



COURT OF APPEAL FOR ONTARIO

CITATION: Lee v. Lalu Canada Inc., 2020 ONCA
    344

DATE: 20200603

DOCKET: C67559

Pepall, van Rensburg and
    Paciocco JJ.A.

BETWEEN

Gerard Lee

Applicant (Appellant)

and

Lalu Canada Inc.

Respondent (Respondent)

Benjamin Salsberg, for the appellant

Michael M. Title and Patricia Virc, for
    the respondent

Heard: April 29, 2020 by videoconference

On appeal from the judgment of Justice Laurence
    A. Pattillo of the Superior Court of Justice, dated September 10, 2019, with
    reasons reported at 2019 ONSC 4664.

van Rensburg J.A.:

I.

INTRODUCTION

[1]

The appellant, Gerard Lee, is the former Chief Executive Officer (CEO)
    of the respondent, Lalu Canada Inc. (Lalu), a real estate investment company.
    Lee asserts that the application judge erred in dismissing his application for
    advance funding of his legal costs to defend an action brought against him in
    his capacity as a former officer of Lalu. The application judge concluded that
    a strong
prima facie
case of fraud had been made out against Lee in
    connection with acquisition fees he had received in respect of development
    properties acquired by Lalu, as a result of which he was disentitled to advance
    funding.

[2]

The following arguments are made on appeal: (1) the application judge
    erred in his interpretation of Lees consulting agreement with Lalu, which Lee
    relies on as the basis for his entitlement to the acquisition fees; (2) the
    application judge erred in his assessment of the evidence about whether Lalu
    knew Lee was receiving the fees and whether, by receiving the fees indirectly, Lee
    was concealing the fees from Lalu; and (3) the application judge erred in
    applying too low a legal threshold for overcoming the presumption that Lee was
    acting in good faith and concluding that he was not entitled to advance
    funding.

[3]

For the reasons that follow, I would dismiss the appeal.

II.

LEGAL FRAMEWORK

[4]

Lees application for advance funding was based on the provisions of
    Lalus Unanimous Shareholders Agreement (dated December 15, 2015 and amended
    and restated in June 2017) and s. 124 of the
Canada Business Corporations
    Act
, R.S.C. 1985, c. C-44 (the CBCA).

[5]

The relevant provision of the Unanimous Shareholders Agreement reads as
    follows:

To the fullest extent permitted by law, the Corporation will
    indemnify and save harmless each director and officer and former director or
    officer of the Corporation  against all costs, charges and expenses  reasonably
    incurred by the director or officer in respect of any civil, criminal,
    administrative, investigative proceeding to which the director or officer is
    made a party by reason of being or having been a director or officer of the
    Corporation[.]

[6]

Section 124 of the CBCA provides for the indemnification of individuals,
    including former directors and officers of a corporation, for their reasonable
    costs incurred in defending an action in which they are involved because of
    their association with the corporation. Advance funding of costs is available, without
    court approval under s. 124(2) or with court approval under s. 124(4), subject
    to the individual fulfilling the conditions of s. 124(3), one of which is that
    the individual acted honestly and in good faith with a view to the best
    interests of the corporation. Subsection 124(7) provides that an individual, entity
    or corporation can apply to the court for an order approving indemnity.

[7]

The test on an application under s. 124 for advance funding is set out
    in this courts decision in
Cytrynbaum v. Look Communications Inc.
, 2013
    ONCA 455, 116 O.R. (3d) 241, leave to appeal refused, [2013] S.C.C.A. No. 379,
    [2013] S.C.C.A. No. 377. Advance funding should be denied only where the court
    is persuaded, on a preliminary assessment of the merits, that the corporation
    has made out a strong
prima facie
case of bad faith on the part of the
    applicant for funding. In
Cytrynbaum
, Sharpe J.A. noted that the
    strong
prima facie
case test is a stringent test that gives
    significant weight to the protection of officers and directors. It ensures that
    they will ordinarily receive advance funding but leaves open the possibility
    that advancement will be denied when there is strong evidence of bad faith: at
    para. 56.

III.

