IN THE SUPREME COURT OF BRITISH COLUMBIA
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Citation: |
Choung v. Heo, |
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2018 BCSC 1167 |
Date: 20180712
Docket:
S151284
Registry: Vancouver
Between:
Hong
Geun Choung also known as Harry Choung,
Jin Bang, 1013256 B.C. Ltd. and 692886 Enterprises Ltd.
Plaintiffs
And
Kang
Nam Heo also known as Kevin Heo, Joon Heo,
Eun Heo also known as Christina Heo and also known as
Christina Eun Heo, Yoon Seok Heo, Shannon Motel Ltd.,
N.R.S. Westburn Realty Ltd. doing business as Coldwell
Banker Westburn Realty and Chung Nam John
also known as Chung-Nam John and also known as Nam John
Defendants
– and –
Docket: S151601
Registry: Vancouver
Between:
Kang
Nam Heo, Eun Heo, Joon Heo and
Yoon Seok Heo
Plaintiffs
And
1013256
B.C. Ltd., 692886 Enterprises Ltd.,
Hong Geun Choung and Jin Hee Bang
Defendants
Before: The Honourable Mr. Justice Myers
Reasons for Judgment
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Counsel for the Plaintiffs in Action No. S151284 and the Defendants in Action No. S151601: |
Jeffrey P. Scouten |
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Counsel for the Defendants In Action No. S151284 and the Plaintiffs in Action No. S151601: |
Krista M. Johanson |
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Place and Dates of Trial: |
Vancouver, B.C. February 13–16,
19–23; |
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Written submissions: |
May 29 and May 30, 2018 |
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Place and Date of Judgment: |
Vancouver, B.C. July 12, 2018 |
I. Introduction
[1] Mr. Heo owned and operated the Shannon Motel in Fort Nelson, British Columbia. Mr. Choung, through his company, purchased the motel from Mr. Heo in September 2014, for $2.2 million, financing the purchase with a $1.3 million mortgage from Mr. Heo. He did not make any payments on the mortgage.
[2] In his action, Mr. Heo seeks foreclosure on the mortgage. Mr. Choung in his action seeks rescission of the contract, claiming that Mr. Heo fraudulently misrepresented that the motel generated undisclosed cash income. Mr. Heo denies having made the representation.
[3] I conclude that Mr. Heo knowingly misrepresented that there were unrecorded cash sales, but that Mr. Choung did not rely on the representations. Mr. Choung's action must therefore be dismissed and the foreclosure relief granted.
II. Facts
[4] Mr. Heo and Mr. Choung were both born in Korea. Neither are unsophisticated business people.
[5] Mr. Choung worked as an engineer in Korea. He worked on several major projects. He moved to Canada in 1999. Shortly after his move, he became a shareholder of Commodore Lanes, a bowling facility on Granville Street, which he managed for some of his ownership years.
[6] He sold his shares in the Commodore in 2014; however, he had been looking for another business to invest in since 2010 or 2011. He was using a real estate agent – Chung Nam John – who assisted him in his search. As I will describe later, Mr. John eventually brought the Shannon Motel to Mr. Choung's attention and acted as the agent for the transaction.
[7] Turning to Mr. Heo, he studied business administration in Korea. Some of his work experience involved working at a bank, working as a strategist at a consulting firm and managing the construction of a chemical plant.
[8] Mr. Heo moved to Canada in 1992 to join his children. He has owned and operated five motels in Alberta and British Columbia, including the Shannon Motel, which he purchased in 2005 for approximately $1.95 million.
[9] The land and the motel business were originally owned by separate entities, but by the time of the sale they were both owned by 692886 Enterprises Ltd., which, in turn, was owned by Mr. Heo.
[10] Mr. Heo resided in Coquitlam. The motel's day-to-day operations were managed by an on-site manager. From time to time, Mr. Heo and his late wife would travel to Fort St. John to assist and supervise the manager.
[11] In 2011, Mrs. Heo's wife fell ill and Mr. Heo spent less time at the motel. Mr. Heo began to consider selling the motel. As his wife's illness progressed his time at the motel decreased.
