COURT FILE NO.: CV-19-627063
MOTION HEARD: 20210204
REASONS RELEASED: 20210326
SUPERIOR COURT OF JUSTICE – ONTARIO
BETWEEN:
XIN LI
Plaintiff
- and-
WEI LI and YAN ZHANG
Defendants
BEFORE: MASTER M.P. McGRAW
COUNSEL: C. Sparling E-mail: christopher.sparling@sympatico.ca -for the Plaintiff
M. Magonet E-mail: m@magonetlaw.com -for the Defendants
REASONS RELEASED: March 26, 2021
Reasons For Endorsement
I. Introduction
[1] By Reasons For Endorsement dated November 26, 2020 (the “Reasons”), I dismissed a motion (the “CPL Motion”) by the Plaintiff, Xin Li (“Cindy”) to issue a Certificate of Pending Litigation (“CPL”) with respect to the property located at 138 Alamo Heights Drive in Richmond Hill (the “Property”) without prejudice to her right to seek an alternative form of security pending trial. On or about December 23, 2020, the Defendant Wei Li (“Wei”) entered into an agreement to sell the Property to a third party (the “Third Party”) which is scheduled to close on March 30, 2021 with an option to close sooner.
[2] Cindy now brings a motion for alternative security requesting an order that the proceeds of sale or $700,000, whichever is less, be paid into court or otherwise held in escrow as the parties may agree pending the disposition of this action.
II. Background
[3] A more detailed version of the background to this motion is set out in the Reasons. The parties did not file any additional evidence and rely on the original record from the CPL Motion. The Defendants did not file any affidavit evidence on the CPL Motion.
[4] This action arises from Cindy’s aborted purchase of the Property from Wei. Cindy, her husband, Xiao Geng Liang (“Xiao”) and their son are citizens of China who reside in Ontario on Visitors’ Visas. Wei and his wife, the Defendant Yan Zhang (“Jane”) are permanent residents and long-time friends of Cindy and Xiao. Jane is a licensed real estate agent in the Richmond Hill area. Cindy and Wei have the same surname but are not related.
[5] In 2016, Wei entered into an agreement to purchase the Property from the builder. Wei’s purchase was originally scheduled to close on November 28, 2017. On August 26, 2017, Cindy and Wei entered into an Agreement of Purchase and Sale (the “First Agreement”) with respect to the Property (the “Sale”). Jane had acted as Cindy’s agent on previous transactions, however, the Sale was considered a private transaction and they did not execute a Representation Agreement. In any event, Jane prepared all documentation for the Sale.
[6] Cindy and Wei agreed to a purchase price of $1,980,000 with $300,000 paid to Wei upon acceptance, $400,000 payable by December 30, 2017 (together the total payments of $700,000 are referred to as the “Deposits”) and the balance payable upon closing. Cindy alleges that the purchase price was based on Jane’s misrepresentation that the market value of the Property was $2,000,000. In the Agreement, the words “in trust” in reference to the payment of the Deposits were struck and initialed.
[7] Wei completed his purchase of the Property from the builder on December 21, 2017 for a purchase price of $1,177,177. Cindy and Wei executed a second Agreement of Purchase and Sale dated December 28, 2017 (the “Second Agreement”, together with the First Agreement, as amended, the “Agreements”) with an extended closing date of January 16, 2019. Cindy paid the second Deposit of $400,000 by cheques in the amount of $260,000 on January 18, 2018 and $140,000 on January 26, 2018.
[8] In September 2018, Cindy advised Jane that she was experiencing difficulties transferring funds from China. Cindy alleges that Jane advised her that she was concerned about the carrying costs of the Property and suggested that Cindy and Xiao sell an investment property they had purchased in Richmond Hill (the “Felix Property”). They listed the Felix Property for sale with Jane as their agent. Cindy alleges that Jane advised her shortly after that the Felix Property could not be sold due to the depressed real estate market resulting from the Non-Resident Speculation Tax (“NRST”) which requires individuals who are not Canadian citizens or permanent residents to a pay a tax equivalent to 15% of the purchase price for properties located in certain areas of Southern Ontario including Richmond Hill. Cindy alleges that Jane did not previously advise her of the NRST and this was the first time that she became aware of it and that it also applied to the Sale. Jane alleges that Cindy was aware of and previously raised the NRST with her.