THE
    APPLICATIONS IN THE COURT BELOW

[8]

The application for advance funding in this case was in respect of Lees
    defence to an action commenced by HZC Capital Inc. (HZC) (a CBCA company that
    serves as an investment vehicle for monies from China) and other plaintiffs,
    including Lalu (75% owned by HZC and incorporated to invest in the Canadian
    real estate development industry) and other related entities. The action claims
    breach of contract, breach of fiduciary duty and statutory duties, conspiracy,
    and fraud. The plaintiffs allege that they were the victims of a complex
    commercial fraud in relation to their investments in six real estate
    development projects.

[9]

Lee became involved with Lalu in or around July 2015. In November 2015,
    he was named CEO, and in February 2016, 2505805 Ontario Inc. (250) (a company
    owned and controlled by Lee) entered into an agreement with Lalu (the
    Consulting Agreement), for the provision of the services of its principal,
    Lee, as CEO of Lalu. At the outset of the relationship between HZC and Lee, Lee
    was granted an ownership interest in what became Lalu and a seat on Lalus
    board of directors. Lee directed that the shareholding and directors position
    be held by his wife, Tongfang (Cathy) Jiang. Lee was terminated as Lalus CEO
    in February 2018, and Jiang was terminated as director, although she continued
    to hold 25% of the shares of Lalu. Jiang and various corporations owned and
    controlled by Lee and Jiang are also defendants to the action, as are Domenic
    Di Gironimo, the former Chief Operating Officer and Acting Chief Financial
    Officer of Lalu, and certain corporations he owned and controlled.

[10]

The
    application judge heard a motion in the HZC action for a
Mareva
injunction
    against various defendants to the action, including Lee, Jiang and Di Gironimo,
    and some of their companies. The record was voluminous, consisting of ten
    affidavits, transcripts from seven cross-examinations and numerous documents.
    The motion was dismissed, with reasons reported at
HZC Capital Inc. v. Lee
    et al.
, 2019 ONSC 4622. These reasons are important to this appeal, as
    they were relied on and informed the application judges subsequent decision denying
    advance funding of Lees legal costs.

[11]

On
    the first part of the test for a
Mareva
injunction, the application
    judge was satisfied that the plaintiffs had a strong
prima facie
case
    against Lee for fraud in relation to his receipt of what he characterized as
    acquisition fees  amounts totaling $951,250 he had received from transaction
    proceeds in respect of a number of investments made by Lalu while he was the
    CEO. Lee, who never denied receiving the fees, asserted that he was entitled to
    receive these amounts under the terms of the Consulting Agreement, and that the
    Lalu board of directors was aware of the fees, because he had disclosed them to
    Lei (Eric) Guo, one of the principals of Lalu. Guo denied such disclosure.
    Lalus position was that Lee had no right under the Consulting Agreement to
    receive acquisition fees in respect of the investments Lee brought to Lalu, and
    that the fact that Lee had concealed his receipt of the fees from Lalu by
    channeling them through other parties, demonstrated that he knew he was not
    entitled to them. Both Lee and Guo filed affidavits and were cross-examined on
    the motion.

[12]

After
    interpreting the Consulting Agreement and considering the evidence, the
    application judge stated, at para. 66:

My conclusion that Lee had no right under the
    Lee Consulting Agreement to acquisition fees together with the evidence of the
    concealment of the receipt of such fees from Lalu are sufficient, in my view,
    to establish a strong
prima facie
case of fraud against Lee. In other
    words, I consider that Lalu is likely to succeed at trial in respect of its
    claim against Lee concerning his receipt of acquisition fees.

[13]

By
    contrast, with respect to Di Gironimo, the application judge concluded that the
    evidence concerning Di Gironimo and his companies was not sufficient,
    particularly given Di Gironimos responses to Lalus allegations, to convince [him]
    that the plaintiffs had a strong
prima facie
case against them: at
    para. 77. He added that, in his view, the plaintiffs had, at best, established
    a
prima facie
case against Di Gironimo.

[14]

The
    application judge dismissed the
Mareva
injunction motion after
    concluding that the plaintiffs failed at the second step of the test: they had
    provided no evidence that there was a real risk of the defendants assets being
    removed from the jurisdiction or otherwise being put out of reach of judgment.
    He also found that there was no evidence of irreparable harm and that the
    balance of convenience did not favour granting a
Mareva
injunction.