[12] In 2013, Mr. Heo decided to list the motel business for sale. From September 2013 to June 2014 the business was listed with three successive realtors. From September 20, 2013 through October 11, 2013, it was listed for sale by Mr. Michael Hur of Hanna Realty Ltd, at an asking price of $3.6 million. On October 22, 2013, Mr. Heo listed the business with Tim Seo of Sutton Group – 1st West Realty, initially for an asking price of $3.98 million, reduced in January 2014 to $3.3 million. In March of 2013, Mr. Heo cancelled Mr. Seo's listing and listed the business for sale with William Lee of Royal Pacific Tri-Cities Realty, initially for a reduced asking price of $2.89 million, which, in June 2014 was further reduced to $2.2 million. Mr. Heo said that he cancelled Mr. Lee's listing in June or July 2014.
[13] During the time the business was listed, no offers or serious expressions of interest were received.
[14] Mrs. Heo died in May 2014 and Mr. Heo decided to start over in his effort to sell the business. He said he thought the business was worth $3.3 million because of the price he paid for it and the extent of the improvements he had made.
[15] As I said above, Mr. John had been working with Mr. Choung in an effort to find a business to buy, and had brought him several motel opportunities. Mr. John testified that he learned the Shannon Motel was for sale from a third party around August 13, 2014. On August 13, Mr. John sent Mr. Choung some financial statements for the motel, which he had obtained from an unspecified third party.
[16] Shortly after, not knowing that Mr. John and Mr. Choung were discussing the Shannon Motel, Mr. Heo contacted Mr. John to discuss listing it for sale. (The two knew of each other because when Mr. Heo bought the motel in 2005, Mr. John was agent for an unsuccessful competing bid.) Mr. John said this was around August 18. Mr. John did not mention Mr. Choung to Mr. Heo at that time. Mr. Heo emailed financial statements to Mr. John.
[17] Mr. John wanted to learn about the business and he and Mr. Heo met at the McDonald's restaurant in Coquitlam. Mr. John said this was around August 18. Mr. John testified that Mr. Heo said the business was doing well and getting a lot of business from oil field workers. Mr. John asked Mr. Heo whether the guests were paying by cash. He said that Mr. Heo replied that he "should not ask those questions; whoever takes over the business will learn that after they take over". However, Mr. John said that Mr. Heo "admitted there were cash transactions".
[18] Mr. John said he relayed the fact of the cash transactions to Mr. Choung on August 21 or 22, around the time they were preparing an offer for the motel. Mr. John said that Mr. Choung said he "would like to have in writing what those records were". Mr. John told Mr. Heo that Mr. Choung wanted it written down.
[19] On August 20, 2014, Mr. Choung, through Mr. John, offered to purchase the Shannon Motel for $2 million. Mr. Heo declined the $2 million offer. On or about August 21, 2014, Mr. John presented a further offer from Mr. Choung at $2.2 million. Mr. Heo also declined this offer. Mr. Heo made a counter-offer for $2.3 million.
[20] On August 22 Mr. Choung signed an offer for $2.25 million with a $1.3 million take-back mortgage at 5%. Before signing the offer, Mr. Choung reviewed it with Mr. John. Mr. Heo accepted the offer on the same day. On August 23, Mr. John forwarded the accepted offer to Mr. Choung.
[21] The purchase contract had the following subject conditions, for the benefit of the buyer:
1. The buyer inspecting the subject building and approval of said inspection, arrange and costs by the buyer.
2. The buyer being satisfied w/the environmental site assessment Report of the property, arrange and costs by the buyer.
3. The buyer's satisfaction withe company's financing statements.
The removal date for the subjects was September 15, 2014, upon which the deposit was to be increased to $100,000.
[22] Completion and possession were to be September 22, 2014. Mr. Heo or his manager was to supply two weeks' training at his cost.
A. The handwritten note
[23] Within a day after signing the contract, Mr. Choung was given a handwritten note prepared by Mr. Heo, which became central to this case. Rather than describe it I will set it out:
1. Mr. Heo's explanation of the note
[24] Before dealing with the discussions surrounding the note, I will describe Mr. Heo's explanation as to how it came about and what it meant.
[25] Mr. Heo said that he received a call from Mr. John on August 19, 2014, saying that he had a potential buyer. They decided to meet on August 20. Mr. Heo created the note in preparation for that meeting to justify his view, as I set out above, that the motel was worth at least $3.3 million, in part because of what he spent on renovations and improvements.
[26] Mr. Heo said he thought most realtors take a multiple of five times annual earnings to determine the listing price for a motel. That would not be sufficient to get the price he wanted.