[9] Cindy also alleges that Jane advised her that the NRST was temporary. Cindy claims that in order to buy time until the NRST was rescinded and because Jane could not otherwise find financing for her, the parties signed an Amendment to the Second Agreement dated December 6, 2018 to further extend the closing date to January 20, 2020.
[10] Cindy took occupancy of the Property on May 31, 2018 and paid monthly occupancy fees until July 2019. Cindy claims that the first time she learned that Wei paid $1,177,177 for the Property was in May 2019 when she retained counsel. Cindy has obtained 3 appraisals which estimate the market value of the Property at $1,500,000 (as at August 2017), $1,540,00 (as at September 2019) and $1,490,000 (as at July 2020). Cindy subsequently advised Wei that she would not complete the Sale and commenced this action by Statement of Claim issued on September 10, 2019 (the “Original Claim”).
[11] In this action, Cindy claims rescission of the Agreements and the return of $775,000 from Wei comprised of the Deposits and $75,000 in occupancy fees less reasonable compensation of $40,000 representing $3,000 rent per month for 14 months (though counsel has advised that she is no longer claiming occupancy fees). In the alternative, Cindy claims damages of $775,000 from Jane for breach of fiduciary duty and negligent or fraudulent misrepresentation. Cindy amended the Original Claim on February 28, 2020 (the “Amended Claim”) to claim the CPL; a declaration that the Defendants have been unjustly enriched; an equitable tracing of all funds paid to Wei; an order declaring that Cindy has a purchase money resulting trust, resulting trust or, in the alternative a constructive trust; and punitive damages.
[12] Cindy alleges that Jane, as Xiao and Cindy’s regular real estate agent and friend who stood to benefit from the Sale by her spouse, owed a fiduciary duty to Cindy, who does not speak English or understand the Ontario real estate market, which Jane breached by: misrepresenting the value of the Property; not disclosing that Wei was making a significant profit on the Sale; not advising that the Deposits were non-refundable and not a down payment; failing to advise that the Deposits were payable to Wei personally and not being held in trust; failing to advise her about the NRST; and promising Cindy that she would find financing and advising her to delete the financing condition in the Agreements.
[13] In their original Statement of Defence and Wei’s Counterclaim, the Defendants alleged that Wei paid approximately $1.4 million for the Property with “upgrades and taxes”. In their Fresh As Amended Statement of Defence and Counterclaim dated March 2, 2020, the Defendants allege that Wei’s cost of acquiring the Property (including taxes, appliances and upgrades) was significantly greater than $1,177,177. In his Counterclaim, Wei claims vacant possession of the Property; a declaration that the Deposits have been forfeited due to Cindy’s breach of the Agreements; and damages for unpaid carrying costs and any losses and costs related to the re-sale of the Property.
[14] On December 9, 2019, Wei offered to permit Cindy to close the Sale without prejudice to her right to continue this action. Cindy declined. By email dated January 14, 2020, Wei’s counsel noted Cindy in anticipatory breach of the Agreements and claimed forfeiture of the Deposits, damages and legal fees. Cindy vacated the Property in or about October 2020 and the Property was listed for sale.
III. The Law and Analysis
[15] For the reasons that follow, I conclude that Cindy is not entitled to alternative security pending trial.
[16] Cindy relies on section 103(6) of the Courts of Justice Act (Ontario) (the “Act”):
“103..(6) The court may make an order discharging a certificate,
(a) where the party at whose instance it was issued,
(i) claims a sum of money in place of or as an alternative to the interest in the land claimed,
(ii) does not have a reasonable claim to the interest in the land claimed, or
(iii) does not prosecute the proceeding with reasonable diligence;
(b) where the interests of the party at whose instance it was issued can be adequately protected by another form of security; or
(c) on any other ground that is considered just,
and the court may, in making the order, impose such terms as to the giving of security or otherwise as the court considers just.”
