Court File and Parties

COURT FILE NO.: CV-21-662203 MOTION HEARD: 20210816 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Yu Liang, Plaintiff AND: Zhen Wang, Jian Xu aka Phoenix Xu, 2587830 Ontario Inc., 2599816 Ontario Inc. and 2682062 Ontario Inc., Defendants

BEFORE: Master Jolley

COUNSEL: Louis Brzezinski, Stephen Gaudreau and Alexandra Teodorescu, Counsel for the Moving Party Defendants Heng Pandora Du, Counsel for the Responding Party Plaintiff

HEARD: 16 August 2021

REASONS FOR DECISION

[1] The defendants bring this motion on an urgent basis on August 16 for the discharge of a number of certificates of pending litigation (“CPLs”), one of which is on property that is scheduled to close Wednesday, August 18. The plaintiff obtained the CPLs without notice and on an urgent basis on 16 June 2021.

[2] There are four properties in question: 174 Caribou Road, Toronto (“174”), 176 Caribou Road (“176”), 176B Caribou Road (“176B”) and 178 Caribou Road (“178”).

[3] The defendants entered into an agreement and sale for 174 on 25 May 2021 for $1,900,000. The transaction is set to close on 22 January 2022.

[4] The defendants entered into an agreement of purchase and sale for 176 on 12 June 2021 for $2,900,000 and it is set to close on 18 August 2021.

[5] The defendants entered into an agreement of purchase and sale for 176B on or about 4 May 2021 for $2,898,000 and the transaction closed on 28 May 2021. The current owners have not been notified of the CPL or of this motion.

[6] The defendants entered into an agreement of purchase and sale for 178 on or about 16 February 2021 for $2,880,000 and it closed on 17 March 2021. The current owners have not been notified of the CPL or of this motion.

[7] Given this decision is required immediately, I have not recited all of the background facts but have reviewed all the evidence filed by each party in detail.

[8] The parties are agreed both on the test for obtaining a CPL and on the test for setting aside a CPL. In order to obtain a CPL, a party must raise a triable issue as to its reasonable claim to an interest in the property in question. The defendants concede that the plaintiff has met this test.

[9] A CPL may be discharged where a party claims money in lieu of an interest in the land, does not raise a triable issue as to a reasonable claim to an interest in the claim, does not prosecute the claim with due diligence; where its interest can be adequately protected by another form of security or on any other ground that is considered just (i.e. the Dhunna factors; 572383 Ontario Inc. v. Dhunna 1987 Carswell 551).

[10] Further, where a CPL is obtained without notice, it may be set aside, regardless of the merits of the claim, if the plaintiff did not make full and fair disclosure to the court on the original motion (Rule 39.01(6). The policy reasons for this requirement and remedy are fully canvassed by Myers, J. in Moses v. Metro Hardware and Maintenance Inc. 2020 ONSC 6684. The defendants argue that the CPLs should be discharged due to the plaintiff’s egregious non-disclosure of material facts.

[11] The defendants argue that the plaintiff mislead the court when he failed to provide full disclosure on multiple material issues. Their primary argument is that the plaintiff did not adequately disclose that the funds he advanced for these properties were all in relation to a transaction that did not close and for which the money was lost to the vendors in a fraud. The defendants purchased the properties in a second subsequent transaction involving two of the properties in question and argue that the plaintiff’s money was not tendered in respect of the second transaction that closed. By not pointing out that there were two distinct transactions, one for which the plaintiff advanced funds and which failed and one for which he did not advance funds and which closed, he deliberately misled the court.

[12] The defendants also argue that the plaintiff misled the court by arguing that there was a trust agreement between him and the defendants, when never was any such agreement, oral or in writing and by not disclosing a confirmation letter that would have demonstrated that there was no trust. In this same vein, they argue that the plaintiff suggested that he had no dealings with the original vendor and left all negotiations to the defendants, whom he understood were protecting his interests. The defendants argue that the plaintiff strategically omitted a number of documents that would have demonstrated that he was directly involved in the transactions and did not rely on the defendants. On this last point, the defendants note that on the original motion, the plaintiff advised that he provided his funds to the defendants as his trustees. He omitted to disclose evidence that he provided funds to directly to the vendors in some instances.

[13] Having reviewed the evidence of both parties and heard the submissions of counsel, I cannot say that the plaintiff misled the court on his original motion. On some instances, there is a disagreement between the parties on what the evidence means. For instance, the plaintiff says there was a trust agreement and the defendants disagree. The plaintiff’s version cannot be characterized as misleading. (see Zhao v. 8657181 Canada Inc. 2020 ONSC 2864). The defendants may succeed at trial in demonstrating there never was a trust agreement but at this stage the court is left with competing narratives.