[27] Mr. Heo testified that he spent approximately $1.2 million on improvements and renovations to the motel. He said these expenses were not shown in a discrete line item on the financial statements; rather, they were allocated to repair and maintenance, supplies, or transportation, among other categories, or, under capital expenses, to equipment. In October or November 2013, he prepared a list of the expenses.
[28] Mr. Heo explained that the column in the center titled "Act" represents the actual motel value; that is, the annual revenue plus the investments he had made. He did not have time to look at the general ledger in order to accurately match the proven expenses to the specific year in question. He knew that he had invested at least $1 million in that seven-year period and made rough allocations for each year relying on his memory. He denied that the column heading or figures in it meant actual sales or that it was meant to include undisclosed cash sales.
[29] The Korean writing at the top of the right column means "report". Mr. Heo said this was the actual income from the financial statements. I note that the figures do match the statements.
2. Discussions regarding the note and cash sales
[30] I will set out the evidence of the three witnesses regarding discussions about the note separately.
a) Mr. Heo
[31] Mr. Heo said that he showed the note to Mr. John when they met on August 20. He told Mr. John he wanted $3.3 million for the motel so Mr. John should list it at $3.5 million. He explained the note to him and acknowledged there was nothing specific in the financial statements as backup. Mr. John said it was "garbage" and he could not get $3.3 million.
[32] Mr. Heo said that while that hurt his feelings, he immediately agreed he could not get $3.3 million. Mr. John said they should take $562,000 average annual income as shown on the bottom right of the handwritten note, and multiply it by five to arrive at a price of $2.9 million. (The math does not quite work.) He thought that would result in a sale for $2.5 million.
[33] Mr. Heo said he did not give Mr. John any instructions as to the memo. He remembered Mr. John saying that he would take it and use it as a reference. Mr. John did not tell him he would show the note to Mr. Choung.
[34] Mr. Heo testified that he never told Mr. John that the figures in the Act column represented unreported cash sales. He only told him that the figures represented the combined revenue plus the investment in renovations. He further testified that Mr. John never asked him for proof of cash sales.
[35] Mr. Heo said that he met with Mr. Choung and Mr. John – again at Macdonald's – sometime between the first and second offers. Mr. Choung had questions about the motel and Fort Nelson, which Mr. John answered. Mr. Choung asked whether the motel was profitable to which Mr. Heo replied that that was the wrong way to think; he should have a long-term perspective and could not expect to make money in the short term.
[36] Mr. Heo said he did not know that Mr. Choung had been given the note until the closing in Fort St. John when he noticed it in Mr. Choung's papers.
b) Mr. John
[37] In his direct examination, Mr. John said he received the note on August 23, the day after the offer was accepted. His evidence as to how he got the note was vague. He said he received it from Mr. Heo, without any discussion or explanation.
[38] Mr. John recalled the note being discussed at a meeting between him, Mr. Choung and Mr. Heo at MacDonald's in Coquitlam the evening of August 23. The purpose of the meeting was to correct some initials on the executed documents.
[39] Mr. John said he explained to the others at the meeting what the note was. However he also testified that it was self-explanatory. He did not recall Mr. Heo saying anything about it. Later in his direct examination, Mr. John said that he believed Mr. Choung asked for further documents; something that would show the figures in the note were true. He said Mr. Heo said the price of $2.25 million was based on the financial statements and not "on the extra income". Mr. Heo said further documents would be provided once the subjects were removed; he had them on his computer. He could not recall whether the subject was discussed again when all three were present.
[40] Mr. John said there might have been a second meeting in which Mr. Choung asked Mr. Heo for back-up data. (Neither Mr. Choung nor Mr. Heo recalled a second meeting.) Mr. John denied discussing getting back-up data with Mr. Choung or Mr. Heo after that point.
[41] Mr. John said that Mr. Heo gave him the list of renovations together with an environmental report and financial statements. He thinks he gave them to Mr. Choung after the offer was accepted.
c) Mr. Choung
[42] Mr. Choung said that after reviewing the financial statements sent to him by Mr. John on August 13, 2014, he was of the view that the profit from the motel was too low, even when management salary was included. He told Mr. John that he could not buy the motel based on that statement. He said Mr. John told him there was significant other revenue. Mr. Choung asked for that to be shown to him. Mr. John said he would do that.