[15]

At
    the end of the hearing on the
Mareva
injunction motion, the
    application judge heard Lee and Di Gironimos applications for advance funding
    for their defence of the HZC action. In determining the applications for
    advance funding, the application judge referred to the test in
Cytrynbaum
and
    confirmed that, in order for an applicant to be denied advance funding, there
    must be a finding of a strong
prima facie
case of bad faith against
    him. Based on his findings on the
Mareva
injunction motion that the
    plaintiffs had established a strong
prima facie
case of fraud against
    Lee in connection with the acquisition fees, the application judge denied Lees
    application for advance funding. Because the plaintiffs had established only a
prima
    facie
case against Di Gironimo, the application judge granted his
    application for advance funding.

IV.

ISSUES ON APPEAL

[16]

Lee
    advances three grounds of appeal. First, he contends that the application judge
    erred in interpreting the Consulting Agreement as not authorizing him to be
    paid acquisition fees. Second, on the question of bad faith, he asserts that
    the application judge erred in his assessment of the evidence about whether
    Lalu knew he was receiving the fees and whether, by receiving the fees
    indirectly, he was concealing them from Lalu. Third, he submits that the
    application judge applied too low a legal threshold in rejecting his claim for
    advance funding of his legal costs. More specifically, Lee argues that the
    application judge incorrectly applied a likely to succeed standard to his
    determination of a strong
prima facie
case, rather than the very
    likely standard mandated by the Supreme Court in
R. v. Canadian
    Broadcasting Corp.
, 2018 SCC 5, [2018] 1 S.C.R. 196.

[17]

I
    will address each ground of appeal in turn.

V.

DISCUSSION

(1)

Did the application judge err in his interpretation of the
    Consulting Agreement?

[18]

The
    interpretation of a contract involves the application of contractual
    interpretation principles to the words of the written contract, considered in
    light of the factual matrix, and is therefore a question of mixed fact and law,
    which is entitled to deference absent a palpable and overriding error:
Sattva
    Capital Corp. v. Creston Moly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633, at
    paras. 50-53. In the rare circumstances where an extricable error of law can be
    identified in the interpretation process, the standard of review is
    correctness. An extricable error of law arises where an incorrect principle is
    applied, a required element of a legal test is ignored, or a relevant factor is
    ignored:
Sattva
, at para. 53.

[19]

At
    the centre of the HZC action against Lee are various amounts Lee received,
    which the plaintiffs alleged were kickbacks and unauthorized payments he had
    sought to conceal from Lalu. Lee argued that he was entitled to receive certain
    amounts as acquisition fees in relation to the various development projects
    that Lalu acquired through his efforts. He claimed that the payment of
    acquisition fees is a standard industry practice and that the Consulting
    Agreement contemplated his receipt of such fees. Indeed, he had sourced at
    least one of the properties before joining Lalu. Lee relied on recital (h),
    which, after reciting that the retainer fee under the agreement was
    under-market for Lees services, acknowledged that Lee had the opportunity to
    make an indirect gain through an equity holding in the Partnership independent
    of [the] Agreement, and the Consultant and the Partnership are relying on the
    Services of the Consultant to realize such other gains. He also relied on s.
    6.1 of the Consulting Agreement, which authorized Lee and 250 to hold an
    interest in any other business, venture, investment or activity whether
    similar to or competitive with the Business of the [Lalu] Companies, and
    provided that this would not be a conflict of interest or breach of fiduciary
    or other duty.

[20]

The
    application judge considered Lees argument that the acquisition fees he
    received were authorized by the Consulting Agreement. At para. 57 of the
    reasons on the
Mareva
injunction motion, he stated that, [l]ooking at
    the Lee Consulting Agreement as a whole and also considering the context in
    which it was executed, he did not agree that it provided for or contemplated
    the payment of acquisition fees to Lee or 250 in respect of real estate deals
    that Lee sourced for Lalu. He rejected Lees argument that recital (h) is a
    reference to Lee having an opportunity to make an indirect gain in respect of
    Lalu transactions. He concluded that the reference to such other gains
    referred to the equity gains both HZC and Lee, through Jiangs equity stake in
    Lalu, were expecting to realize from the real estate transactions Lee was supposed
    to bring to Lalu. He noted that this interpretation of recital (h) was
    consistent with the context of the Consulting Agreement, as Lees compensation
    included not only the retainer fee but also any gain in Jiangs equity stake in
    Lalu. As for s. 6.1 of the Consulting Agreement, the application judge
    concluded that it permitted Lee to enter into real estate transactions with
    third parties, and did not speak to the real estate transactions he was
    required to bring to Lalu, or his compensation in respect of such deals. He
    also noted that there was no mention of acquisition fees in the compensation
    section of the Consulting Agreement.