[17] In substantially all of the cases cited by Cindy, security was granted as a condition of discharging a CPL as expressly provided in s. 103(6) (Scalamogna v. DiToro, 2015 ONSC 4931; Swiss Tech v. 2316543 Ontario Limited, 2017 ONSC 6742; Tambeau v. Martin, 2020 ONSC 2843; Bank of Nova Scotia v. Fulchini, 2016 ONSC 2773). In one case, alternative security was granted on consent of the defendant (Guz v. Olszwoka, 2019 ONSC 5308). Counsel were unable to refer me to any cases where security was ordered after a CPL was denied at first instance including as alternative relief on an initial CPL motion or on a subsequent motion. The case law reflects the more usual circumstances whereby a CPL is granted, often on an ex parte basis, then discharged and replaced with an alternative form of security so as to allow the sale of a property to close.
[18] In my view, the plain wording of s.103(6) of the Act does not provide for the granting of alternative security in the present circumstances. Unlike s. 103(6) of the Act, which explicitly provides for security as a term of discharging a CPL, there is no equivalent statutory authority to order security where a CPL has not already been granted.
[19] Cindy submits that, notwithstanding the absence of any express provision in the Act or the Rules, this Court has jurisdiction to grant security in the present case under s. 146 of the Act:
“146 Jurisdiction conferred on a court, a judge or a justice of the peace shall, in the absence of express provision for procedures for its exercise in any Act, regulation or rule, be exercised in any manner consistent with the due administration of justice.”
[20] Cindy argues that there is a “procedural lacunae” since the issues and tests are the same on a motion to grant or discharge a CPL but the court only has the authority to grant security when discharging a CPL (R. v. Sztuke, 1993 CarswellOnt 1096 at paras. 14-16). Cindy further submits that since the material issues to be decided and the legal tests are substantially the same on motions to grant or discharge a CPL, a Master has jurisdiction by necessary implication to order security where no CPL has been granted (Abrams v. Abrams, 2010 ONSC 2703). Cindy relies on Abrams where D.M. Brown J. (as he then was) held that s.146 of the Act recognizes the court’s inherent jurisdiction by necessary implication to regulate and control its own process and proceedings other than those conferred on it by legislation including delegated legislation such as rules of practice (Abrams at paras. 30-32 and 42).
[21] However, a Master’s authority is statutory and a Master does not have the inherent jurisdiction conferred upon a Judge to, among other things, make orders deemed necessary to effect fairness in proceedings (Unwin v. Crothers, (2005) 2005 CanLII 23337 (ON SC), 76 O.R. (3d) 453 at para. 5; Carpenter v. Wagg, [2003] O.J. 2990 at para. 8). Accordingly, this Court does not have the inherent jurisdiction to grant the relief requested by Cindy in the absence of an express provision in the Act, another statute or the Rules to do so. I note here that given the limits on a Master’s jurisdiction (including the inability to grant injunctive relief) I suggested during a telephone case conference on January 13, 2021 to schedule this motion and again during the motion that counsel might wish to schedule an attendance at Civil Practice Court or a Chambers appointment before a Judge to speak to the relief sought.
[22] Cindy further submits that she is entitled to an order under Rule 45.02 which provides that where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on such terms as are just.
[23] The Court of Appeal summarized and explained the test under Rule 45.02 in Sadie Moranis Realty Corp. v. 1667038 Ontario Inc., 2012 ONCA 475:
17 Rule 45.02 is part of Rule 45 which, as its title suggests, provides for the interim preservation of property pending litigation. The Rule is a limited exception to the law's deep-seated aversion to providing a plaintiff with execution before a trial. The risk of such an order, because of its invasive nature, is well explained by Sharpe J.A. in Injunctions and Specific Performance, looseleaf 3d ed. (Aurora: Canada Law Book, 2012), at para. 2.760:
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.
