Court File and Parties

COURT FILE NO.: CV-21-00655752-0000 DATE: 2022-04-26 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: BH Frontier Solutions Inc., Plaintiff – AND – 11054660 Canada Inc. doing business as Canadian Choice Supply, 9428364 Canada Corporation, Kambiz Salami, Rongze Chai also known as Melinda Chai, Rumqi Xuhekamg Medical Equipment, Jiang Xiaoxain and Jiang Wanyin, Defendants

BEFORE: E.M. Morgan, J.

COUNSEL: David Milosevic, for the Plaintiffs Ran He, for the Defendants, 11054660 Canada Inc. doing business as Canadian Choice Supply, 9428364 Canada Corporation, Kambiz Salami, Rongze Chai also known as Melinda Chai

HEARD: April 13-14, 2022

Reasons for Judgment

[1] In December 2021, Dunphy, J. granted summary judgment to the Plaintiff as against the Defendant, 11054660 Canada Inc. doing business as Canadian Choice Supply (“CCS”), for repayment of all but $7,000 paid by the Plaintiff for personal protective equipment (“PPE”) that was contracted for but never delivered by CCS: BH Frontier Solutions v. 11054660 Canada Inc., 2021 ONSC 8224. Liability for the $7,000 balance remains to be determined.

[2] In addition, the Plaintiff claims fraud as against a company related to CCS, the Defendant, 9428364 Canada Corporation (“942”), and against Kambiz Salami and Rongze Chai also known as Melinda Chai, who are the individual principals of CCS. Justice Dunphy was of the view that the fraud claims required a trial so that credibility could be assessed and a proper defense presented: Ibid., at para 4.

I. The Agreement

[3] On September 29, 2020, the Plaintiff entered into a 3-way Agreement with CCS and Shijazhuang Hongray Group (“Hongray”), for the purchase of medical grade Hongray Nitrile Examination Gloves (the “Agreement”). Hongray is a company with a worldwide reputation for quality merchandise. It produces the medical gloves in issue in its manufacturing facilities in China. The Plaintiff had agreements with medical facilities in Ontario to provide PPE items, which were in high demand in the fall of 2020. CCS presented itself to the Plaintiff as an authorized distributor of Hongray products.

[4] The Agreement was negotiated and signed on behalf of the Plaintiff by its principal, Ran David Tao. It was negotiated on behalf of CCS by Ms. Chai and Mr. Salami, and signed on behalf of CCS by Mr. Salami. An official-looking seal also appears on the Agreement representing the signature of Hongray. That signature was provided by Jiang Xiaoxain, a former Defendant against whom the present claim has been discontinued in favour of a lawsuit brought by the Plaintiff in China. The Hongray signature is now agreed by all parties here to have been fraudulently placed on the Agreement by Ms. Jiang; that fraud is a subject of the claim before the Chinese courts.

[5] The Agreement included, in part, the following terms:

(a) The Seller will deliver, on or before October 20, 2020, (i) 67,600 boxes of 12” Hongray Nitrile Examinations Gloves; and (ii) 40,000 boxes of 9” Hongray Nitrile Examinations Gloves.

(b) Payment by the Buyer in U.S. dollars as follows: (i) 50% deposit towards a distributor’s corporate account upon agreement signed; and (ii) Balance of 50% prior to the shipment date and after successful independent SGS inspection requested by the Buyer and the Buyer is satisfied with the inspection results.

(c) The Distributor (Canadian Choice) is required to wire the Manufacturer (Hongray) payment and to provide an official receipt from the Distributor via mail or email for the deposit and payment to the Manufacturer. The deposit will be refunded to the Buyer if the transaction is not completed.

(d) The Distributor is responsible to deliver the goods to a port in China specified by the Buyer at the Distributor’s expense. The Distributor has agreed to deliver the goods on the same day or the next day after receiving the balance. After loading the goods on trucks or other form of transportation, a packing slip will be generated and emailed to the Buyer. The delivery is considered accepted when the Buyer’s representative has signed on the Receipt of delivery. The Distributor agrees to complete all custom clearance in China under this Agreement.