[21]

Lee
    argues that the application judge erred in concluding that he had no right to
    acquisition fees under the Consulting Agreement. Specifically, Lee takes issue
    with the application judges conclusions that Jiangs equity stake in Lalu was
    a type of compensation under the Consulting Agreement, that the conflicts acknowledgment
    under s. 6.1 did not speak to the real estate transactions that he was required
    to bring to Lalu, and that the Consulting Agreement as a whole and in context
    does not provide for or contemplate the payment of acquisition fees. Although
    he characterizes these as palpable and overriding errors in the findings of
    the application judge, Lee is simply challenging the application judges
    interpretation of the Consulting Agreement, and in particular the meaning he
    attached to the various provisions relied on by Lee. In oral argument, Lees
    counsel asserted that the application judge committed an extricable legal error
    by failing to give proper consideration to the relevant provisions of the
    Consulting Agreement and in failing to give full force and effect to the
    agreement as a whole. He also argued that the application judges
    interpretation of the Consulting Agreement would lead to a commercial
    absurdity: that Lee would be incentivized to bring real estate deals to other
    parties, rather than to Lalu.

[22]

I
    disagree. Contrary to Lees arguments, the application judge considered the
    very provisions Lee relied on in the light of the entire Consulting Agreement
    and its purpose. The application judge interpreted the plain meaning of the
    Consulting Agreement as not authorizing Lee to receive acquisition fees in
    respect of properties he sourced for Lalu. The application judge considered the
    context, including the relationship between the parties, when he observed that
    Lees compensation included not only the retainer fee provided for in the
    Consulting Agreement but also any gain in Jiangs equity stake in Lalu. This
    conclusion is fully supported by the evidence, including the terms of the
    Unanimous Shareholders Agreement that speak to such gains.

[23]

Lee
    has demonstrated no reversible error in the application judges rejection of
    his argument that the Consulting Agreement authorized his receipt of acquisition
    fees in respect of the investments he sourced for Lalu.

(2)

Did the application judge err in his assessment of the evidence on
    whether Lalu knew of the acquisition fees and whether Lee had concealed the
    acquisition fees from Lalu?

[24]

Lee
submits that the application judge erred in principle in making
    a credibility finding against him on the issue of whether Lalu knew about the
    acquisition fees and whether he had concealed the fees from Lalu. In
    particular, Lee argues that the application judge erred in accepting Guos
    evidence that he was not aware of Lees receipt of acquisition fees and
    rejecting Lees evidence to the contrary.

[25]

In
    oral argument, Lees counsel characterized Guos evidence as containing an
    internal inconsistency: Guo admitted under cross-examination that he knew
    that Lee had sourced various deals, that there was an industry practice to
    pay acquisition fees, and that the pro formas for the various properties purchased
    by Lalu contained line items for acquisition fees. With these admissions, how
    could the application judge accept Guos evidence that he was unaware that Lee
    would be receiving acquisition fees?

[26]

First,
    I note that Guos cross-examination evidence is not entirely as summarized by Lees
    counsel. While Guo acknowledged that Lee had sourced various deals for Lalu, he
    insisted that Lee was doing this in his role as consultant and CEO of Lalu. He
    acknowledged that there was an industry practice for the person who sources a
    deal to receive an acquisition fee if it is external, independent and we had
    an agreement. Further, he stated that the fact that acquisition fees were
    included as a line item in a pro forma did not mean that they were authorized
    to be paid. Contrary to Lees submission, Guos evidence does not lead to the
    necessary inference that Lalu must have known that Lee was receiving
    acquisition fees. Moreover, Lee does not rely on any other alleged
    corroboration of his statement that he told Guo and others at Lalu that he was
    receiving acquisition fees, or for that matter, that Lalu authorized such fees
    to be paid to him.

