Court File and Parties

COURT FILE NO.: CV-24-00723370-0000 DATE: 2024-12-13 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: RONGHAI CHEN and JIANLIN FENG, Applicants – and – JIAXIANG HUANG a.k.a. JASON HUANG, 2614069 ONTARIO INC., IBC VENTURES INC., GOLDEN OCEAN INVESTMENT CORPORATION, YONG SHI, XIN DI HUANG, KIT YING TERESA LO, NIA LAW PROFESSIONAL CORPORATION, PINTTENG TAN o/a TAN & ASSOCIATES, KEVIN LEE, WING CHAO-MA, ANGEL UNIFORM LTD., UFEEL SCRUBS INC., WU LAW PROFESSIONAL CORPORATION, KURT ANTHONY SUNN, 710561 ONTARIO LIMITED, CHIA MAO HSIANG, YADONG ZHAO, TING TING LAM, XIAOLI YU, YUTONG GE, HAOXIANG LIANG, 14455169 CANADA INC., LINDA HUNG-I CHAO, KATHERINE WONG PROFESSIONAL CORPORATION, JIAN JIANG, YINGHUA GUAN, JX LAW PROFESSIONAL CORPORATION, CANWELL ASSET MANAEMENT INC., 11202898 CANADA INC., BO XIAO, VOLODYMYR CHAGROV, JOHN DOE PURCHASER, JOHN DOE SOLICITOR FOR MORTGAGEES IN POSSESSION and JOHN DOE SOLICITOR FOR UNKNOWN PURCHASER, Respondents

BEFORE: E.M. Morgan J.

COUNSEL: Jonathan Mesiano-Crookston, Stephen Barbier, and Ye Yuan, for the Applicants Dominique Michaud and Joey Jamil, for the Respondents, 710561 Ontario Limited, Linda Hung-I Chao, Chia Mao Hsiang, Yadong Zhao, Ting Ting Lam, Xiaoli Yu and Yutong Ge Michael Myers and Parjot Benipal, for the Respondent, Jian Jiang

HEARD: December 12, 2024

REASONS FOR DECISION

[1] The Applicants bring a motion challenging the validity and enforceability of a second and third mortgage registered against a multi-unit apartment building at 2818 Bayview Avenue, Toronto (the “Property”). The Property was owned at the material time by the Respondent, Golden Ocean Investment Corporation (“Golden Ocean”). The loan documents and mortgages were executed on Golden Ocean’s behalf by its sole registered director and officer, the Respondent, Jason Huang.

[2] The Applicants, who are Mr. Huang’s co-shareholders in Golden Ocean, contend that they knew nothing about these mortgages and that Mr. Huang had no authority to enter into them. The motion before me has been brought in the context of a shareholder oppression application in which the Applicants allege that that they have been defrauded and that Golden Ocean has been manipulated and that they as shareholders have been deprived of substantial funds by Mr. Huang.

[3] The lenders under the second and third mortgages are comprised of individual investors. For the second mortgage, the Respondents, 710561 Ontario Limited, Linda Hung-I Chao, Chia Mao Hsiang, Yadong Zhao, Ting Ting Lam, Xiaoli Yu and Yutong Ge (the “Second Mortgagee”), lent Golden Ocean $6,000,000 for a one-year term at an interest rate of 13.5% per annum. For the third mortgage, the Respondent, Jian Jiang (the “Third Mortgagee”), lent Golden Ocean $1,700,000 for a six-month term at an interest rate of 15% per annum.

[4] The Property has now been sold under Power of Sale by the Second Mortgagee. That sale was authorized by Order of Justice Koehnen dated July 26, 2024. I am advised that the sale price was in the range of $16 million; of that, a first mortgage has been paid off, fees paid, and a holdback of $6,000,000 of the sale proceeds (the “Holdback”) is being held in trust by the Second Mortgagee’s mortgage enforcement counsel, FIJ Law LLP. Justice Koehnen authorized the sale of the Property on the understanding that there would be a Holdback and that the question of the validity of the second and third mortgages is to be determined at a later time.

