Rarotonga, 2010

Simon's Megalomaniacal Legal Resources

(Ontario/Canada)

ADMINISTRATIVE LAW | SPPA / Fairness (Administrative)
SMALL CLAIMS / CIVIL LITIGATION / CIVIL APPEALS / JUDICIAL REVIEW / Practice Directives / Civil Portals

home / about / Democracy, Law and Duty / testimonials / Conditions of Use

Civil and Administrative
Litigation Opinions
for Self-Reppers


TOPICS


Partnerships - Limited Partnerships

. Extreme Venture Partners Fund I LP v. Varma

In Extreme Venture Partners Fund I LP v. Varma (Ont CA, 2021) the Court of Appeal considered fiduciary duties generally, here in the context of corporate general partners:
[102] It is well established that the “categories of fiduciary relationship are never closed”: Frame v. Smith, 1987 CanLII 74 (SCC), [1987] 2 S.C.R. 99, at para. 36; see also Guerin v. R., 1984 CanLII 25 (SCC), [1984] 2 S.C.R. 335 at 384. Certain status relationships—solicitor-client or doctor-patient, for example—give rise to a per se fiduciary relationship. In other circumstances, courts can find an ad hoc fiduciary duty. Such a duty arises where: (1) the fiduciary has the discretionary power to affect the vulnerable party’s legal or practical interests and (2) the fiduciary has made an express or implied undertaking that it will exercise the discretionary power in the vulnerable party’s best interests: Galambos v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247, at paras. 66, 83.

...

[104] Further, I note that certain jurisdictions in the United States have similarly determined that the liability owed by a general partner to the limited partnership should be expanded: see Colin P. Marks, “Piercing the Corporate Veil” (2015) 19 Lewis & Clark L Rev 73 at 83; J. William Callison & Maureen A. Sullivan, Partnership Law & Practice (St. Paul, MN: Thomson Reuters, 2021) at § 22:18; In re Harwood, 637 F (3d) 615 at 622 (5th Cir 2011); One seminal American case is In re USACafes, L.P. Litig., 600 A (2d) 43 (Del Ch 1991). Delaware courts have consistently upheld and in certain cases expanded the reach of that decision: Marks, at 83, 85. In USACafes, Chancellor Allen drew an analogy to corporate trustees:
While the parties cite no case treating the specific question whether directors of a corporate general partner are fiduciaries for the limited partnership, a large number of trust cases do stand for a principle that would extend a fiduciary duty to such persons in certain circumstances. The problem comes up in trust law because modernly corporations may serve as trustees of express trusts. Thus, the question has arisen whether directors of a corporate trustee may personally owe duties of loyalty to cestui que trusts of the corporation. A leading authority states the accepted answer:

The directors and officers of [a corporate trustee] are certainly under a duty to the beneficiaries not to convert to their own use property of the trust administered by the corporation. . . . Furthermore, the directors and officers are under a duty to the beneficiaries of trusts administered by the corporation not to cause the corporation to misappropriate the property. . . . The breach of trust need not, however, be a misappropriation. . . . Any officer [director cases are cited in support here] who knowingly causes the corporation to commit a breach of trust causing loss . . . is personally liable to the beneficiary of the trust. . . .

Moreover, a director or officer of a trust institution who improperly acquires an interest in the property of a trust administered by the institution is subject to personal liability. He is accountable for any profit. . . . Even where the trustee [itself] is not liable, however, because it had no knowledge that the director was making the purchase . . ., the director . . . is liable to the beneficiaries. . . . The directors and officers are in a fiduciary relation not merely to the [corporation] . . . but to the beneficiaries of the trust administered by the [corporation].
[105] Chancellor Allen also made the following comments that are particularly pertinent to the circumstances of the case at bar:
The theory underlying fiduciary duties is consistent with recognition that a director of a corporate general partner bears such a duty towards the limited partnership. That duty, of course, extends only to dealings with the partnership's property or affecting its business, but, so limited, its existence seems apparent in any number of circumstances. Consider, for example, a classic self-dealing transaction: assume that a majority of the board of the corporate general partner formed a new entity and then caused the general partner to sell partnership assets to the new entity at an unfairly small price, injuring the partnership and its limited partners. Can it be imagined that such persons have not breached a duty to the partnership itself? And does it not make perfect sense to say that the gist of the offense is a breach of the equitable duty of loyalty that is placed upon a fiduciary?[1]
. Hudson's Bay Company v. OMERS Realty Corporation

In Hudson's Bay Company v. OMERS Realty Corporation (Ont CA, 2016) the Court of Appeal makes some observations on limited partnerships:
[16] The application judge’s reasoning, which we adopt, can be summarized as follows.

[17] A limited partnership is not a legal entity. It is required by law to have a general partner through which it normally acts: Kucor Construction & Developments & Associates v. Canada Life Assurance Co. (1998), 41 O.R. (3d) 577, 1998 CanLII 4236 (ON CA), 1998 CanLII 4236 (C.A.). A limited partnership cannot hold title to real property. It can hold title to real property only through its general partner.
. Canadian Home Publishers Inc. v. Parker

In Canadian Home Publishers Inc. v. Parker (Ont CA, 2019) the Court of Appeal discusses the difference between partnerships and limited partnerships:
[16] In my view, the application judge erred in his conclusion that David, as the limited partner, was entitled to share equally with the appellant, the general partner, in the ultimate residual assets remaining upon dissolution of the limited partnership and payment of amounts specified in s. 24 of the LPA. More specifically, he erred in importing into the LPA the residual distribution provision found in s. 44 of the Partnerships Act. There is no gap in the LPA that requires reference to the Partnerships Act to be filled.

