A B.C. Supreme Court judge ordered the owner of a Richmond luxury car detailing business to pay back $240,000 to an investor, plus interest and costs.
Zi Hao Zhou sued Zhi Yuan Li, the owner of Morecan Auto Spa, Morecan Auto Detailing and Morecan Auto Group Corp., alleging fraudulent misrepresentation and breach of fiduciary duty. Justice Barbara Norell found that Li falsely told Zhou that he invested $700,000 in the company.
From a Morecan Auto Group promotional video in 2016 (TIV Productions)
“I find Mr. Zhou would not have invested $240,000 for a 35% interest in Morecan if he had been told the true information, which was that Mr. Li’s investment was either in the range of $250,000 or even up to $430,000 which is what Mr. Li has pleaded in his response to civil claim,” said Norell’s Feb. 21 judgment, published almost a month later.
The money was not Zhou’s first choice for a remedy. He wanted Norell to declare a constructive trust over a strata property in Richmond’s River Green development. She heard testimony that Li was the beneficial owner who placed the property in permanent resident Jian Fu’s name so that he could avoid paying the 15% foreign buyer’s tax.
Norell ruled it was not appropriate to order a remedial constructive trust in this case.
Li did not attend the trial, so Norell dismissed his countersuit alleging Zhou breached a shareholders’ agreement and breached fiduciary duty.
A little over a year after Zhou bought the shares in Morecan, the company closed.
Zhou, 26, immigrated to Canada in 2008, attended senior high school and studied business from 2009 to 2011 at Douglas College.
“From 2014 to mid-2015 he worked as a realtor’s assistant, taking clients to open houses, and introducing new immigrants to Vancouver. At the time he purchased shares in Morecan from Mr. Li in early 2016, he had no other work experience, no experience in running or buying a business, and no experience in the auto detailing business.”
Zhou was introduced to Li by a mutual friend in mid-2015. The business was known at the time as CSC Auto Spa Club Inc. Near the end of the year, Li offered Zhou 35% of Morecan shares. Zhou did not ask for any documents or to review any company financial statements. He said he trusted what Li told him orally. Zhou paid $10,000 cash and the remaining $230,000 by bank draft. He received 35,000 shares on Jan. 28, 2016, but there was no share agreement.
“Mr. Li told Mr. Zhou that simpler would be better and that it would save them money not to have an agreement drafted.”
Zhou expected a $5,000 return at the end of every month, but has not received any funds. Zhou discovered in early July 2016, when Li asked him to go to the bank to withdraw money for employee payroll, that the company had insufficient funds. A review of bank statements showed\ unrelated purchases, including goods at Holt Renfrew.
Witness Shu Heng Xu testified that he worked at both CSC and Morecan, washing cars and helping in management. He testified that Li constantly made excuses not to pay employees on time and did things on time. Xu quit at the end of 2016 or start of 2017 because he was working long hours and not always getting paid on time.
“He would post pictures on the internet to make it look like the company was busy,” the judge wrote. Included in the Morecan Instagram account are photographs of a waiting room that resembles an e-gaming lounge.
“Mr. Xu said Morecan was not profitable. Some transactions were in cash as the clientele were wealthy, and either the clients offered to pay in cash or Mr. Li would ask to be paid in cash. This money did not go into the company account. Mr. Xu said he knew of $12,000 in cash transactions during the time Mr. Li operated the business from August 2015 to December 2016. Mr. Xu also thought there were wasted expenses. He saw expense items on a statement Mr. Zhou showed him that could not be company expenses, such as a charge at Holt Renfrew.”
Inside Morecan’s e-gaming lounge (Instagram)
Jian Fu was named as a defendant because his name is on title of the Richmond property. He did not file a response but was called by Zhou as the first witness.
The court heard that Fu owned a 99/100 interest and Li 1/100 in a strata lot in Richmond’s River Green with a mortgage in favour of CIBC, certificates of pending litigation, liens and a judgment against Li.
Fu, 26, testified that he paid nothing for the property.
“He said he signed the documents to put the property in his name ‘unwittingly’ as Mr. Li ‘asked me to hold the interest in trust for him’. When asked why he did this he said it was ‘based on the deception’ of Mr. Li. They were friends. He said he ‘did not tell me the whole truth about’ the property. He believed he was still on title but Mr. Li was ‘withholding information’ from him.”
“Mr. Zhou testified that Mr. Li told him that he was purchasing property and he did not want to pay the 15% foreign buyer’s tax. He said he wanted to find someone with a permanent resident card to hold the property for him. He said he needed Mr. Fu to help him so he would be spared paying the tax. He said Mr. Fu has a permanent resident card.”
Xu testified that he did not know how Fu became 99/100 owner, but said Li had asked him to be a 99/100 owner so that he could avoid paying the 15% tax.
“Mr. Xu asked Mr. Li if it was legal and decided not to do it,” Norell wrote. “Mr. Xu helped Mr. Li move into the Richmond property which is in an area of Richmond called River Green.”
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