[14] The defendants agree that the plaintiff advanced considerable sums for the purchase of these properties. However, they argue that these sums were provided either to the original owners of the properties (176, 176B and 178) or at least in connection with the proposed purchase from the original owners and that those owners defrauded the defendants and the plaintiff of all the funds they have advanced.

[15] The fraudsters’ mortgagee then commenced power of sale proceedings. The defendants argue that, with those original funds gone, they started afresh to purchase 176, 176B and 178 through the power of sale proceedings. They argue that the plaintiff did not advance any funds for this new transaction. Further, he did not disclose to the court that there were two separate transactions or that his funds were only advanced to the fraudsters in the original transaction and not in connection with the power of sale transaction.

[16] I accept the plaintiff’s argument that not only was the power of sale disclosed but also that, from his perspective, he had advanced the funds to the defendants for the purchase of these properties, and it was not material whether it was for the first or the second version of the transaction.

[17] On the first point, in his affidavit on the original motion, the plaintiff provided the agreement of purchase and sale that shows the vendor is “Baybank Capital Inc., under power of sale”. He also referenced in the body of his affidavit that Baybank was the vendor of both 176 and 178. He noted that the defendant Ms. Xu had told him that the owners were fraudsters and would not acknowledge receiving their funds. He further noted that the defendants told him that “the mortgagee of 176 and 178 had possessed the lands and that I need to pay $200,000 to the mortgagee to take back the lands. Relying on their representation, I transferred a total of $185,000 to Mr. Wang and Ms. Xu for the purpose of taking back the lands from the mortgagee.” I am satisfied there was no material non-disclosure with respect to the advancement of funds, with respect to the fact that there were two transactions, and with respect to how the transactions came about, the second one being through the mortgagee.

[18] On the second point, the plaintiff argues he paid $3,480,000 toward the purchase of these properties. Regardless of when he advanced the funds to the defendants (excluding the funds he advanced to the alleged fraudsters), those funds were earmarked for the purchase of these properties. He was given no evidence of any fraud, although Xu told him in September 2018 that the vendors were fraudsters and had defrauded them but that she and Wang had sued them. He also argues that the fraud characterization may be suspect as the defendants allege that they settled their litigation with the fraudsters for zero dollars and without his input or agreement, despite his acknowledged advancement of $3,480,000 toward the purchase of these properties. He has not been provided with the minutes of settlement confirming that the defendants received no funds. From the productions he did receive, the plaintiff noted that it was the alleged fraudsters who sued the defendants and the defendants’ position was advanced only by way of counterclaim.

[19] The same answer is made to the defendants’ argument that the plaintiff’s funds were all advanced by October 2018 and, therefore, could not have been used to fund the power of sale purchases. The defendants may succeed in demonstrating that all of the $3,480,000 was given to the fraudsters and that none of the funds were used directly or indirectly to fund the purchase of any of the properties in question, but I cannot find at this point that the plaintiff has misled the court concerning his advances. The Master had before her the chart outlining the dates of the plaintiff’s advances as well as the dates of the agreements

[20] As for the trust, the defendants argue that the plaintiff failed to disclose a clarification letter that would have demonstrated that the defendants were not trustees of the plaintiff. The clarification letter was not disclosed until the plaintiff filed his responding record on this motion. The defendants argue that, had this clarification letter been before the Master, she would have found that this was a business collaboration and not a trust arrangement. They also argue it would have demonstrated that the plaintiff was aware that the first transaction failed, that there was a fraud, that litigation ensued and that there was a new agreement entered into. His narrative about discovering the fraud and the subsequent agreement late in the day would not have been accepted.

[21] I find that a review of the clarification letter is as supportive of the plaintiff’s position as of the defendants’. It was drafted by the defendant Xu and states that “Mr. Yu Liang (the buyer) [emphasis added] entrusted Zhen Wang and Jian Xu (the third party) to purchase properties 176, 178 Caribou Road on his behalf.” The word “entrusted” is repeated in two other instances in the clarification letter prepared by Xu. It goes on to state that “Mr. Yu Liang did not use his real name to execute the agreement, instead, he used friends’ names to sign on his behalf for the time being.”. A contemporaneous chat message from Xu confirms that “Mr. Yu Liang did not sign the purchase agreement in his name due to personal reasons, it was signed by Jian Xu.” These are arguably supportive of the trust arrangement that the plaintiff alleges.

[22] I note the plaintiff had also included in his original motion a proposed construction or development agreement prepared by Xu for 176 and 178 that showed the fraudsters as the contractor and the owner as “Yu Liang (Representative: Jian Phoenix Xu).”

