Executive Summary: Key Legal and Evidentiary Issues

• Dispute over the validity and enforceability of two mortgages on corporate property.

• Allegations that the mortgages constituted fraudulent conveyances by the sole director.

• Examination of whether the mortgagees acted as bona fide purchasers for value without notice of fraud.

• Assessment of the authority of the sole director and officer to execute the mortgages.

• Consideration of whether adequate consideration was provided for the third mortgage.

• Determination of the appropriate scale and entitlement to costs on appeal.

Shareholder dispute and mortgage validity

Ronghai Chen and Jianlin Feng, the majority shareholders of Golden Ocean Investment Corporation, brought a challenge against Jiaxiang Huang (also known as Jason Huang), the minority shareholder and sole director and officer of the corporation. The dispute arose after Mr. Huang authorized the second and third mortgages on a property owned by Golden Ocean. Chen and Feng alleged that these mortgages were fraudulent conveyances and that Mr. Huang had defrauded them and manipulated the corporation. They further claimed that the mortgagees ignored clear badges of fraud and that there was no consideration for the third mortgage.

The case was initially heard by Justice Edward M. Morgan of the Superior Court of Justice, who dismissed the challenge and upheld the validity and enforceability of the mortgages. On appeal, the Ontario Court of Appeal considered whether the motion judge had erred in his findings. The appellants argued that the mortgages should be set aside as fraudulent conveyances and that the mortgagees had failed to conduct proper due diligence. The Court of Appeal found that the motion judge had correctly applied the governing legal principles and was attentive to the appellants’ arguments. The court accepted the finding that the second and third mortgagees, represented by counsel, “did all the due diligence required of them” and were “bona fide purchasers for value with no notice of any fraud by Mr. Huang.” The court also affirmed that Mr. Huang, as the sole director and officer, had both ostensible and actual authority to enter into the mortgages. Regarding the third mortgage, the evidence established that monies were advanced under that mortgage in accordance with directions provided by the lawyers representing the parties.

There was a brief discussion of policy terms, specifically the Standard Charge Terms in the mortgage contract. The second mortgagee respondents sought costs on a full indemnity basis, relying on these terms. However, the court found that the Standard Charge Terms did not apply to the appellants, as they were not parties to the mortgage contract, and that these terms did not fetter the court’s discretion as to costs.

The appeal was dismissed. The successful parties were the respondents, including the second and third mortgagees. The court ordered the appellants to pay the second mortgagee respondents costs of the appeal on a partial indemnity scale in the amount of $18,176.97. The third mortgagee respondents did not seek costs. No other damages or monetary awards were granted.