[6] In payment for the PPE covered by the Agreement, the Plaintiff wired $1,325,546.25 USD as directed by Ms. Chai between October 9-26, 2020. Of this amount, several orders were not delivered to the Plaintiff and no refund has been provided. The missing orders represent a total of $504,980.00 of the purchase price paid by the Plaintiff.

[7] The Defendants provided Mr. Tao with a receipt showing that the funds he deposited in their Canadian accounts were sent directly to Hongray in China. That receipt was fraudulent and was not issued by Hongray. The Defendants concede that it was sent to them by Ms. Jiang, and state that it was Ms. Jiang who, unbeknownst to them, created the false receipt.

II. The double fraud

[8] The Defendants do not deny that they failed to deliver $504,980.00 USD worth of goods bought and paid for by the Plaintiff. It is the Plaintiff’s position that the Agreement and sale pursuant thereto was fraudulent to the extent of the undelivered PPE, and that the Defendants were the principal agents of that fraud.

[9] In response, the Defendants’ contention that they sent the Plaintiff’s funds to China at the direction of Ms. Jiang but were themselves the victim of Ms. Jian’s fraud. It is the Defendants’ position that the present case is a contest between two fraud victims, and that any recovery by the Plaintiff must wait until the outcome of their claim against Ms. Jiang in the Chinese courts.

[10] During the course of the trial, it has become clear that the transaction at issue was composed of two separate and distinct frauds: (a) a fraudulent misappropriation that took place in China; and (b) a fraudulent misrepresentation that took place in Canada. It is likely, but not certain on the evidence before me, that the Defendants participated in the former. It is clear beyond any doubt, however, that the Defendants perpetrated the latter and that the Plaintiff suffered significant loss as a result.

a) The Canada-based fraud

[11] The Plaintiff’s principal, Mr. Tao, is a young, entrepreneurial, and altogether credible Queens University graduate with a degree in commerce. He testified that in an initial meeting, Mr. Salami represented that his company, CCS, had a “factory direct” relationship with Hongray, a renowned company and manufacturer of medical grade gloves. This representation was reinforced by CCS’ promotional brochures, which announced the “factory direct” relationship in bold headlines and stated that there were “No middle-men & distributors” standing in between these direct dealings between CCS and Hongray.

[12] In cross-examination, Mr. Tao stated that the Defendants’ direct dealings with Hongray were very important to him, and that without this direct relationship he would not have had business dealings with them and would not have entered into the Agreement. Mr. Tao was concerned that the Hongray gloves be authentic and not come from any other source, and was also concerned that the funds he paid to the Defendants be transferred directly to Hongray and not be diverted to any other party. He testified that he confirmed and re-confirmed this direct relationship by asking Mr. Salami and Ms. Chai to reiterate it five times during the course of their discussions.

[13] Mr. Tao also testified that in their second meeting, Mr. Salami and his spouse, Ms. Chai, both assured him that any funds paid to them for the gloves would go directly to Hongray. Mr. Tao stated that this was of great importance to him, and that he was reassured by the fact that direct payments to Hongray were reflected in Clause 5 of the Agreement.

[14] In fact, Mr. Tao stated that he specifically asked Mr. Salami if he could send the funds directly to Hongray, but that Mr. Salami had instead built the direct payment language into Clause 5. According to Mr. Tao, this satisfied him that the Defendants were dealing directly with Hongray in selling him the PPE in question.

[15] Clause 5 of the English language version of the Agreement provides:

When payments are deposited to the Distributor's account, the Distributor is required to wire the Manufacturer's payment under this Agreement to the Manufacturer, contract manufacturer or designate manufacturer as defined by Shijiazhuang Hongray Group on the same day. An official receipt from the Distributor will be provided to the buyer via mail or email regarding the receipt of the deposit and payment to the manufacturer. A notice of receipt of the deposit from the Manufacturer, contract manufacturer or designate manufacturer as defined by Shijiazhuang Hongray Group need to be sent to the Distributor, who will email that to all parties. The deposit will be refunded to the Buyer if this transaction is not completed.

