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Partnerships - Limited Partnerships. Binscarth Holdings LP v. Grant Anthony
In Binscarth Holdings LP v. Grant Anthony (Ont CA, 2024) the Ontario Court of Appeal allowed 'derivative action' appeals, which are actions brought by (typically, shareholders but here) limited partners against principles of the (typically, corporations but here) a limited partnership and third parties. The case is useful to get a feel for limited partnerships structuring in modern practice.
Here the court considers the nature and history of limited partnerships:(b) Discussion
[40] On this first issue, I will commence my discussion by addressing the construct of a limited partnership and the roles of general partners and limited partners. I will illustrate that, although not a distinct legal entity, a limited partnership may nonetheless sue and be sued with the general partner having responsibility for the proceedings. I will then address derivative actions generally and in the context of a limited partnership. I will explain why, with respect to Binscarth GP and Grant, leave to commence a derivative action against Binscarth GP and Grant should not be granted.
Origin
[41] Limited partnerships were first introduced into Ontario in 1849 through An Act to authorize Limited Partnerships in Upper-Canada, S. Prov. C. 1849, 12 Vict. c. 75. Today, the LPA is the applicable statute specifically governing limited partnerships.
[42] As Farley J. long ago described in the oft quoted decision of Lehndorff General Partner Ltd., Re (1993), 17 C.B.R. (3d) 24 (Ont. Gen. Div.), at para. 17, a limited partnership is a creation of statute consisting of one or more general partners and one or more limited partners. Limited partnerships may be formed to carry on any business that an ordinary partnership without limited partners could carry on, but they only exist if formed in the manner described in the Act: LPA, ss. 2-3.
[43] Although limited partnerships are governed by the LPA and the Partnerships Act, R.S.O. 1990, c. P.5, this does not preclude access to the common law when addressing limited partnerships: Kingsberry Properties Ltd. Partnership, Re (1997), 3 C.B.R. (4th) 124, at para. 3, aff’d (1998), 1998 CanLII 7120 (ON CA), 3 C.B.R. (4th) 135 (Ont. C.A.).
Limited Partners
[44] The limited partnership is an investment vehicle for passive investment by one or more limited partners where the entitlements and liabilities of the limited partners are restricted compared to those of the general partner or partners, or partners in an ordinary partnership: Lehndorff, at para. 17. As Farley J. explained in Kingsberry, “[t]he limited partners do not have any ‘independent’ ownership rights in the property of the limited partnerships. The entitlement of the limited partners is limited to their contribution plus any profits thereon, after satisfaction of claims of creditors”: at para. 6, citing the LPA, ss. 9, 11, 12(1), 13, 15(2) and 24. As described in s. 10 of the LPA, a limited partner may inspect the limited partnership books, obtain an accounting, and obtain dissolution of the limited partnership by court order. Under s. 12(2), a limited partner may also examine the state and progress of the business, advise as to its management, and act as a contractor, agent, employee of, or surety for, the limited partnership.
[45] Section 13(1) provides that a limited partner may lose its limited liability if it takes part in the control of the business. However, a limited partner does not lose its limited liability simply for exercising its rights and powers as a limited partner. Indeed, a limited partner is not presumed to be taking part in the control of the business by reason only that the limited partner exercises rights and powers in addition to the rights and powers conferred upon the limited partner by the LPA: s. 13(2).
[46] A limited partner derives two principal benefits from the limited partnership construct. First, provided that the limited partner does not take part in the control of the business, liability for the obligations of the limited partnership is restricted to the amount of property they contributed or agreed to contribute to the partnership: LPA, ss. 9, 13(1). Second, limited partnerships are not taxed at the partnership level and so profits or losses that can be set off against other income flow to the limited partners. In Canadian Home Publishers Inc. v. Parker, 2019 ONCA 314, 146 O.R. (3d) 27, leave to appeal refused, [2019] S.C.C.A. No. 233, this court confirmed that “[t]he limited liability of the limited partner is premised on their status as a passive investor in the partnership business”: at para. 21. In return for limited liability, “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”: at para. 25.
General Partners
[47] General partners, in contrast, manage the affairs of the limited partnership and have sole control over the property and business of the limited partnership. The general partners are fully liable to creditors of the business of the limited partnership. They have all the rights and obligations of a partner in an ordinary partnership, subject to some statutory exceptions: Canadian Home Publishers, at para. 19; LPA, s. 8.
[48] General partners are responsible for bringing or defending proceedings against the limited partnership in the firm name. They also owe a fiduciary duty to their limited partners: Molchan v. Omega Oil & Gas Ltd., 1988 CanLII 103 (SCC), [1988] 1 S.C.R. 348; Extreme Venture Partners Fund I LP v. Varna, 2021 ONCA 853, 24 B.L.R. (6th) 38, at para. 98, leave to appeal refused, [2022] S.C.C.A. No. 61. Moreover, among other things, the general partner has no authority to do any act in contravention of the partnership agreement or to possess limited partnership property for other than a partnership purpose: LPA, s. 8.