[5] The Applicants challenge the two mortgages pursuant to section 2 of the Fraudulent Conveyances Act. They allege that the Second and Third Mortgagees were reckless or willfully blind as to the fraud being perpetrated by Mr. Huang, and that, had the Property not been sold and the mortgages discharged, both the second and third mortgages would be subject to being set aside. Since the Property has been sold, Justice Koehnen’s Order provides that any claim for repayment of the mortgages is, in effect a claim for distribution of the proceeds out of the Holdback funds.

[6] Accordingly, if the mortgages are valid, the Second and Third Mortgagees will get paid from the Holdback funds; and if they are not valid, then the Holdback will be transferred to Golden Ocean as previous owner of the Property. Although the record does not contain an exact accounting of monies owing under the two mortgages, counsel advise that the funds remaining in trust after various fees may only be enough to repay the Second Mortgagee. It is likely that the Third Mortgagee will lose much of its investment.

[7] The record establishes that the Second and Third Mortgagees are both unrelated to Golden Ocean and Mr. Huang. While one of the principals of the Second Mortgagee group of investors knew Mr. Huang from previous dealings, there is no evidence that they share any financial interest or that Mr. Huang was in a conflict of interest in dealing with them. In fact, it is the Applicants’ position that the two mortgagees were wilfully blind in entering the mortgage transactions the way they did with a company represented by a person – Mr. Huang – who they did not know at all and had no reason to trust.

[8] Applicants’ counsel submit that the Second Mortgagee was reckless to the point of being wilfully blind to the risks of lending $6 million to Golden Ocean. They submit the same of the Third Mortgagee, who lent $1.75 million to Golden Ocean behind the Second Mortgagee’s $6 million. Given the level of rental income produced by the Property, Golden Ocean would effectively be insolvent in assuming this level of debt.

[9] Applicants’ counsel points out that a review of the rent roll produced by Mr. Huang would have rather quickly revealed that it was likely falsified. It showed that rents had ostensibly increased to a level three times higher than they had been four years previously when Golden Ocean acquired the Property. At a realistic level of rents, the Property’s income could not come close to covering the interest payments that Golden Ocean would be obliged to make under the second and third mortgages.

[10] On the other hand, counsel for the Second Mortgagee point out that the Second Mortgagee received 3 months interest pre-paid upon entering the mortgage agreement, and continued to receive monthly payments from November 2022 until Golden Ocean’s default in July 2023. Given that the second mortgage was only for a 12-month term, the Second Mortgagee received monthly payments for over half the mortgage term.

[11] In any case, counsel for the Third Mortgagee points out that the Second and Third Mortgagees are value investors, and that those types of non-institutional lenders typically focus on the equity in the property offered as security for the loan over the income that property produces. To this end, it is noteworthy that Mr. Huang provided the Second and Third Mortgagees with an appraisal of the Property showing its value at $18.8 million. That left ample equity to secure the Second Mortgagee’s position and, potentially, the Third Mortgagee’s position as well. It is the submission of both Mortgagees that in evaluating a mortgage loan in this way they were not wilfully blind to the risks of such loans; to the contrary, the elevated rates of interest are designed to cover precisely those risks.

[12] Mr. Huang has deposed that the purpose of both loans was to pay off previous second and third mortgages on the Property. The evidence is that Mr. Huang told them that was the reason for the loans, and the record confirms that this is indeed where the funds went. The previous mortgages were indeed discharged and replaced by the second and third mortgages in issue here. The evidence does not suggest that the Second and Third Mortgagees should have been alerted to some plan by Mr. Huang to take and use the Mortgagees’ funds for unknown or suspicious purposes; to the contrary, by all appearances, the funds appear to have needed, and to have been used, to discharge the previous mortgages.

[13] The Second and Third Mortgagees both state that, contrary to the Applicants’ view of them, they did proper due diligence by relying on their lawyer to investigate the transaction for them. This indicates, of course, that they made sure that their investment was properly secured from a legal point of view, but not necessarily from a financial point of view.