[43] Mr. Choung said he met with Mr. John the following day, and again Mr. John told him there was significant other sales. Mr. John thought the vendor was asking $3.2 million. When Mr. Choung asked him the amount of the cash sales, Mr. John said he did not know but would get the information for him.
[44] He and Mr. John had several further conversations in which they discussed how much he should offer. Mr. Choung said, "Why don't we start this at 2.2 million". Mr. John told him a major benefit of the deal would be the vendor financing.
[45] Mr. Choung was then asked in direct evidence how he had arrived at the figure of $2.25 million. He said there had been a discussion with Mr. John who said they should make an offer at $2.25 million and see whether the statements as to significant other income were true; if not the deal could always be cancelled.
[46] At his examination for discovery (one year after the events in question) Mr. Choung testified that he could not recall the basis for offering $2 million.
[47] In cross-examination, Mr. Choung again said that he was not sure exactly how he came up with the $2 million offer. He confirmed that his discovery evidence was true.
[48] In direct, Mr. Choung was asked if he believed the $2.25 million offer reflected the motel's value. He responded that if the figure on the note was true, $2.25 million was a very appropriate price in his opinion.
[49] Mr. Choung said he was given the handwritten note by Mr. John the day after the contract was signed, i.e. August 22. It was given to him at McDonald's. He said Mr. John explained to him there are two types of sales: one is what was reported to the CRA and the other was not. Mr. John told Mr. Choung that Mr. Heo wrote the note.
[50] Mr. Choung said that he met with John and Mr. Heo on August 24, at which time the note was discussed. However, Mr. Choung could not remember whether he brought the original note, a copy of it, or no note at all.
[51] Mr. Choung said he asked Mr. Heo to explain what the note meant. Mr. Heo gave him a similar explanation to what Mr. John had given him; namely, that the columns represented reported and unreported income to the CRA.
[52] Mr. Choung asked Mr. Heo for "backup data" to support the note and Mr. Heo said it would be provided after the subjects were removed. Mr. Choung said he did not know what type of data Mr. Heo was referring to, but Mr. Heo said it was on his personal computer.
[53] Mr. Choung testified that Mr. Heo explained what "Act" meant. However, in discovery he said the word was self-explanatory so he did not think of asking what it meant. When this was put to him he acknowledged that one of his two answers had to be wrong.
B. The removal of the subject conditions
[54] On August 26, Mr. Choung and Mr. John flew to Fort Nelson to inspect the motel. They stayed overnight at the motel. Mr. Heo was there as well.
[55] Mr. Choung viewed a few rooms. While there was disagreement as to how many rooms were viewed, nothing turns on that. Mr. Choung viewed the exterior of the motel, the furnace rooms and the coin laundry. He was shown where the computer was and where the business records were kept; he did not ask to look at the records. Mr. Heo showed him uncompleted roof repair work. Mr. Choung reviewed an environmental report. He had discussions with the motel manager, David Koo.
[56] Mr. Choung was also interested in seeing the Fort Nelson area. He wanted to visit the city hall, but it was closed. He wanted to see the railway terminal or station in operation but he said they were not able to visit it.
[57] Mr. Choung mentioned that a one-night stay was not enough to make a complete inspection, but of course that was his choice.
[58] Before and after the visit to Fort St. John, Mr. Choung did some research on the area and its economy.
[59] Mr. Choung said that he told Mr. John he was concerned about removing the subject conditions without the back-up data for the note. Mr. John told him not to worry; he worried too much; and he could trust Mr. Heo.
[60] In direct, Mr. John was asked whether Mr. Choung asked about the information after Mr. Heo said he would have to wait until after the closing. He said he did not. In cross, he said that Mr. Choung was satisfied with what he saw at the inspection, which is why they engaged a lawyer immediately upon their return.
[61] The subject conditions were removed on September 10, 2014, five days earlier than the deadline.
[62] After the subjects were removed and before the closing on September 17, Mr. Heo and Mr. Choung met at Denny's in Coquitlam. Mr. Choung did not remember the date; Mr. Heo said it was September 12, 2014. Mr. Heo brought his computer to the meeting and transferred documents relating to the operation of the motel onto a USB memory stick, which he gave to Mr. Choung. Mr. John said there were multiple meetings where Mr. Heo explained the business to Mr. Choung.
