Three fraudulent real estate schemes revisited by B.C. court in aborted $32 million deal

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      A trial judge was right when he refused to enforce a failed real estate deal that was “tainted with illegality”.

      A B.C. Court of Appeal thus ruled on a case brought forward by litigants in a failed $32 million real estate deal.

      “Where one of the purposes of an agreement sought to be enforced is to commit a fraud and the agreement is deliberately structured in such a way as to facilitate the commission of the fraud, it is open to a court to decline to enforce the agreement on the ground that to do so would undermine the integrity of the legal system,” Justice John J.L. Hunter stated in his written reasons.

      Justices Harvey M. Groberman and Justice Gail M. Dickson concurred in the decision, which also revisited three “dishonest acts” involved in the aborted deal.

      Xiao Dong Liu, also known as Allen Liu, offered to buy two commercial properties owned by Jeong Lee in Burnaby and Maple Ridge.

      Realtor Kevin Hien acted as common agent for Liu and Lee.

      In October 2011, vendor Lee accepted both offers for the two properties, with the one in Burnaby, site of a bowling alley in the Brentwood area and near the Holdom SkyTrain Station, worth $28.8 million.

      But as B.C. Supreme Court Justice Andrew Mayer determined in his May 2019 ruling, the transaction was designed by purchaser Liu to deceive investors and lenders.

      In upholding Mayer’s decision, the court of appeal reviewed these three schemes embedded in the failed deal:

      False Purchase and Sale Agreement

      In November 2011, at the request of purchaser Liu, realtor Hien asked Lee to sign a false purchase and sale agreement for the Burnaby property, along with another document that purported to terminate the same agreement.

       Lee and Liu signed both of these documents around mid-November.

      “The False Purchase and Sale Agreement showed a purchase price for the Brentwood property of $38.8 million, and stated a $10 million deposit had been paid,” according to the court of appeal.

      This means that the false purchase and sale agreement increased the sale price by $10 million over the true price of $28.8 million.

       “It was undisputed at trial that this False Purchase and Sale Agreement was a fabrication,” the court noted.

      A copy of the false agreement was “provided to a potential lender referred to as Youyi China in late December 2011”.

      Liu did not provide Youyi China with a copy of the document purporting to terminate the false agreement.

      “The trial judge considered it likely that Jeong Lee knew that Allen Liu intended to use the False Purchase and Sale Agreement to mislead Youyi China,” according to the appeal court.

      Moreover, the judge concluded that “since the False Purchase and Sale Agreement was prepared in order to induce Youyi China to contribute funds towards the purchase of the Brentwood property based on false information, it was prepared for the unlawful purpose of defrauding Youyi China”.

      “The False Purchase and Sale Agreement was also subsequently provided by the Purchasers to a developer with whom they were in negotiations to assign the purchase agreement after the approach to Youyi China fell through,” the court of appeal recalled.

      Misleading Rent Reduction Schedule

      Vendor Lee wanted to lease back the Burnaby and Maple Ridge properties, and a rent agreement was drawn up as part of the deal.

      The agreement for the Brentwood property was set out in an eight-page document, which provided for an annual rental rate of 5.5 percent of the purchase price.

      Lee will be responsible for property tax, utility, insurances and other costs related to the operation of the bowling business on the property.

      But there was another document that provided that the annual rental rate “can be adjusted from 5.5% of the purchased price to 3.5% of the purchased price”.

      The trial judge “concluded that this Rent Reduction Schedule was purposefully designed in a way so that it could be used to mislead”.

      “It was prepared as a separate document to allow Allen Liu to conceal it and thereby artificially inflate the revenue for the Brentwood property in the minds of lenders,” according to the appeal court.

      The judge also “found that the agreement had been used in this way, by presenting the eight-page document to prospective lenders without disclosing the one-page schedule that expressed the true lease rate”.

      “There was ample evidence to support this conclusion, and it is not challenged on this appeal,” the court of appeal noted.

      False Deposit Scheme

      In November 2012, the court of appeal realted, realtor Hien, acting on instructions from purchaser Liu, proposed a scheme “intended to mislead lenders into believing that he had contributed $8 million more in equity towards the purchase of the Brentwood property than he in fact had”.

      The False Deposit Scheme was intended to work this way:

      -The purchaser would provide a $4 million payment to the vendor;

      -The vendor would provide a “receipt’ for $4 million and then return the $4 million amount to the purchaser;

      -Using the funds received back, the purchaser would pay the vendors another $4 million in exchange for another $4 million receipt;

      -The vendor would again return the $4 million back to the purchaser;

      -And after the purchaser obtained financing to purchase the Brentwood property by "relying in part on the fictitious additional $8 million in equity, the Vendor would be provided with $8 million in mortgage security over other properties owned by Allen Liu or his companies,” the court explained.

      Vendor Lee refused to cooperate with Liu’s false deposit scheme.

      “The trial judge found that the False Deposit Scheme was unlawful and taints the entire transaction because it was designed to hide the facts that the Purchasers planned to obtain $8 million in vendor financing and that they were providing second mortgages on some of their properties to the Vendors, which if known, may have impacted their ability to obtain financing,” according to the court of appeal.

      In December 2012, Lee, through counsel, advised purchaser Liu and realtor Hien that he is not going to proceed with the sale of the Burnaby and Maple Ridge properties.

      In the same month, Liu started legal action to enforce the sale.

      Trial judge Mayer concluded that the purchase agreements were “unenforceable due to illegality”.

      “Since the action was commenced in December 2012, the value of the Brentwood property increased from about $28.8 million to roughly $76 million at the time of trial,” according to the court of appeal.

      By the way, Liu and Lee’s common realty agent Hien did not inform Lee that Hien knows that the City of Burnaby has created a new zoning in the Brentwood area that almost doubled the allowable density for the property.

      Hien informed only Liu about this information that would make the property “much more valuable to developers interested in a high density, multi-tower, mixed-use commercial and residential high-rise project”.