[17] At the risk of stating the obvious, limited partnerships are different from ordinary partnerships. Their structure is different, as a limited partnership must have at least one general partner and at least one limited partner: LPA, s. 2(2). Further, the LPA expressly sets out the rights and obligations of general partners and of limited partners.

[18] More specifically, on that latter point, to fully understand the differences between limited partnerships and ordinary partnerships, it is important to have reference to the provisions of the LPA that establish the structure of a limited partnership and define the roles played by the general partner and the limited partner in it. A review of these provisions illustrates that general partners and limited partners have fundamentally different rights and obligations within the limited partnership under the LPA.

[19] First, with respect to the general partner, s. 8 of the LPA states:
A general partner in a limited partnership has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners…
Thus, the general partner has all the rights and obligations of a partner in an ordinary partnership, subject to some statutory enumerated exceptions. Notably, there is no corresponding provision in the LPA conferring the same general rights and obligations upon the limited partner.

[20] The LPA then proceeds to expressly define the rights and the obligations of a limited partner. In particular, s. 9 of the LPA significantly limits the obligations of a limited partner:
Subject to this Act, a limited partner is not liable for the obligations of the limited partnership except in respect of the value of money and other property the limited partner contributes or agrees to contribute to the limited partnership, as stated in the record of limited partners.
This is the defining feature of a limited partnership: except as otherwise contemplated by the LPA, the limited partner’s liability is limited to the extent of their capital contribution to the partnership: Alison Manzer, A Practical Guide to Canadian Partnership Law, loose-leaf, (Toronto: Thompson Reuters, 2017), at paras. 9.560 to 9.580.

[21] The limited liability of the limited partner is premised on their status as a passive investor in the partnership business. In this vein, s. 13(1) of the LPA provides:
A limited partner is not liable as a general partner unless, in addition to exercising rights and powers as a limited partner, the limited partner takes part in the control of the business.
[22] The LPA then sets out the extent of the limited partner’s entitlements. Section 11 provides that a limited partner is entitled to a share of the profits of the limited partnership and to the return of the limited partner’s contribution to the limited partnership. Further, s. 15(1) provides that a limited partner has the right to demand and receive the return of the limited partner’s contribution, upon the dissolution of the limited partnership, subject to certain exceptions.

[23] The LPA does address the priority for payments arising on the dissolution of the limited partnership. I repeat s. 24 of the LPA for ease of reference:
In settling accounts after the dissolution of a limited partnership, the liabilities of the limited partnership to creditors, except to limited partners on account of their contributions and to general partners, shall be paid first, and then, unless the partnership agreement or a subsequent agreement provides otherwise, shall be paid in the following order:

1. To limited partners in respect of their share of the profits and other compensation by way of income on account of their contributions.

2. To limited partners in respect of their contributions.

3. To general partners other than for capital and profits.

4. To general partners in respect of profits.

5. To general partners in respect of capital.
The respondents conceded, at the hearing, that they were not taking the position that there was any agreement providing otherwise, as contemplated by s. 24.

[24] On a plain reading of the LPA, a limited partner has very strict and defined rights and obligations. Those defined rights and obligations do not include the right to participate in the residual value of the partnership on dissolution. Had it been the intent of the Legislature to accord that right to limited partners, presumably the LPA would have so provided.

[25] Moreover, a limited partner is expressly not in the same position as a partner in an ordinary partnership. A limited partner enjoys protection from the liabilities of the limited partnership, unlike a partner in an ordinary partnership. In return for that protection, the limited partner is restricted to the receipt of two things under the LPA: one is their share of the profits and the other is the return of their contribution (see LPA, s. 11). A limited partner has no broader right to participate in the upside of the limited partnership, just as the limited partner has no broader obligation to suffer or contribute in the downside. That conclusion is consistent with the approach set out in Lehndorff General Partner Ltd. (Re), (1993), 9 B.L.R. (2d) 275, where Farley J. said, at para. 17:
The limited partnership is an investment vehicle for passive investment by limited partners…Limited partners had no liability to the creditors of the partnership’s business; the limited partners’ financial exposure is limited to their contribution. The limited partners do not have any "independent" ownership rights in the property of the limited partnership. The entitlement of the limited partners is limited to their contribution plus any profits thereon, after satisfaction of claims of the creditors. [Emphasis added.]
[26] Given the inherent purpose behind the structure of a limited partnership, there was no need to have recourse to s. 44 of the Partnership Act to resolve the issue presented by this case. The clear effect of the LPA is to give to the general partner all rights to any residue that may exist after dissolution. That conclusion is consistent with the broad rights and obligations that the general partner enjoys. It is consistent with the plain wording of s. 8 of the LPA, which provides the general partner with all the rights and obligations of a partner in an ordinary partnership. It is also consistent with the limited rights and obligations of a limited partner as set out in the LPA. With respect, the contrary conclusion reached by the application judge does not sit comfortably with the inherent structure of a limited partnership under the LPA.

[27] Finally, I would also note that, even if one could find a proper route to have recourse to s. 44 of the Partnership Act, it would seem to follow that only the general partner constitutes a partner in an ordinary partnership for the purposes of the Partnership Act, given the context in which it arises and the express statutory limitations on a limited partner. Thus, only the general partner would have rights to the residue under that section.




CC0

The author has waived all copyright and related or neighboring rights to this Isthatlegal.ca webpage.




Last modified: 30-11-22
By: admin