A Limited Partnership is a Partnership
[49] The distinctions between limited and general partners, and the powers of the general partner, demonstrate the broader reality that limited partnerships are derived from ordinary partnerships and are distinct from corporations. Farley J. elaborated on this in Kingsberry where he observed at paras. 3-4:While the [LPA], and the concept of [limited partnerships] have been in existence for a long period of time, it seems that there is some degree of mystery accorded same. This is unfortunate in light of growing usage of the concept for investments in the past several decades, with the result that litigation involving [limited partnerships] has come to court with increased frequency. Perhaps part of the mystery is caused by the (a) reliance on statutory law to exhaustively deal with the subject matter as opposed to recognizing that there is a wealth of common law to draw on and (b) not fully considering that a [limited partnership] is a special form of partnership which is governed not only by the [LPA] (and the common law focussing on [limited partnerships]) but also by the [Partnerships Act, R.S.O. 1990, c. P.5, as amended] and the common law affecting partnerships. This aspect is clearly recognized (although somewhat awkwardly worded) by s. 46 of the [Partnerships Act]:s. 46. This Act [Partnerships Act] is to be read and construed as subject to the Limited Partnerships Act and the Business Names Act. In other words, a [limited partnership] is a partnership which is governed by the [Partnerships Act] except to the extent that the [LPA] supersedes the [Partnerships Act] (and the common law affecting [ordinary partnerships]). [50] This court affirmed this decision at (1998), 1998 CanLII 7120 (ON CA), 3 C.B.R. (4th) 135 (Ont. C.A.). See also Gemini Group Automated Distribution Systems Inc. v. PWA Corp. (1993), 1993 CanLII 314 (ON CA), 16 O.R. (3d) 239 (C.A.), which, as noted by Farley J. at paras. 7 and 8 of the trial decision in Kingsberry, implicitly recognized that a limited partnership is a form of partnership.
A Limited Partnership is not a Legal Entity
[51] In Kucor, this court affirmed that limited partnerships are not distinct legal entities. At pp. 587-88 of that decision, Borins J.A. wrote:Well respected authorities are uniform in the view that a limited partnership is not a legal entity. In 35 Halsbury’s Laws of England, 4th ed. (London: Butterworths, 1994) at p. 136 it is stated: “A limited partnership, like an ordinary partnership, is not a legal entity”. In R.C.P. Banks, Lindley & Banks on Partnership, 17th ed. (Sweet & Maxwell, 1995) it is said at p. 864: “A limited partnership is not a legal entity like a limited company but a form of partnership with a number of special characteristics introduced by the Limited Partnerships Act 1907” … The concept that neither a general, nor a limited partnership, is a legal entity has been long accepted by Canadian and English law and, no doubt, is why a limited partnership is required by law to have a general partner through which it normally acts: Limited Partnerships Act, ss. 2(2), 8 and 13. [52] In an article entitled “Some Lacunae in the Law of Limited Partnerships” (2009) 88 Can. Bar Rev. 147, Neil Guthrie describes at pp. 148-49 “the vexed question of separate legal personality” as it relates to limited partnerships:In spite of their popularity, limited partnerships are misunderstood. In part this stems from the failure of business people and – it must be said – lawyers to appreciate the fact that in Ontario a limited partnership, like any partnership formed in the province, is not a legal entity distinct from its members but rather a relation among persons who are carrying on a business together with a view to profit. The principal differences between a limited partnership and a general partnership lie in the fact that the former comes into being only once a declaration is filed with the government, and in the distinction made between the nature and legal consequences of the type of partnership interest held, whether general or limited. A limited partnership’s lack of legal personality distinct from its partners is complicated by the fact that the law treats a limited partnership as having a separate legal existence for certain procedural purposes; these include bringing and defending an action, and registration and enforcement under personal property security legislation. [53] As the Supreme Court affirmed in McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39, [2014] 2 S.C.R. 108, at para. 30, partnerships are “a collection of partners, rather than a distinct legal entity separate from the parties who are its members.”
Lawsuits Involving a Limited Partnership
[54] Although not a separate legal entity, a limited partnership can nonetheless sue and be sued.
[55] At common law, the process by which ordinary partnerships could sue and be sued ignored the firm and looked to the partners composing it. As this court noted in Kucor, at p. 593, partnerships lacked the “capacity to sue or be sued, with the result that [at common law] proceedings [had to] be brought by or against all members of the partnership individually.” This problem was overcome by r. 8.01(1) of the Rules of Civil Procedure, which provides that a proceeding by or against two or more persons as partners may be commenced using the firm name of the partnership. Given that r. 8.01(1) applies to partnerships generally, it also applies to limited partnerships. Thus, as we have seen, the law permits a limited partnership to act as a distinct legal entity for certain limited purposes, such as bringing and defending actions: Extreme Venture, at para. 98; Guthrie, at pp. 148-49.
[56] Nonetheless, it is still the general partner who is responsible for proceedings by and against the limited partnership. Again, from Lehndorff, at para. 18:A general partner is responsible to defend proceedings against the limited partnership in the firm name, so in procedural law and in practical effect, a proceeding against a limited partnership is a proceeding against the general partner. [57] See also Hudson’s Bay Company v. OMERS Realty Corporation, 2016 ONCA 113, 346 O.A.C. 14, at paras. 17-21, and YG Limited Partnership and YSL Residences Inc. (Re), 2023 ONCA 505, 168 O.R. (3d) 153, as well as Belzberg Technologies Inc. v. ITG Canada Corp., 2005 CanLII 35788 (Ont. S.C.), at para. 20, where Harvison Young J. (as she then was) stated:[T]here is no legal distinction between actions taken in the name of a limited partnership and the actions of the general partner…. [W]here action is taken in the name of a limited partnership, it is the general partner or its agents that is in fact acting. [58] Thus, it is the general partner that asserts or defends a claim by or against a limited partnership. However, what if the wrongdoer is the general partner? It seems self-evident that general partners are not going to sue themselves, either in their own name or in the name of the limited partnership. This brings us to the subject of derivative actions. . 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.
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[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.
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