[27]

Second,
    I do not agree with Lees submission that the application judge rejected his
    evidence on the basis of a preference for the testimony of Guo. Rather, the application
    judge recognized that there was a conflict between the evidence of Lee and Guo
    that could not be determined on the
Mareva
injunction motion. Nevertheless,
    he concluded, at para. 62 of the reasons on the
Mareva
injunction
    motion, that Lees evidence  that he believed he received payments as
    acquisition fees in good faith with the knowledge of Guo and others  was
    diminished by evidence of his steps to conceal his receipt of the
    acquisition fees from Lalu, when the fees were not paid directly to Lee or a
    company he controlled.

[28]

In
    oral argument, Lees counsel acknowledged that the application judge was
    entitled to take into consideration the evidence that he received the payments indirectly
    through corporate entities in which he did not hold an interest. Indeed, this
    was important evidence that undermined the plausibility of Lees claim that the
    acquisition fees were known to Lalu (and presumably approved by Lalu
    notwithstanding the absence of any corroborating evidence). And, contrary to
    Lees argument, the application judge did not engage in circular reasoning when
    he relied on the evidence of the indirect payment of fees. Rather, it was
    evidence that itself suggested that Lee was concealing the payments, especially
    in light of Lees admissions that the fees were not paid to him directly or in
    a way that would enable others at Lalu to understand that he was receiving
    them, and the failure to offer any real explanation for the indirect path of
    the funds. As the application judge queried, [i]f [Lee] told Guo about the
    acquisition fees, why cause them to be paid to him indirectly?: at para. 62.

[29]

Lee
    has demonstrated no error in the application judges assessment of the evidence
    about whether Lalu knew that he was receiving acquisition fees and whether, by
    receiving the fees indirectly, he was concealing the fees from Lalu.

(3)

Did the application judge apply the wrong legal test?

[30]

Finally,
    Lee argues that the application judge erred in law in adopting too low a
    threshold for refusing him advance funding. He points to para. 66 of the
    reasons on the
Mareva
injunction motion, where the application judge,
    after stating his conclusion that there was a strong
prima facie
case
    of fraud against Lee, continued: In other words, I consider that Lalu is
    likely to succeed at trial in respect of its claim against Lee concerning his
    receipt of acquisition fees.

[31]

Lee

submits that, while the
    application judge correctly identified the test as whether there was a strong
prima
    facie
case of fraud, he ought to have been satisfied that Lalu was very
    likely to succeed at trial, or that Lalus case was unusually strong and
    clear. According to Lee, the standard of likely to succeed places the bar
    too low.

[32]

Lee
    refers to and relies on a formulation of the test for a strong
prima facie
case set out by the Supreme Court in its 2018 decision in
Canadian
    Broadcasting Corp.
That case involved an application for an interlocutory
    mandatory injunction in the context of a citation for contempt, after the Canadian
    Broadcasting Corporation (the CBC) refused to remove information from its
    website identifying a victim, allegedly contrary to a publication ban, under s.
    486.4(2.2) of the
Criminal Code
, R.S.C. 1985, c. C-46, that was issued
    after the CBC had posted the information. Brown J., writing for the court, confirmed
    that the test for an interlocutory mandatory injunction requires, at the first
    stage, that the applicant demonstrate a strong
prima facie
case, and not
    simply a serious issue to be tried (which was the threshold that had been
    applied by the courts of some Canadian jurisdictions at the time). After setting
    out the various formulations of what a strong
prima facie
case entails
    in a number of interlocutory mandatory injunction cases, Brown J. noted, at
    para. 17, that [c]ommon to all these formulations is a burden on the applicant
    to show a case of such merit that it is very likely to succeed at trial. He then
    set out the test, at paras. 17 and 18, in the following way: [U]pon a
    preliminary review of the case, the application judge must be satisfied that
    there is
a
strong likelihood
on the law and the evidence presented
    that, at trial, the applicant will be ultimately successful
in proving the
    allegations set out in the originating notice (italics in original; underlining
    added).

