Litigation can be expensive. At the forefront of the minds of many parties is the question of how to pay the legal costs. Sometimes the money that a party needs (or wants) to access in order to pay for the litigation is at the centre of the dispute. This can be the case in estate litigation when there is a question of who owns an asset, such as multiple beneficiaries or a beneficiary and a third party. How will the court determine whether to release a portion of the money held in trust if there are competing proprietary claims? This was the question before the British Columbia Supreme Court in Xie v. Lai, 2021 BCSC 1768 (CanLII).
A law firm was holding the net proceeds of sale of a property in foreclosure (the “Lands”). Prior to the foreclosure, the plaintiffs registered a Certificate of Pending Litigation (“CPL”) on title to the Lands by claiming a proprietary interest in the Lands. The plaintiffs’ claim was based on allegations of fraud and breach of fiduciary duty by one of the defendants, Mr. Lai. The plaintiffs alleged that Mr. Lai misappropriated the plaintiffs’ money (which the plaintiffs advanced in a joint venture to develop other property), and purchased the Lands with the misappropriated funds. In addition, the plaintiffs argued that the conduct of Mr. Lai amounted to a “theft of a corporate opportunity” which prevented the plaintiffs from purchasing the Lands. The registered owners of the Lands were two companies unrelated to the plaintiffs.
When the court approved the sale and cancelled the CPL, it ordered that “the proceeds from the sale of the Lands shall stand in place of the Lands”. The plaintiffs’ argued that their proprietary claim therefore extended to the money held in trust by the law firm (the “Fund”). The value of the Fund exceeded the advancement made by the plaintiffs in the joint venture. However, based on the plaintiffs’ claims, they argued that they had an interest in the entire Fund: $8.3 million.
Another defendant, Ms. Teh, claimed that she was the beneficial owner of almost 60% of the Fund through her company, of which Ms. Teh was the sole shareholder. Through her company, Ms. Teh claimed an ownership interest in the two companies which were the registered owners of the Lands prior to foreclosure.
Ms. Teh and her company applied to the court for the release of some of the Fund to pay their litigation costs. The plaintiffs objected. From early in the litigation, the plaintiffs alleged that Ms. Teh was the alter ego of Mr. Lai, and acted on his instructions. They further argued that Ms. Teh was the bare trustee of Mr. Lai’s personal and real property and that the shares in Ms. Teh’s company (as well as other companies involved in the litigation), were beneficially owned by Mr. Lai. The plaintiffs argued that Ms. Teh should not be permitted to access the Fund. The question of who owned the Fund was at the centre of the litigation. The court could not determine ownership prior to a full hearing.
After considering the plaintiffs’ argument, the court agreed that the applicable legal test is articulated by Justice Walker in Otal v. Azure Foods Inc., 2019 BCSC 1510 (CanLII). If a defendant seeks the release of funds which are subject to a proprietary injunction (or a non-proprietary Mareva injunction), the onus is on the defendant to first establish that she has no other assets with which to pay her legal costs. If the defendant succeeds in meeting this threshold test, the court must then balance two possible injustices: to the plaintiffs, if they succeed, of permitting the defendant to access some of the fund and to the defendant, of denying her the opportunity to advance a possibly successful defence.
In Xie v. Lai, the court did not have to consider the second step of the test. Ms. Teh failed to establish that she had no other means to pay for her defence of the litigation. Although Ms. Teh filed an affidavit stating that she required access to the Fund, it was a bald statement. Ms. Teh did not provide evidence of her assets. On the contrary, by Ms. Teh’s own evidence, she came from a wealthy family, was highly educated and had been investing in real estate for several years. The plaintiffs provided evidence that Ms. Teh held title to property in her name alone and leased a luxury vehicle. The court did not seem to place much weight on the evidence put forth by the plaintiffs, but noted that Ms. Teh was not impecunious. The onus was on Ms. Teh to establish that she did, in fact, require access to the Fund in order to continue with her defence of the action. The court held that she failed to do so, though she was not precluded from renewing the application on better evidence.
Competing proprietary claims to a pot of money will make it difficult for an owner to access that money, even to pay the costs of litigation. This is the case at least where one party claims an interest in the entire pot. The defendant seeking the release of the money will need to first establish that without access to it, defending the action is not possible. In order to persuade the court, the defendant must provide evidence of her assets and means. It would be wise to do so in the initial record. No party wants to incur the costs of a second kick at the can, particularly when the issue is how to pay for those costs in the first place.