[16] The Chinese language version of Clause 5 turns out to be slightly different than the English version. In the Chinese version, the Defendants added the words “designated by Party B” [i.e. CCS] instead of having the payments go straight to Hongray and only to Honray. When asked in cross-examination where this addition came from, Mr. Salami gave what amounted to a non-answer. Clause 5 of the Chinese version of the Agreement provides:

Transaction Process: from the date of signing the contract, Party A [i.e. the Plaintiff] will remit 50% as deposit to the company account designated by Party B [i.e. CCS], and Party B must remit the portion of the amount that belongs to Party C [i.e. Hongray] on the same day to Party C’s USD business account and present the proof of remittance to Party A. The amount of money to be received by Party C shall be determined by Party B and Party C in accordance with their own contracts or negotiated by themselves, and is not the responsibility of Party A, which means, on the day when Party A pays the deposit to Party C’s company account it shall be deemed as Party A having paid 50% of the amount to Party C. Party C shall not use the amount between it and Party B, other disputes or the unpaid amount from party B to Party C as an excuse to refuse to perform here of. After receiving the payment, Party C needs to show the payment receiving statement to Party B, and Party B needs to show the statement to Party A.

[17] Upon making payment, Mr. Salami presented Mr. Tao with a receipt showing that the funds were forwarded to Hongray. Mr. Tao testified, “but now we know it was forged.” Neither Mr. Salami nor Ms. Chai deny that the receipt is forged. As indicated above, they both state that the false receipt was provided to them by Ms. Jiang.

[18] Whether or not the Defendants knew that the receipt for payment was fraudulent, they certainly knew that they had not transmitted the Plaintiff’s funds directly to Hongray as provided in Clause 5 and as assured to Mr. Tao. The trail of the money, which is not denied (and could not be denied) by either Mr. Salami or Ms. Chai, shows that the funds were never sent to Hongray and likely never made their way to Hongray.

[19] For reasons that Ms. Chai blames on banking issues in Canada but which remain not fully explained and are, frankly, somewhat mysterious to me, Ms. Chai directed the Plaintiff not to make his cheques payable to CCS but rather to another company controlled by Ms. Chai and Mr. Salami, the Defendant, 9428364 Canada Corporation (“942”). It was Ms. Chai’s and Mr. Salami’s explanation that their bank was willing to handle the Plaintiff’s funds on behalf of 942 but not on behalf of CCS because 942 was a longer established company. I have significant doubts about the credibility of this claim.

[20] Although pressed on the point in cross-examination, neither Ms. Chai nor Mr. Salami provided a coherent explanation. In fact, it seems that the Plaintiff’s first cheque was made payable to CCS, but that was rejected by CCS’ bank. Ms. Chai then misled Mr. Tao, and told him that she needed a new cheque payable to 942 because his first cheque had been rejected by Hongray – when, in fact, it had never been sent to Hongray.

[21] The evidence shows that the Plaintiff’s second cheque was deposited in Canada by 942, and then was sent – supposedly at Ms. Jiang’s direction – to six different individuals in China:

(i) $40,000 to Zhixi Liu on October 7, 2020; (ii) $200,000 to Yutonmg Chai on October 8, 2020; (iii) $100,000 to Qingjuan Chen on October 13, 2020; (iv) $300,000 to Quang Ma on October 13, 2020; (v) $130,000 to Ying Liu on October 21, 2020; and (vi) $170,000 to Ying Liu on October 21, 2020.

[22] When asked in cross-examination who these individuals are, Ms. Chai responded that she does not know. When pressed on why she would forward this money to persons who she did not know, she provided a cryptic answer about money exchange agents in China requiring things to be done in this way.

[23] Likewise, Mr. Salami testified that he knew nothing about the payments made with the funds that the Plaintiff had provided, and parroted the indecipherable explanation about money exchange agents in China. Both Ms. Chai and Mr. Salami testified that the payment arrangements were done on the instructions of Ms. Jiang, but apparently neither of them had inquired of Ms. Jiang why things were being done in this way. In addition, both indicated that they had never actually met Ms. Jiang, but rather had been introduced to her over WeChat.