[23] The defendants may demonstrate at trial that the plaintiff was not a passive investor who relied on them as trustees but was equally involved with the original vendors. They may also succeed in demonstrating that the fraudsters absconded with all the plaintiff’s funds. But, to date, the plaintiff has not been provided with a complete accounting as to what happened to his funds, which he “entrusted” to the defendants. According to the plaintiff, the accounting that was included in the defendants’ supplementary motion record leaves substantial funds unaccounted for.

176 Caribou

[24] The 176 closing is scheduled for tomorrow, August 18. The plaintiff has agreed to a discharge of the CPL on this property provided the net closing funds are held in trust by the real estate lawyer with carriage of the closing or, absent the lawyer’s agreement to do so, paid into court. The defendants object to any payment into court, arguing that it allows the plaintiff to use an improperly obtained CPL as leverage. At best, they argue that only $90,000 should be paid into court, being roughly half of what the plaintiff indicated he paid as a deposit on the power of sale for this property.

[25] Had the plaintiff not consented, I would have discharged the CPL, and ordered payment of the net proceeds into court as a remedy that would adequately protect the plaintiff’s interest (Section 103(6)(b) of the Courts of Justice Act (Ontario)).

[26] It is important to note that one point that all the parties do agree on is that their original intention was to purchase, develop and sell real estate. It is in keeping with that intention that 176 be sold tomorrow and the net proceeds be held in trust as outlined above. For this reason, an order shall go discharging the CPL over 176 as part of the closing.

[27] While it would have been preferable to pay some funds to the parties out of sale proceeds, there is no agreement to do so on this motion. The plaintiff maintains that he advanced more than $3,000,000 to be used for the purchase of these properties. The defendants argue that none of those funds went toward any of the purchases, which they funded themselves, and the plaintiff is entitled to nothing. As such, the net proceeds will remain in trust pending agreement between the parties or further order of this court.

[28] The discharge shall be at the initial expense of the defendants, as the plaintiff has demonstrated an entitlement to a CPL but is – and indicated in his responding record that he was – prepared to discharge the CPL to facilitate the closing. This expense, however, shall be subject to ultimate determination by the trial judge. The defendants shall also provide the plaintiff with a copy of the mortgage payout statement and the trust ledger on closing.

174 Caribou

[29] The defendants argue that there is no evidence that the plaintiff advanced any money toward this property and they have led evidence that they used their own funds to purchase 174 in May 2018. The plaintiff argues that the funds he initially gave 258, the defendants’ company, for the purchase 176 were in fact used by the defendants to purchase 174 and he can trace those funds through to this property. He also notes specifically that he paid $300,000 in October 2017 and notes the defendants’ admission that they used half of those funds for 174. Lastly, he argues that Xu has stated in the fraudster litigation that she paid $3,000,000 for 174, and he states it is not disputed that those funds came from him. He notes that 258, the company to whom he originally gave the funds, ultimately ended up purchasing 174, with no attribution to the plaintiff of his contribution.

[30] As with 176, there is no reason the sale of this property should be jeopardized, given the parties’ mutual intention to develop and sale the real estate. Also as with 176, at closing the CPL shall be discharged and the net proceeds held either in trust by the real estate lawyer with carriage of the closing or paid into court. The defendants shall provide the plaintiff with a copy of the mortgage payout statement and the trust ledger on closing.

178 Caribou

[31] This property has been owned by arm’s length third parties since 17 March 2021. The plaintiff has agreed to an order discharging the CPL but requests as a term that the defendants provide copies of the reporting letter from the closing, the payout statement, the statement of trust balance and copies of the sale proceeds cheques. Upon receipt of those documents, he will consent to the discharge. The defendants argue that the plaintiff is not entitled to these documents and I am not prepared to make them a condition of the discharge. He is free to ask for those documents on discovery. I hereby order that this CPL be discharged.

176B Caribou

[32] For the reasons set out above related to 178, this CPL is also discharged. 176B has been owned by arm’s length third parties since 28 May 2021.

[33] The plaintiff asks that the costs of these two discharges be reserved to the trial judge. I disagree. If the plaintiff obtained the CPLs on what turned out to be an erroneous basis, or without knowledge that the properties had been sold to arms-length purchasers, this is not a state to which the defendants contributed. The plaintiff shall bear the cost of the discharges.

[34] For both of these properties, I am concerned that the plaintiff had not served the owners with the motion record or advised them of the CPL. As a result, the owners were not present to argue their case. It is appropriate that the plaintiff discharge both CPLs as soon as possible.

Conclusion

[35] An order shall go discharging all CPLs in the form attached and providing for payment into court as set out above.

[36] If the parties are unable to agree on costs by 24 September 2021, they may each file a costs outline and costs submissions no more than three pages in length, by email to my assistant trial co-ordinator, Ms. Meditskos at Christine.Meditskos@ontario.ca.

Date: 17 August 2021

Master Jolley