18 In my view, the policy approach dictated by this caution must inform the test required by rule 45.02. In News Canada Marketing Inc. v. TD Evergreen, a Division of TD Securities Inc., [2000] O.J. No. 3705 (S.C.), at para. 14, Nordheimer J. put forward a test which does that, and which I would adopt:
I conclude therefore that the appropriate test for relief under rule 45.02 should require the plaintiff to establish that:
(a)the plaintiff claims a right to a specific fund;
(b)there is a serious issue to be tried regarding the plaintiff's claim to that fund;
(c)the balance of convenience favours granting the relief sought by the plaintiff.
19 The first of these requirements, the one under special scrutiny in this appeal, faithfully reflects the language of rule 45.02. It requires that there be a specific fund readily identifiable when the order is sought. It also requires that the plaintiff assert a legal right to the specific fund as a claim in the litigation. While I do not find it to be a helpful descriptor, I think it is in this sense that past jurisprudence has sometimes described the specific fund as "earmarked to the litigation".
20 The second and third requirements, though not centrally in issue in this case, are equally important in manifesting the policy behind the rule. They ensure that interference with the defendant's disposition of assets is limited to cases where the plaintiff has a serious prospect of ultimate success, and there is something compelling on the plaintiff's side of the scales, such as a real concern that the defendant will dissipate the specific fund, that is sufficient to outweigh the defendant's freedom to deal with his or her property.
21 Framed in this way, the test will not be met where a plaintiff's claim is for damages. That is so even if a specific fund is identifiable in the factual matrix of the litigation, because a claim for damages is not a claim to a legal right to that fund. In Asante Financial Management Ltd. v. Dixon (2004), 8 C.P.C. (6th) 57 (Ont. S.C.), Wilton-Siegel J. put it this way, at para. 28:
There is a subtle but important difference between an amount that may be owing to the plaintiff and a right of the plaintiff to a fund.
22 Where the test is met, the order secures the specific fund claimed by the plaintiff pending the outcome of the litigation. The order is distinguishable from a Mareva injunction (with its even stricter test), where the defendant is restrained from dealing with its own assets pending trial even though the plaintiff is not asserting a legal right to any of those assets.”
[24] In my view, Cindy has not satisfied the test set out in Sadie Moranis. While I have concluded that Cindy does not meet any of the three requirements, it is only necessary that I find that she has not satisfied the “specific fund” threshold requirement or any one part of the test for her motion to fail.
[25] In 3Genius Corp. v. Locationary Inc., 2016 ONSC 4092, relied on by Cindy, Belobaba J. summarized and re-stated the “specific fund” threshold:
“11 In my view, it makes sense to restate the threshold "specific fund" requirement post-Sadie Moranis by focusing on each of the two sub-questions. I believe that the case law to date can be best understood as saying two things about this threshold requirement: one, there must be a reasonably identifiable fund of money; and two, the plaintiff must be claiming a legal right to that fund and not just making a claim for damages.
12 It is only after the two-part threshold requirement has been satisfied that one goes on to consider the second and the third requirements, 'serious issue to be tried' and 'balance of convenience.'
14 The first part of the "specific fund" requirement can be satisfied if the plaintiff shows that a specified and differentiated sum of money exists under the control of the defendant or a third party. The money in question does not have to be physically separated or segregated from other monies. It does not have to be bound in a rubber band and secured in a safety deposit box, or hidden under a mattress. Most 45.02 claims are for funds that are "sitting in" a bank account. But modern banking does not keep actual funds in a bank account or even trust account. The account holder's right to the monies in her bank account is based on related and supporting documentation. To accord with modern banking practices, it is enough if the specified amount is sufficiently differentiated by a book-keeping entry or line-item description in an accounting ledger or other related financial documentation. The key requirement is not actual or physical segregation but a sufficient differentiation.