[24] In my view, none of the Defendants’ explanations are satisfactory or even logical. It is very odd for the Defendants to contract with one company they control but insist on receiving payments to an altogether different company without any real reason (or, at least, none that they are willing to share in their testimony). It is even more suspicious for them to forward the funds provided to them by the Plaintiff to a number of individuals who they do not know, all on the direction of an individual that they have never met.

[25] What is clear, however, is that their representation that they have a “factory direct” business relationship with Hongray was not only false, it was knowingly so. Ms. Chai and Mr. Salami dealt only with Ms. Jiang, and they did not know who she was nor did they do any investigation of her or the credibility of her supposed association with Hongray. They intentionally misled Mr. Tao in this respect, and by doing so induced the Plaintiff into entering the Agreement and sending its funds to 942 at Ms. Chai’s direction.

[26] The Plaintiff’s losses in the form of payments made for PPE never delivered were a direct result of the fraudulent misrepresentations made by Mr. Salami and Ms. Chai on behalf of CCS. That company, in turn, was entirely controlled by Mr. Salami and Ms. Chai, who were its only directors, officers, and shareholders. It had no other business interests, and was completely dominated by the personal interests of its two principals.

[27] By virtue of the intentional misrepresentations made by Mr. Salami and Ms. Chai, CCS defrauded the Plaintiff into entering the Agreement. It then further caused CCS to send its funds to 942, after which they disappeared into the hands of unknown individuals in China.

[28] In 642947 Ontario Ltd. v. Fleischer (2001), 56 O.R. (3d) 417, at para 68 (Ont CA), Laskin JA set out the conditions in which the courts will pierce the corporate veil of a defendant:

Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if when incorporated ‘those in control expressly direct a wrongful thing to be done’: Clarkson Co. v. Zhelka at p. 578. Sharpe J. set out a useful statement of the guiding principle in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 at pp. 433-34 (Gen. Div.), affd [1997] O.J. No. 3754 (C.A.): ‘the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.’

[29] This description is apt to the Defendants’ situation. The two elements that the Court of Appeal require for piercing the corporate veil – a) complete domination of the company by its owners, and b) conduct akin to fraud – are certainly present. While CCS is liable for its breach of contract with the Plaintiff, the two individuals behind CCS – Mr. Salami and Ms. Chai – are liable for the fraudulent misrepresentations that induced the Plaintiff to enter the Agreement and engage in a transaction with CCS in the first place.

b) The China-based fraud

[30] The evidentiary record does not reveal what happened to the Plaintiff’s funds once they were sent to the unknown individuals by Ms. Chai. What we do know is that $504,980.00 worth of goods were never shipped by Hongray, and that presumably the corresponding funds never made their way to Hongray. Whether Ms. Jiang misappropriated them on her own, as the Defendants contend, or Mr. Salami and Ms. Chai collaborated with Ms. Jiang in their disappearance, is difficult to say.

[31] While there is no direct evidence of their having received any of the misappropriated funds themselves, Ms. Chai’s having sent a substantial portion of the funds to a series of individuals that supposedly neither she nor Mr. Salami knew is so mysterious as to undermine the credibility of their professed innocent victimhood. Furthermore, the fact that they added the phrase “or directed by [CCS]” to the payment mechanics set out in Clause 5 of the Chinese version of the Agreement, but could not say why that phrase was added, lends further doubt to Mr. Salami’s and Ms. Chai’s testimony that they played no part in the misappropriation of the Plaintiff’s funds and are themselves victims of a fraud.

[32] Interestingly, in August 2020, just weeks before the date of the Agreement, a fraud alert was posted on Hongray’s website warning of individuals posing as false agents/distributors for Hongray and passing off forgeries of Hongray’s corporate seal. The warning states that Hongray has no export agency or distributorship contracts with anyone, and that all products are only sold directly through the company. The description of the fraud posted in this warning message is strikingly similar to the China-based fraud perpetrated in the present case.