[14] Counsel for both Mortgagees submit that their clients were entitled to rely on Mr. Huang’s ostensible authority to enter into the transactions on Golden Ocean’s behalf. They further submit that the Second and Third Mortgagees are protected in that respect by the indoor management rule, and that they were bona fide purchasers for value who had no knowledge of any dispute between Mr. Huang and the Applicants or, for that matter, of the Applicants’ existence.

[15] It is the Second and Third Mortgagees’ overall position that they did the due diligence necessary to satisfy themselves that their mortgages were legally valid and enforceable; beyond that, they are free to take all the financial risks they want and cannot be faulted for doing so.

[16] By contrast, it is the Applicants’ position that by taking serious financial risk the two Mortgagees turned a blind eye to badges of fraud. Applicants’ counsel argues that had they done more thorough financial investigation of what Mr. Huang was offering, they would have detected, or at least seen warning signs, of the fraud he was perpetrating on the other shareholders of Golden Ocean.

[17] In Vestacon Limited v. Huszti Investments (Canada) Ltd. o/a Eyewatch, 2022 ONSC 2104, at para 334, the court set out a list of red flags that a transferee or mortgagee of property might detect:

[34] Badges of fraud include: (i) the transferor has few remaining assets after the transfer; (ii) the transfer was made to a non-arm’s length person; (iii) there were actual or potential liabilities facing the transferor, he was insolvent, or he was about to enter upon a risky undertaking; (iv) the consideration for the transaction was grossly inadequate; (v) the transferor remained in possession or occupation of the property for his own use after the transfer; (vi) the deed of transfer contained a self-serving and unusual provision; (vii) the transfer was effected with unusual haste; and (viii) the transaction was made in the face of an outstanding judgment against the debtor: Bank of Montreal v. Bibi, 2020 ONSC 2949, at para. 23.

[18] It is obvious on the face of these indicators that the issues addressed in a buyer’s or lender’s due diligence and for the most part legal issues. This accords with the overall view of the courts that the law…

…makes a clear distinction between suspicions about the creditworthiness of the borrower and suspicions about the validity of the borrower’s title. On reflection, it can be seen that this distinction is exactly relevant to the question of fraudulent intent in the present case. A mortgagee who has reason to suspect that there is something wrong with the prospective mortgagor’s title has or may have reason to suspect the possibility of fraud. A mortgagee who has reason only to suspect that there is a credit risk is not in such a position and therefore if that mortgagee fails to make enquiry it might indicate negligence or indifference but it is not sufficient to show willful disregard of possible fraud.

The defendants assert that their situation comes within the innocent side of the distinction made in the trial decision in the Bank Leu Ag case and upheld on appeal.

Each defendant says in effect (although in different ways) that it was lending only on the equity in the property and its concern was therefore only to be assured that the title of the mortgagor was valid.

Cybernetic Exchange Inc. v. JCN Equities Ltd., 2003 CanLII 7041, at para. 240-242 (SCJ).

[19] In other words, an underwriting risk such as that taken by the Second Mortgagee and Third Mortgagee is not a badge of fraud. It is a business risk that investors are permitted to take and that non-institutional investors in mortgages frequently do take. The higher rate of interest compensates for this risk, and the appraised value of the mortgaged property provides the security that this type of investor seeks.

[20] The Second and Third Mortgagees did all the due diligence required of them. They are bona fide purchasers for value with no notice of any fraud by Mr. Huang. Further, Mr. Huang had both ostensible authority and, as sole director and officer, actual authority to enter into the mortgages.

[21] I find that the second and third mortgages on the Property were valid and enforceable. The Second and Third Mortgagees are to be paid from whatever funds remain in the Holdback.

[22] The Applicants’ motion is dismissed.

[23] The parties may make written submissions on costs. I would ask counsel for the Second and Third Mortgagees to send brief submissions by email to my assistant by the end of the second week in January 2025. I would ask counsel for the Applicants to send equally brief submissions by email to my assistant by the end of the first week in February 2025.

Date: December 13, 2024 Morgan J.