[63] The documents included daily transaction records. They listed, by room and by day, customer names; payment amounts; methods of payment; and applicable taxes. The report totaled the daily motel revenue. Mr. Heo said he explained the records to Mr. Choung and how these were used to generate monthly reports. He considered this to be part of his training obligations provided for in the contract.
[64] Mr. Heo testified that Mr. Choung did not ask for additional documentation at the meeting.
C. The closing and following events
[65] On September 21, 2014, Mr. Choung arrived with Mr. John in Fort St. John for the closing and to take possession.
[66] There were some discussions between Mr. Choung and Mr. Heo about the inventory and other adjustments. The final closing amount was agreed. Mr. Choung testified that he asked Mr. Heo why he was not given the back-up data as the closing date was getting close. Mr. Heo replied that there were a lot of other things to do before closing that should be done first. Mr. Heo did not affirm or deny this conversation.
[67] The closing documents were signed on September 22.
[68] Mr. Choung testified that on September 23 – the day before Mr. Heo left – Mr. Choung asked to finally be given the back-up data that Mr. Heo had promised. Mr. Choung testified that Mr. Heo took him to where a large number of boxes were located and said, "They are in there", without any further explanation.
[69] Mr. John did not give any evidence regarding requests for the back-up data when they were in Fort St. John for the closing.
[70] There were some points of tension between the parties. Mr. Heo thought Mr. Choung had been rude and Mr. Choung was annoyed when he learned that Mr. Heo planned to return to Vancouver on September 24 without providing any further training. Mr. Heo left Fort St. John on September 24.
[71] On October 6, 2014, Mr. Choung emailed Mr. Heo offering "sincere apologies" for being rude and asked for his cooperation on dealing with issues concerning banking and taxes.
[72] There is a dispute in the evidence about the operation of the company's bank account after the closing. Although some time was taken with this in the trial, I do not see it as being significant to the matters I have to decide and will not detail the matter any further.
[73] Monthly payments were to start on October 22, 2014. Mr. Choung sent Mr. Heo an invoice claiming pre-closing expenses paid by him. On October 27, Mr. Heo emailed Mr. Choung refuting the charges and noted that the October 22 payment had not been made and that he might commence legal action.
[74] On October 28, 2014, Mr. Choung sent an email to Mr. Heo promising to send him six months of post-dated cheques. He never did.
[75] On December 11, 2014, Mr. Heo's counsel sent demand letters and a Notice of Intention to Enforce Security under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. On January 12, 2015, he filed the foreclosure petition.
[76] On December 22, 2014, Mr. Choung's counsel wrote to Mr. Heo's counsel asking, amongst other things:
Firstly, we ask Mr. Kevin Heo, also known as, Kang Nam Heo ("Mr. Heo") provide the financial records that correspond with the written representations (herein enclosed on page l of the enclosures) made by Mr. Heo related to the actual sales and reported sales records and provided to Mr. Choung. We understand that Mr. Heo made these representations to induce Mr. Choung into purchasing the said shares. We understand that Mr. Heo promised to provide the financial records that he removed from the motel that corresponds with the actual sales records. However, once the transaction completed, Mr. Heo did not provide these records despite his earlier promises and despite our client's and our own repeated demands for production of these records.
III. Analysis
[77] Mr. Choung's claim is based on fraudulent misrepresentation.
[78] Although some of the following have often been combined, the cases establish the elements of fraudulent misrepresentation as:
a) the defendant made a material representation of fact to the plaintiff;
b) the representation was false;
c) the defendant knew the representation was false, or made it recklessly without caring whether it was true or false;
d) the defendant intended that the plaintiff rely on the representation;
e) the plaintiff acted in reliance on the representation; and
f) the plaintiff suffered damage as a result of its reliance on the false representation.
Continental Steel Ltd. v. CTL Steel Ltd., 2015 BCSC 1672 at para. 205, aff'd 2018 BCCA 82
Islip v. Coldmatic Refrigeration of Canada Ltd., 2002 BCCA 255 at para. 11
[79] With respect to reliance, in Sidhu Estate v. Bains, 1996 CarswellBC 1262, the Court of Appeal noted, at para. 36, that it is not necessary that the misrepresentation be the only thing relied on by the plaintiff; it need only be a material inducement. At para. 35 it quoted with approval the following passage from Fleming in The Law of Torts, 7th ed. (Sydney: Law Book, 1987) at p. 604:
Besides being intended to rely on the misrepresentation, the plaintiff must have actually done so. A mere attempt to deceive is not actionable. Hence, if the representee did not allow the falsehood to affect his judgment, as where he either knew the statement to be false or regarded it as so unimportant that he would have acted in the same way without it, he cannot complain even if he acted in the way intended and suffered harm in consequence. At the same time, a defendant cannot excuse himself by proving that his misrepresentation was not the sole inducing cause, because it might have been precisely what tipped the scales, as in the case of the plaintiff who had taken up debentures, partly by reason of a falsehood contained in the prospectus, partly in the mistaken belief that they created a charge on the company's property. Nor is it a defence that the plaintiff was negligent or foolish in relying on the misrepresentation or had an opportunity for verifying it. [Footnotes omitted.]
