Executive Summary: Key Legal and Evidentiary Issues

• Whether the applicants, as majority shareholders, could assert a triable proprietary interest in Xiao’s personal residence at 18 Caine Street through a trust-based claim tied to alleged misappropriation of corporate funds.
• The impact of the applicants’ material non-disclosure on an ex parte motion, particularly the omission of Xiao’s earlier responding affidavit contesting the misappropriation allegations.
• The extent to which the applicants’ claim was primarily a monetary damages claim, making a Certificate of Pending Litigation an improper tool to secure recovery.
• The adequacy of alternative security—specifically paying the net sale proceeds of the Caine Street property into court—instead of maintaining a CPL on title.
• How the statutory test under s. 103(6) of the Courts of Justice Act and the equitable factors from Perruzza v. Spatone and related authorities applied to the discharge of the CPL.
• The treatment of a late-registered $49,990 charge in favour of Xiao’s law firm and whether those funds should be preserved in court rather than treated as an immediately deductible encumbrance.

Background and parties

The case arises from a dispute among three shareholders of Mastermind Montessori School Inc. (“Mastermind”), a closely held private corporation operating a Montessori school. The applicants, Jianlian (Jian) Chen and Weihan (Wei) Chen, together hold a majority interest in Mastermind. The respondent, Yuxiang (Chris) Xiao, was until early March 2025 the president, director and manager of the school. The other respondents are Xiao’s spouse, Yajing Liu, another individual, Yunyi Luo, and the corporation, Mastermind Montessori Schools Inc. The applicants allege that Xiao misused his control of the school’s finances and misappropriated significant corporate funds, some of which they say were channelled into Xiao’s personal real estate dealings, including his residence at 18 Caine Street in Richmond Hill, Ontario. The Caine Street property is Xiao’s only property in Ontario and becomes central to the interim relief sought.

Allegations of misappropriation and corporate oppression

In February 2025, the applicants commenced an application under the Ontario Business Corporations Act (OBCA), relying on the oppression remedy provisions. They sought numerous remedies: declarations that each applicant was a proper person to bring the application under Part XVII; findings that Xiao, as sole director, exercised his powers in an oppressive, unfairly prejudicial manner and breached his fiduciary duties; and declarations that he failed to act honestly and in good faith as an officer and director. They further alleged that Xiao was in material breach of a January 6, 2020 shareholders’ agreement and had misappropriated monies from the corporation, resulting in unjust enrichment. The relief claimed extended to Liu and Luo, with allegations that they misappropriated funds, were unjustly enriched and conspired with or aided Xiao in defrauding and embezzling funds from the corporation. Substantively, the applicants sought orders requiring Xiao to repay all misappropriated sums to the corporation, authorizing equitable tracing of misappropriated monies, and declaring that all assets purchased by Xiao with such funds were held in trust for Mastermind. They also sought a buyout of Xiao’s shares pursuant to the shareholders’ agreement or, alternatively, an independent valuation with appropriate adjustments for monies allegedly owed by Xiao to the corporation. In the further alternative, they claimed general damages of $2 million against Xiao and Luo and requested injunctive relief restraining the respondents from disposing of assets outside the ordinary course of business.

Events surrounding the tuition cheques and the school’s finances

A critical factual episode occurred on the night of February 27, 2025. CCTV footage from the principal’s office recorded Xiao removing tuition cheques belonging to Mastermind totalling roughly $694,029.30. Those cheques were deposited into Mastermind’s bank account, which was subject to a line of credit obtained in the school’s name and secured by a mortgage on Xiao’s personal residence at 18 Caine Street. The applicants relied on a forensic accounting report indicating that more than $1.1 million remained outstanding from Xiao to the corporation, arguing that corporate funds had been improperly used to benefit Xiao’s personal real estate interests, including the Caine Street property. Xiao, for his part, did not deny having borrowed from Mastermind. He asserted that he had repaid some of the indebtedness and contended that his house was pledged as security to support the school’s overdrawn operating account, from which operating expenses—including payroll and rent—were paid. Xiao maintained in his earlier responding affidavit that it was inappropriate for his personal residence to continue as security once he was removed from management of the school.

Corporate governance changes and initial attempts at interim relief

In early March 2025, the applicants used their majority position to pass a resolution removing Xiao from his roles at Mastermind. Jian Chen replaced him as director and treasurer. Shortly thereafter, the applicants brought an ex parte motion for a Mareva injunction and a Certificate of Pending Litigation (CPL) over the Caine Street property. A judge declined to grant such relief without notice, indicating that the motion, though pressing, should be brought on notice, even on short timelines. The matter then entered the civil triage and case conference process. Timetables were set, cross-examinations and undertakings were completed, and a half-day motion on the CPL was scheduled for June 2026, with factums to be exchanged in advance.

