference if the matter is not resolved.
[50] While the previous court order was vacated, the Applicant did receive some relief in relation to his allegations and his cross-motion. As such, he should receive some partial indemnity costs. If the parties cannot agree on costs, they may provide written costs submissions of no more than two pages in length exclusive of any Bill of Costs or Offers to Settle. The costs submissions are due on a seven-day turnaround from the date of this Endorsement starting with the Applicant. Costs submissions are to be sent to me electronically. Case law must be hyperlinked. If no costs submissions are received within 35 days of the date of this Endorsement, costs will be deemed to be settled.
C. Gilmore, J.
Date: June 3, 2020
[^1]: Chitel v. Rothbart (1982), 39 O.R. (2d) 513. [^2]: 2018 SCC 5 at para 17. [^3]: McConnell v. Huxtable, 2014 ONCA 86. [^4]: Petro-Diamond v. Verdeo Inc. [2014] ONSC 2917 at para 25. [^5]: HZC Capital Inc. v. Lee [2019] ONSC 4622, at para 77.