[80] Sidhu also dealt with the onus of proof of reliance. At para. 42 the Court stated:
I think the preferred view of the law in Canada is that once intention, materiality and causation of loss are proven, the burden of proving non-reliance shifts to the defendant.
[81] Mr. Choung's position is summarised in his written argument:
… In the course of discussions between the parties preceding the purchase, Mr. Heo fraudulently misrepresented to Mr. Choung that the motel business had significant undisclosed revenues in the years preceding the sale and that he had back up records to prove it. These misrepresentations were deliberately and dishonestly made by Mr. Heo with the intention of inducing Mr. Choung to purchase the motel business, were plainly material to Mr. Choung's decision whether or not to buy and, in their effect, operated as a factor in inducing the Choung parties to purchase the business.
Mr. Choung's case, therefore, hinges on two misrepresentations: the motel had significant unreported revenues and Mr. Heo had documents to back that up. I am not certain they can, in fact, be treated as two separate misrepresentations rather than two sides of the same coin. Nevertheless, I do not think it makes a difference to the end result and I will treat it as two separate representations for the purpose of my analysis.
[82] Mr. Heo, while denying that the representations were made, focussed his argument on lack of reliance by Mr. Choung. He also argued that the second statement – the existence of documents to back up the first statement – is in the nature of a contractual term rather than a representation of fact. Therefore it is an alleged collateral agreement that contradicts the terms of the written agreement.
A. Did Mr. Heo make the alleged representations and were they false?
[83] As I said in the introduction, I conclude the action must be dismissed because Mr. Choung did not rely on the alleged misrepresentations. I will therefore be more brief in dealing with whether the misrepresentations were made and whether they were fraudulent than would be the case if I had reached the opposite conclusion.
[84] I do not accept Mr. Heo's explanation as to the handwritten note. First, it does not make sense that he would distribute the total spent on renovations arbitrarily between various years. His stated purpose of justifying the value of the motel would have been equally served by showing the total amount spent.
[85] Second, the amounts spent on renovations on his list total $1.236 million, yet the difference between the "Act" column and the other is $1,038,000. There is no reason for him to want to distribute the renovation to various years, but short the total amount by close to $200,000.
[86] His explanation of the word "Act" for the column heading does not make sense. It is more likely he meant it to include additional cash sales.
[87] The evidence of the two prior real estate agents who attempted to sell the motel for Mr. Heo is consistent with Mr. Choung's evidence. As I said above, Mr. Hur had the listing for the motel in September 2013. He testified that Mr. Heo had told him the motel revenue was $700,000 and that the figure would not be on the financial statement. This is approximately consistent with the average "Act" figure in the handwritten note. Neither the 2012 nor 2013 reported revenues were close to $700,000. Mr. Heo attempts to explain Mr. Hur's evidence by saying he had only given Mr. Hur the 2011 statement, which did show revenue of $772,000 but I do not accept that.
[88] Mr. Seo had the listing in October 2013, after Mr. Heo cancelled the listing with Mr. Hur. Mr. Seo testified that Mr. Heo was the source of the information that the business had annual revenues of $730,000. Once again, that is approximately consistent with the $710,000 average income in the "Act" column.
[89] I conclude that Mr. Heo did tell Mr. John there were unrecorded cash sales and this was eventually discussed between the three of them after Mr. Choung's offer was made and accepted. There is no reason not to accept the evidence of Messrs. John and Choung that Mr. Heo did mention there was back-up records for the cash sales.
[90] There is also no reason to doubt that Mr. Heo made the representations deliberately with the intent that they be relied on.