15 A claim to an amount that remains undifferentiated and will simply be paid out of the defendant's or third party's corporate bank account is not a specific fund. As Brown J., (as he then was) noted in Deol v. Morcan Financial, which involved a disputed claim for unpaid finder's fees:
What the plaintiff really seeks is an order compelling the defendants to put to one side general corporate funds to stand as security for a judgment which the plaintiff hopes to secure at trial. That sort of execution before judgment is not available under Rule 45.02.
16 It is important to understand, however, that a specific fund can sometimes be found in a defendant's or third party's general corporate funds. This will happen when the claimed fund is, or is likely to be, differentiated by a book-keeping entry or line-item description in a financial ledger. The point is not that the monies are not co-mingled or inter-mingled because they always are - whether in trust accounts or general bank accounts. The question is whether the claimed fund is reasonably identifiable (i.e. differentiated) by a book-keeping entry or other line-item descriptor.
17 In my view, this is the best explanation for the case law that has found specific funds in trust accounts, bank accounts, and even in general corporate funds if the fund being claimed from general corporate funds has been differentiated as an undisputed amount that is owing or payable.” (3 Genius at paras. 11-12; 14-17)
[26] In 3Genius, Belobaba J. held that there was a reasonably identifiable fund on the basis of specified and undisputed holdback payments held by a third party which were due and owing to the defendants which he concluded may be held in the third party’s general corporate account differentiated by book-keeping entries showing the funds as payable. However, he concluded that the plaintiff did not meet the second branch of the “specific fund” test given that it was asserting a claim for damages for breach of fiduciary duty. Similarly, I conclude here that although there is a reasonably identifiable fund, Cindy is advancing a claim for damages and therefore has not met the “specific fund” threshold.
[27] Although the agreement of purchase and sale between Wei and the Third Party is not in evidence, presumably a deposit has been paid and I am advised by counsel that the balance of the purchase price is due to be paid on closing to the Defendants’ real estate lawyer in trust. As a result, in my view, the proceeds of sale are specified, sufficiently differentiated, documented separately and therefore reasonably identifiable. The Defendants argue that because the proceeds of sale do not currently exist and will not be paid until closing, there is no specific fund now at the time Cindy is seeking the order (Cohen v. Woodcliffe Corp., 2016 ONSC 3951 at paras. 8-9). However, the re-statement of the “specific fund” test in 3Genius, decided after Cohen, supports the conclusion that sufficiently differentiated funds due to be paid by a third party on a specified date in the future and funds held in trust are sufficient to satisfy the first part of the “specific fund” test. I also adopt the reasoning of Master Pope in Kuleshnyk v. Kuleshnyk, 2017 ONSC 2696 where she held that a claim to mortgage funds payable on numerous future due dates did not prohibit the granting of relief under Rule 45.02 (Kuleshnyk at para. 17). Specifically, I agree that it would defeat the purpose of Rule 45.02 to require a plaintiff in Cindy’s position to wait until after the proceeds of sale are received to bring her motion as, without an undertaking that the funds will be held, she would be faced with opposing arguments that there is no specific fund if they had already been released to Wei (Kuleshnyk at para. 17).
[28] However, as set out in the Reasons, Cindy has acknowledged and I have found that she is largely advancing a claim for damages based on the amount of the Deposits (Reasons at paras. 39-40). While she claims unjust enrichment and a constructive trust, purchase money resulting trust or resulting trust and seeks equitable tracing in the Amended Claim, similar to the courts’ conclusions in 3Genius and Retrocom Investment Management Inc. v. Davies Smith Developments Inc., [2014] O.J. 4938, she is not claiming a legal right against a “specific fund” including the proceeds of sale. Rather, Cindy is claiming the return of the Deposits from Wei who she claims used them to purchase the Property or alternatively the same amount from Jane in damages for breach of fiduciary duty and misrepresentation. Even where there is a specific fund identifiable in the factual matrix of a claim, here, the proceeds of sale, a claim for damages or an amount owing is not a claim of a legal right to that specific fund (Sadie Moranis at para. 21; 3Genius at paras. 22-26).