[33]

In
    the context of an application under s. 124 of the CBCA, the strong
prima
    facie
case requirement for denying advance funding on the basis of bad
    faith recognizes that there is a presumption of good faith, and that funding
    would ordinarily be available. It recognizes that the assessment of bad faith
    is being made at an interlocutory stage, on the basis of evidence available at
    that stage, and that it will not be binding in the final disposition of the
    matter, when other evidence and arguments may be before the court. Sharpe J.A. explained
    in
Cytrynbaum
that [b]y its very nature, a request for advance
    funding invites a preliminary assessment of the merits of the case but one that
    is not final and that does not bind the parties for the purposes of the
    [corporations] action: at para. 53. He noted that the strong
prima facie
case test is a stringent test, and that, although the applicant for advance
    funding would be presumed to have acted in good faith, there is a possibility
    they would be denied funding when there is strong evidence of bad faith: at para.
    56.

[34]

I
    need not decide whether the strong
prima facie
case test that
    applies in the context of s. 124 of the CBCA has been elevated by the strong
    language used by the Supreme Court in
Canadian Broadcasting Corp
. to
    describe the strong
prima facie
case standard that applies where interlocutory
    mandatory injunctions are sought. In citing
Cytrynbaum
, the
    application judge recognized that the strong
prima facie
case test he
    was to apply was a stringent test, language that is consistent with the
    standard expressed in
Canadian Broadcasting Corp.
The application
    judge also gave compelling reasons that support the strong likelihood that
    Lalus action will succeed. It is clear he understood the difference between a
    strong
prima facie
case and a
prima facie
case, which
    informed his decision to order advance funding to Di Gironimo. I am persuaded
    that, whether or not the application judge was required to ensure that Lalu met
    the strong
prima facie
case test expressed in
Canadian
    Broadcasting Corp.
, he applied a commensurate standard. In the
    circumstances, I do not regard the application judges statement in his reasons
    on the
Mareva
injunction motion that it was likely rather than very
    likely that Lalu would succeed at trial as undermining the stringent test that
    he applied and his determination, at para. 20 of his reasons on the application
    for advance funding, that the evidence against [Lee] established a strong
prima
    facie
case of fraud.

[35]

I
    would therefore reject this ground of appeal. The application judge did not
    apply too low a threshold in denying Lee advance funding.

VI.

CONCLUSION

[36]

Cytrynbaum
instructs that, in an application for advance funding, although there is a
    presumption of good faith, the corporation can lead evidence of the applicants
    bad faith. It is necessary on such an application to conduct a preliminary
    assessment of the merits of the allegation of bad faith. The fact that a final
    determination cannot be made does not prevent the court from conducting the
    required analysis.

[37]

In
    this case, the application judge conducted such a preliminary assessment in the
    context of the
Mareva
injunction motion, when he concluded that Lalu
    had established a strong
prima facie
case of fraud in connection with
    Lees receipt of acquisition fees. He interpreted the Consulting Agreement as
    not entitling Lee to acquisition fees. There was no reversible error in his
    interpretation. And, although there was a conflict between Lees evidence that
    he had informed Guo, and through him Lalu, that he was receiving the
    acquisition fees, and Guos denial, there was other evidence that Lee was
    acting fraudulently: the fact that Lee received the payments through
    corporations in which he held no interest, and the fact that he offered no real
    explanation for doing this, were consistent with an effort to conceal the
    payments from Lalu.

[38]

This
    is not a case where the evidence was evenly balanced, or where there was only some
    evidence to overcome the presumption of good faith on the part of Lee. There
    was strong evidence of bad faith in this case, and no error in the
    application judges analysis and conclusion, based on the evidence before him,
    that there was a strong
prima facie
case of fraud in respect of Lees
    receipt of acquisition fees.

VII.

DISPOSITION

[39]

For
    these reasons, I would dismiss the appeal, with costs to Lalu in the agreed
    amount of $18,500, inclusive of disbursements and HST.

Released: June 3, 2020 (S.E.P.)

K.
    van Rensburg J.A.

I
    agree. S.E. Pepall J.A.

I
    agree. David M. Paciocco J.A.