[91] Were the representations false? Mr. Choung gave evidence that there was minimal, if any, cash taken in after he took over. That does not necessarily establish that cash transactions did not take place when Mr. Heo operated the motel, because business fell off generally. However, the falsity of the representations was not challenged by Mr. Heo. Given that, and his explanation for the figures in the note, which I did not accept, I must conclude that the figures were made up or misrepresented.
B. Did Mr. Heo rely on the representations?
[92] Assuming the representations were made, I will consider whether Mr. Choung relied on them. As set out above, the onus lies on Mr. Heo to prove there was no reliance.
[93] In his reply submission, Mr. Choung argues:
Mr. Choung did not testify – either on discovery or at trial – that he disbelieved the actual sales figures provided by Mr. Heo as set out in the Note. The substance of his evidence, rather, is that the Note alone did not satisfy him that company had unreported sales, or that the figures given in the Note were accurate, and that it was for that reason that he asked Mr. Heo whether he had records that supported those figures.
It was in response to this request that Mr. Heo made the second and related misrepresentation that this case involves, which was that such records did in fact exist on his personal computer. When asked for those records, Mr. Heo told Mr. Choung that he would provide them but, because they were sensitive in nature, he was not prepared to provide them to Mr. Choung until after subjects had been removed. [Emphasis in original.]
For the reasons that follow I do not agree. I conclude that Mr. Choung did not believe there were significant cash sales, or that records would be produced to verify cash sales.
[94] At the time of making the offer, Mr. Choung had financial statements and the list of renovations. Mr. Choung had not been given the handwritten note. Nor had he spoken to Mr. Heo. At most, Mr. John had told him there were unrecorded cash transactions and he would find out some more details of that.
[95] The handwritten note was given to Mr. Choung by Mr. John after the final offer was made and accepted.
[96] The evidence as to how the amounts of Mr. Choung's offer figures were arrived at was equivocal. Mr. Choung's evidence was contradictory and he admitted that he could not recall how he came to the offer amounts. On any analysis, he could not have based the offer on the specific figures in the note, or any specific cash sales figures because he did not have them.
[97] Mr. Choung had been given the handwritten note before the subject conditions were removed. However, he said numerous times in his evidence that he did not believe the figures in the note. In his discovery he said:
425 Q And without the backup data, the information Mr. Heo gave you was groundless and you couldn't rely on it?
A What do you mean -- what did Mr. Heo provided [sic] me with?
426 Q You've said that he told you there was unreported income. You've said that that was groundless without backup, and you've said that you needed the backup. Correct?
A Right.
MS. JOHANSON: Can you repeat my earlier question.
(REPORTER READS BACK)
A Right.
And
711 Q Mr. Choung, isn't the handwritten note a joke without backup?
A I agree. I mean, this didn't even exist, right. Like I said earlier, I don't even know whether this such thing really existed or not, but someone apparently, you know, made it that – apparently as if it existed, such numbers. It's a joke in a transaction of $2 million that someone would actually think of writing such numbers and insist that these were not reported to tax offices either. It's a joke itself.
712 Q It's absolutely meaningless without backup; correct?
THE INTERPRETER: May the interpreter repeat?
That's right.
[98] In response to a question from his counsel, Mr. Choung said he believed what Mr. Heo told him about unreported income. However, he also made the following statements in his direct evidence:
· "How am I supposed to believe this, based on what?"
· "I requested Mr. Heo for [sic] a backup data that supports this note [so] that I can believe what it says on the note."
· "Just by looking at this I couldn't just believe it."
· "I don't even know what kind of backup data he was talking about. I still don't know to this day."
· "Not that I believed that for 100% because I don't even know what kind of backup data they are."
· "What do I know about this guy, I had nothing, I did not know anything about him. I had no information about him other than the fact that he is Korean."
· "As long as I can secure that backup data, the company's actual sales and its actual income can be clarified, I thought".
[99] Mr. Choung said that the purchase was a big transaction for him and he took whatever steps he thought were prudent to protect his interests before signing the offer to purchase.
[100] Mr. Choung did not trust another document he had been given before he signed the contract – the list of renovations, which Mr. Heo said he had done to the motel. He referred to it as "garbage". He also referred to it as a "joke", or more literally translated when the interpreter was questioned on it, a "funny story".
[101] As I said above, Mr. Choung was asked if he believed the $2.25 million offer reflected the motel's value. He responded that if the figure on the note was true, $2.25 million was an appropriate price in his opinion. The problem with this is that he said he had not received the note until after the offer was made.