[29] Even if I had concluded that Cindy met the “specific fund” threshold, I am not satisfied that she has demonstrated that there is a serious issue to be tried regarding her claim to a fund. This requires Cindy to establish that she has a serious prospect of ultimate success in the action (Sadie Moranis at para. 20; Cohen at para. 20; Kuleshnyk at para. 18). D.A. Broad J. explained this requirement in Guz:
“58 However, on the authority of Sadie Moranis a "serious interest to be tried" requires the plaintiff to demonstrate "a serious prospect of ultimate success," a higher standard than that of a "triable issue" to support the issuance of a CPL, which, as stated above, is a low threshold. The requirement for a serious prospect of ultimate success is informed by the policy direction enunciated by the Court of Appeal in Sadie Moranis placing strict limits on execution before trial.” (Guz at para. 58)
[30] On the CPL Motion, I held that the Defendants did not discharge their onus that there was no triable issue with respect to whether Cindy has a reasonable claim to an interest in the Property such that there was a triable issue that the remedy of constructive trust may be available to her at trial. On this motion, Cindy bears the onus of establishing that there is a serious issue to be tried with respect to her claim to a specific fund, a more onerous requirement than the CPL Motion.
[31] In my view, there are too many disputed issues of fact and credibility which are material to Cindy’s claims to conclude that her claims have a serious prospect of success. Although the Defendants have not filed any affidavit evidence on these motions they cross-examined Cindy on her affidavit. Based on the record before me, including Cindy’s admissions and the undisputed facts, I am unable to conclude that her claims have a serious prospect of success.
[32] It is not disputed that Cindy paid the Deposits to Wei, one before he completed his purchase from the builder, that Cindy executed the Agreements, had the opportunity to obtain independent legal advice and translation, had signed previous offers and agreements and purchased numerous investment properties and had no Representation Agreement with Jane on the Sale. However, there are significant disputed issues of fact and credibility as to what Cindy understood including whether the Deposits were non-refundable, the circumstances surrounding the execution of the Agreements, Jane’s involvement and her alleged misrepresentations including with respect to the market value of the Property and the NRST. Cindy’s submission that the sale of the Property to the Third Party for approximately $1,585,000 (which is not in evidence but confirmed by counsel) demonstrates on its own that she will likely be successful ignores the multiplicity of issues that will require findings of fact and credibility on a full record by the trial Judge. I am unable to resolve these issues on the higher threshold applicable to this motion.
[33] With respect to the third branch of the test, I conclude that the balance of convenience does not favour Cindy. In order to satisfy this requirement, Cindy must establish that there is something compelling on her “side of the scales” such as a real concern that the Defendants will dissipate the specific fund or leave the jurisdiction that is sufficient to outweigh the Defendants’ freedom to deal with their property (Sadie Moranis at para. 20; 3Genius at para. 28). Cindy acknowledges that there is no evidence or suggestion that the Defendants have insufficient assets in Ontario to satisfy a Judgment if she is successful in this action, or that they will dissipate their assets or leave the jurisdiction.
[34] Accordingly, exercising the necessary caution that must inform a consideration of security pending trial under Rule 45.02, I am satisfied that there is no concern that would justify interfering with the Defendants’ freedom to manage their funds and affairs. Therefore, I decline to impose the “extreme” remedy sought by Cindy which would amount to execution before Judgment in the circumstances.
III. Disposition and Costs
[35] Order to go dismissing Cindy’s motion.
[36] As provided in the Reasons, the parties filed written costs submissions with respect to the CPL Motion which remain under reserve. In her costs submissions, Cindy requested that the costs of the CPL Motion be deferred and addressed with the costs of this motion. If the parties cannot agree on the costs of this motion they may file additional written costs submissions for the present motion, not to exceed 3 pages (excluding Costs Outlines) on a timetable to be agreed upon by counsel. As counsel have requested that I remain seized of this matter, they may schedule a telephone case conference with me to speak to costs if they are otherwise unable to agree on a process for further submissions.
Released: March 26, 2021
Master M.P. McGraw