Listing and sale of the Caine Street property

The dispute intensified when, on January 14, 2026, the applicants learned that the Caine Street property had been listed for sale since mid-December 2025, a fact not initially disclosed by the respondents’ counsel despite earlier case management directions to keep the applicants apprised of any pending sale and its terms. At a January 20, 2026 case conference, an abridged timetable was imposed for an urgent motion for injunctive relief, including deadlines for serving motion material, responses, replies and cross-examinations. As the timetable unfolded, the applicants discovered through the parcel register that Xiao and Liu had registered a new charge of $49,990 on January 27, 2026 in favour of Xiao’s law firm, ostensibly to secure future legal fees connected to the litigation. On February 3, 2026, Xiao’s counsel advised that the property had been sold with an anticipated closing date of March 26, 2026. A third-party MLS listing later revealed that the actual closing was set for March 11, 2026, earlier than represented. This discrepancy prompted the applicants to bring an urgent without-notice motion on February 6, 2026 for leave to register a CPL, or alternatively for an order that the net sale proceeds be paid into court.

The ex parte CPL order and the choice of remedies

On February 10, 2026, Cameron J. granted the applicants leave in respect of the Caine Street property, framing the relief in the alternative. The order allowed either: (i) leave to obtain and register an interim CPL on title to the property; or (ii) an order that the net proceeds of sale be paid into court after payment of registered encumbrances, without prejudice to the applicants’ right to challenge the validity, priority, enforceability or quantum of such encumbrances. The applicants elected to register the CPL rather than immediately opt for sale proceeds being paid into court. Subsequently, Xiao and Liu brought a motion to set aside that order and discharge the CPL so that the already-agreed sale could close. They indicated a willingness to have the net proceeds paid into court if necessary to secure the applicants’ position.

Legal framework for discharging a certificate of pending litigation

The statutory framework for the motion is set out in s. 103(6) of the Courts of Justice Act, which permits a court to discharge a CPL where, among other things: the party who obtained it claims a sum of money in place of or as an alternative to an interest in land; does not have a reasonable claim to the interest in land; could be adequately protected by another form of security; or where any other just ground exists. The court may impose such terms as it considers just, including security. The decision canvasses leading authorities, including Perruzza v. Spatone, which sets out the relevant factors for granting or discharging a CPL, such as whether there is a triable issue concerning an interest in land, whether there is an alternative damages claim, the ease of calculating damages, the presence of a willing purchaser, and the comparative harm to each party if the CPL is maintained or vacated. Later decisions, including Karkoulis v. Karkoulis and recent appellate guidance in MCAN Home Mortgage Corporation v. Broad, are cited to emphasize that the threshold is whether there is a triable issue about an interest in land, that the onus lies on the party opposing the CPL to show no such issue exists, and that courts exercise equitable discretion by considering all relevant circumstances, particularly where other forms of security could protect the claimant’s interests.

Interest in land and the trust-based theory

On the “interest in land” issue, Xiao and Liu argued that the applicants themselves, as individual shareholders, had no direct proprietary interest in the Caine Street property. Their position was that the core claim was for misappropriation of Mastermind’s funds owed back to the corporation, not to the applicants personally. They invoked the principle that shareholders typically do not have an “interest in property” sufficient to justify a CPL over property owned by the corporation or by a fellow shareholder in a shareholder oppression case. The court acknowledged this general rule but accepted that in the circumstances of a closely held corporation with only three shareholders, two of whom are the applicants, there was at least an arguable basis for the applicants to claim an interest in land on behalf of the corporation if granted leave to proceed derivatively or under oppression provisions. The applicants relied on an equitable trust theory, arguing that tuition payments used to pay down a line of credit secured against Xiao’s personal home effectively converted misappropriated corporate funds into equity in that property, thereby justifying a trust and CPL. While the notice of application did not explicitly reference “constructive trust,” it did seek a declaration that “all assets purchased by Xiao with monies misappropriated from the corporation” were held in trust for the corporation. The judge found that these pleadings, coupled with the factual allegations about the tuition cheques, were enough to establish that “an interest in land is in question” at the low triable-issue threshold.