[102] I find that Mr. Choung did not believe there were unrecorded cash sales. Even if he believed the note might be true and wanted the confirmation, he did not rely on the note or what he had been told verbally about cash sales.
[103] What then of the representation that Mr. Heo had "data" to prove the cash sales? In the passages from his reply quoted above (para. 93), Mr. Choung is effectively saying that he did not trust the note but relied on the statement that there was data to back it up.
[104] Not only is that a logical conundrum for Mr. Choung, but in my view the evidence establishes the opposite.
[105] Mr. Choung, as I said above, is not an unsophisticated business person. Yet he says he was satisfied with a statement that there was "backup data" to prove cash sales without knowing or inquiring what type of data there was. As I quoted above, he said, "I don't even know what kind of backup data he was talking about; I still don't know to this day". Reliance on prospective back-up data in those circumstances belies common sense and is not credible.
[106] The back-up data not having been given to Mr. Choung after the subject conditions were removed, Mr. Choung still closed on the transaction. It defies common sense that an experienced business person would be willing to close relying on a commitment that had already been broken. Moreover, it contradicts Mr. Choung's evidence referred to above (para. 45) where he said he made the $2.25 million offer knowing it could be cancelled if the cash sales were turned out not to be true.
[107] Mr. Choung said he had been told that Mr. Heo had the records on his computer. After the closing, Mr. Choung testified, Mr. Heo pointed to boxes that contained the back-up data; yet he did not question Mr. Heo about that inconsistency, or raise any concern at the time. If Mr. Choung had in fact relied on the existence of the back-up data one would have expected him to ask where in the boxes the data was.
[108] Mr. Choung testified that after the subject conditions were removed, he asked for back-up data from Mr. Heo through Mr. John and did not ask Mr. Heo directly. However, Mr. John said that Mr. Choung had not asked him to make that request.
[109] Mr. Choung's evidence was inconsistent as to when he discovered the representations were not true. In his examination for discovery, he said it was soon after he took over the motel; some time between September 23 and October 15. In re-examination he said he learned of the misrepresentation the day Mr. Heo left Fort St. John (September 24). This was essentially reiterated several more times in re-examination.
[110] However, when shown the December 22 letter from his counsel (above, para. 76) it was put to him (again in re-examination) that he believed Mr. Heo at the time of the letter. Mr. Choung's response was that he had "started to doubt him, his words, that's why we did this letter". When asked again, counsel for Mr. Heo again objected. Mr. Choung was then asked, "When did you conclude that the representations that Mr. Heo had made to you regarding actual sales were false?" Mr. Choung again referred to the takeover in September, and referred to his earlier statement that Mr. Heo told him to look through the boxes himself. Mr. Choung's counsel again asked, "When did you decide in your mind – become certain – that what Mr. Heo had told you was false and there was no backup data?" Mr. Heo replied, "When Heo told me to look through the boxes myself and then I learned that Koo actually listed all of the documents in those boxes." That list was dated January 2015.
[111] This inconsistency, of course, affects Mr. Choung's credibility on this point and in general. It is not credible that Mr. Choung was anxiously awaiting back-up data, but did not immediately look in the boxes to find it. All of the "due diligence" steps he took were consistent with someone not relying on extra cash sales.
[112] In the end, Mr. Choung made no complaint until the December 22 letter from his counsel. This was only after Mr. Heo threatened to enforce the mortgage security.
[113] I conclude that Mr. Choung did not rely on any representation that there were undisclosed cash sales or that there was data to prove it. In fact, his view was that the representations were not accurate and he was nevertheless willing to buy the motel. Put another way, any misrepresentation that may have been made was not material to Mr. Choung's decisions to offer to buy the motel, to remove the subject conditions, to close on the transaction or to the determination of his offer price.
[114] I come to this conclusion recognising that the onus of establishing lack of reliance lies with Mr. Heo. Further, to be clear, I am not basing my conclusion on any legal obligation of Mr. Choung to exercise due diligence. Rather the references to steps he failed to take go to the credibility of his evidence.
IV. Conclusion
[115] While Mr. Heo knowingly misrepresented cash revenue, it was an amateur attempt, which Mr. Choung did not believe or rely on in any way.
[116] The action must therefore be dismissed.
[117] The orders sought in the foreclosure action are granted.
"E.M. MYERS, J."