[33] When asked about this in cross-examination at trial, Ms. Chai said she was unaware of the Hongray warning. However, in her previous cross-examination conducted before the summary judgment motion heard by Justice Dunphy, she was asked if she was aware of this warning at the time. Her response was not quite a denial: “I think I look at it but I didn’t know it is…I didn’t think it is referred to Ms. Jiang and the biggest distributor from Hongray.”

[34] When presented with this prior inconsistent statement, Ms. Chai said that she must have looked at the warning message later, but not at the time. Her response was sufficiently hesitant and confusing that there seemed to be no credibility in what she was saying. It was evident to me that Ms. Chai was backtracking on what she had previously said under oath.

[35] One possibility is that Ms. Chai knew of the Hongray fraud warning in September 2020 but that she and Ms. Salami were so anxious to do business with Ms. Jiang and to conclude an Agreement with the Plaintiff that they had ignored the warning. Another possibility is that Ms. Chai and Mr. Salami were precisely what the Hongray message was warning their bona fide customers about.

[36] Without evidence that Mr. Salami and Ms. Chai shared in the misappropriated funds that were sent to the mysterious individuals, I would be hesitant to conclude that they were in on the fraud for which they blame Ms. Jiang. There is at least a possibility that they were hungry for a deal with the Plaintiff and that they let down their guard and allowed themselves to be preyed upon by Ms. Jiang.

[37] But the fact that the evidence falls slightly short of definitively establishing Mr. Salami and Ms. Chai as full, intentional participants in the China-based fraud and misappropriation of funds, does not counter the fact that the evidence fully supports a finding that Mr. Salami and Ms. Chai perpetrated a Canada-based fraudulent misrepresentation. Either way, the two of them hid behind their company, CCS, and used deceit to manipulate the Plaintiff into entering an Agreement that ultimately caused him financial loss.

c) The $7,000 claim

[38] As indicated earlier in these reasons, Justice Dunphy granted judgment against CCS for breach of contract in the amount of $504,980.00. This represents the amount of unrefunded payments owed to the Plaintiff in respect of goods not delivered under the Agreement. Against this, the Defendants seek a credit of $7,000, reflecting the amount of a proposal for a price increase that they thought they deserved but that was never agreed upon by the Plaintiff.

[39] I see no reason to grant the Defendants this credit. In the first place, the price increase that it reflects never made its way into the Agreement. But perhaps more importantly, there can be no increase on the price of goods not delivered. It is not only wrong, but gallingly wrong, for the Defendants to demand credit in respect of a small price increase on goods that they never managed to deliver to the purchaser.

III. Disposition

[40] Justice Dunphy has already rendered judgment for breach of contract against CCS in the amount of $504,980.00. I hereby grant judgment to the Plaintiff in that amount against the shareholders and directing minds of CCS, Mr. Salami and Ms. Chai, for fraudulent misrepresentation in inducing the Plaintiff to enter the contract. I further grant judgment in the amount of $504,980.00 against 942, a sister company of CCS and the vehicle employed by Mr. Salami and Ms. Chai for furthering their fraudulent misrepresentation with respect to the payment for the PPE purchased by the Plaintiff.

[41] The liability of CCS, Mr. Salami, Ms. Chai, and 942 to the Plaintiff in the amount of $504,980.00 is joint and several.

[42] The Plaintiff seeks punitive damages. While I have found that the Defendants perpetrated a fraudulent misrepresentation that caused the Plaintiff loss, it must be kept in mind that their misdeed was a false representation in promoting their business. I have not concluded on the evidence before me that the Defendants intended for a substantial portion of the goods that the Plaintiff contracted and paid for not to be delivered. While the Defendants are liable for their misrepresentation, and the misrepresentation was done in a way that warrants piercing the corporate veil, it falls short of conduct deserving the court’s approbation it the form of punitive damages.

[43] The parties may make written submissions on costs. I would ask Plaintiff’s counsel to email my assistant with brief submissions within two weeks of today, and Defendants’ counsel to email my assistant with equally brief submissions within two weeks thereafter.

Date: April 26, 2022 Morgan J.