Material non-disclosure on the ex parte motion

A central evidentiary issue concerned the applicants’ duty of full and fair disclosure on an ex parte motion under Rule 39.01(6). In support of their ex parte motion before Cameron J., Jian Chen swore that Xiao had not delivered any evidence responding to the substantive allegations, and that the applicants’ sworn evidence about diversion of school funds and proprietary claims over the property was uncontradicted on the record. In reality, Xiao had served an affidavit around April 7, 2025 that engaged with those allegations, explaining the nature of the line of credit, the security on his home, and his perspective on the use of tuition funds and the overdraft. This earlier affidavit and Xiao’s explanation were not disclosed to Cameron J., nor was there any reference to that responding evidence in the ex parte materials. The court found this omission to be a material non-disclosure. Drawing on authority such as R.A. Fox v. R.S. Fox and Gong v. Neuhaus Management Ltd., the judge noted that while failure to make full and fair disclosure is itself a sufficient ground to set aside an ex parte order, it does not compel that result in every case. The court retains discretion to revisit the CPL under s. 103(6), weighing all factors, but emphasized the heavy burden on a party seeking relief without notice to present a balanced picture, even of evidence they might prefer not to highlight.

Monetary nature of the claim and adequacy of alternative security

The court then examined whether the CPL was being used chiefly as a security measure for a monetary claim rather than to protect a genuine proprietary interest. The notice of application requested orders compelling Xiao to repay all misappropriated sums to Mastermind and, in the alternative, general damages of $2 million against Xiao and Luo. Reading the application as a whole, the judge concluded that repayment or damages were the primary relief sought; the asserted interest in land functioned largely as a mechanism to secure recovery on what was essentially a money claim. Referring to authorities such as Tribecca Development Corporation v. Danieli and Bains v. Khatri, the court reaffirmed that a CPL is not meant to secure a damages claim where other remedies, such as a Mareva injunction or security orders, would be more appropriate. When a party’s interest can be adequately protected by another form of security, s. 103(6)(b) supports discharging the CPL. Here, the respondents proposed an alternative structure: discharge the CPL so the arm’s-length sale to a third-party purchaser—who had offered $1,813,800 after a normal marketing process—could close, and place the net sale proceeds into court pending resolution of the merits. The court accepted that proposal as a suitable means of protecting the applicants against the risk that Xiao might leave the jurisdiction and dissipate assets, while avoiding the unfairness of blocking an apparent arm’s-length transaction.

Treatment of the net sale proceeds and the $49,990 charge

To operationalize the alternative security, the court specified how the “net proceeds of sale” should be calculated and handled. There was no disagreement that the first-ranking CIBC mortgage (with an outstanding balance of $1,279,060.41 as of April 10, 2026) must be repaid, that municipal taxes for the specified period must be satisfied, and that the real estate commission and reasonable legal fees for closing, with applicable HST, should be deducted. The contentious item was the second charge of $49,990 in favour of Xiao’s law firm, registered on January 27, 2026 and said to relate to future legal fees in this litigation. The judge held that this amount should not be treated as a deduction for purposes of calculating net proceeds. Instead, the $49,990 was ordered to be paid into court along with the other net proceeds. Whether the respondents could later draw on those funds to pay legal fees would be determined at a future proceeding or by agreement. The order further provided that if the parties could not agree on the exact amount to be paid into court, the disputed amount would be paid into court and either side could seek a determination on 10 days’ notice to resolve the calculation dispute. Crucially, once the specified sums were paid into court, the CPL registered against title to 18 Caine Street would be discharged, freeing the property for conveyance to the purchaser.

Ruling and overall outcome

In the result, the court exercised its discretion under s. 103(6) of the Courts of Justice Act to modify and partially set aside the earlier ex parte order. Paragraph one of the February 10, 2026 order was amended to remove the “or” that had made the CPL and the payment of proceeds alternatives, and paragraph two was replaced to require payment of the defined net proceeds and the $49,990 loan-firm charge into court. Upon payment of those funds into court, the CPL was to be discharged from title to the Caine Street property, effective immediately without need for further formality, though any party could still submit a formal order for signing and filing. The issue of costs was left open, with the court inviting brief written submissions if the parties could not agree. Overall, the respondents Xiao and Liu achieved their goal of having the CPL discharged so that their sale to the third-party purchaser could close, while the applicants secured the preservation of the net sale proceeds (including the disputed $49,990) in court as a substitute form of security for their predominantly monetary and oppression-based claims. No final damages, repayment amount, or costs award was fixed in this decision, and the total monetary award in favour of any party cannot yet be determined because the substantive merits and costs remain to be adjudicated in future proceedings.