ONTARIO – Partnerships – Derivative Action – A derivative action is an extraordinary remedy. Limited partners may be granted leave to bring a derivative action on behalf of the Limited Partnership (“LP”) against the General Partner (“GP”) if: 1) The GP will not bring the action, 2) The applicant is acting in good faith, 3) it appears to be in the best interests of the corporation, and 4) There is no alternative adequate remedy.

ONTARIO – Limited Partnership – Although not a legal entity, a LP may sue and be sued with the GP having responsibility for the litigation

Binscarth Holdings LP v. Grant Anthony
2024 ONCA 522 (CanLII)
(Pepall, van Rensburg & Monahan,J.J.A) (July 3, 2024)

This decision involved two appeals. The main issue was whether some limited partners may bring a common law derivative action on behalf of a limited partnership. The motions judge granted leave to the limited partner respondents to bring a derivative action on behalf of the limited partnership, Binscarth Holdings LP (“LP”) against the general partner, Binscarth Holdings GP Inc. (“ GP”) and its sole director Grant Anthony (“Grant”). The motions judge denied leave to bring a derivative action against third parties.

The appellants appealed the order granting leave to bring a derivative action against Grant and Binscarth GP. The Respondents are the Grants siblings who were all limited partners in the LP. The Respondents appealed the decision denying them leave to sue the three third parties.

Background

Binscarth LP held real estate acquired by the parents of the Anthony siblings.

The siblings father Frank created Binscarth LP and Binscarth GP and the Anthony Control Trust (“Trust”) to hold 100 of the shares of Binscarth GP. The beneficiaries of the Trust are Grant and his siblings. Grant is the sole trustee. Grant controls 27% of the partnership units in Binscarth LP; the Respondents hold 54.5% of the partnership units and the remaining 18.5% are held by other members of the Anthony family. (paras. 4–5) The deceased parents bequeathed their assets to Binscarth LP, which manages commercial real estate with a value in excess of $200 million and their matrimonial home (“Home”). Grant and Colligan live in the Home. (para. 6)

The third parties are two corporations ( 1862438 and 975393) of which Grant is the sole officer, officer and director and Laura Colligan (“Colligan”) who is Grant’s partner and a real estate agent. Colligan was the listing agent for the Home. 186 provided management services to Binscarth LP pursuant to a Management Agreement. (paras. 7–9)

The Respondents made several allegations against Grant and Colligan, including that:

• Grant has taken excessive remuneration, failed to sell or pay market rent for living in the family home.
• Grant and Laura have undertaken unnecessary renovations and expenditures at the family home.
• Grant has caused Binscarth LP to provide his company 975 with an unsecured revolving line of credit with an outstanding balance of $5.5 M and 975 has failed to make regular interest payments at a market interest rate.
• Grant purchased one of his brother’s partnership units which is contrary to the Management Agreement.
• Colligan has been paid inflated fees by Binscarth LP; and
• Binscarth GP has breached its duties owed to Binscarth LP. (paras. 10-13)

The key terms of the Partnership Agreement are as follows:

• Binscarth GP has extensive powers.
• Binscarth GP must act honestly, in good faith and as a fiduciary and exercise care, diligence and skill.
• No limited partners may take part in the management or control of the activities of Binscarth LP.
• The limited partners may sue Binscarth GP; and
• Binscarth GP may be indemnified for their losses unless they arise from their own fraud, wilful misconduct, gross negligence, breach of the Partnership Agreement or breach fiduciary duty. (para.25)

Issues

1. Did the motions judge err in deciding that at common law, it was permissible for the respondents, as limited partners, to bring a derivative action in the name of and on behalf of Binscarth LP against Binscarth GP and Grant?
2. Did the motions judge err in refusing the respondents leave to bring a derivative action in the name of and against Binscarth LP against Laura, 186 and 975? (para. 35)

Analysis

There is no statutory right to commence a derivative action under the Limited Partnership Act ( LPA). The motions judge held that a common law derivative action should be available, in limited circumstances. The motions judge referred to the exceptions set out in the case Foss v Harbottle (1843) , 67 E.R. 189 (Ch.). The rule prevents shareholders from suing a wrongdoer when their shares lose value due to a wrong to the corporation, subject to certain exceptions. (para.30)

The motions judge found that the only exception that applied to this case was the fraud exception. The exception permits a minority shareholder to bring a derivative action to redress fraud where the alleged wrongdoer was in control of the company. The motions judge held that the exception included a breach of fiduciary duty. (para. 31)

The motions judge found that the respondents had a strong prima facie case and brought the action in good faith. Leave was therefore granted to bring a derivative action against Binscarth GP and Grant. Leave was refused as against Colligan, 186 and 975. (paras. 33 & 34)

ONCA

Pepall, J.A. on behalf of the ONCA held that a limited partnership, although not a legal entity, may sue and be sued with the general partner having responsibility. (paras. 40, 51, 52 & 53)

Pepall J.A. relied upon Lehndorff General Partner Ltd. RE (1993) 17 CBR (3d) 24 (Ont Gen Div) in which the court held: “a limited partnership is a creation of statute consisting of one or more general partners and one or more limited partners. Limited partnership 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 prescribed on the Act” (LPAs.2& 3). (para. 42)

The ONCA also held that even though limited partnerships are governed by the LPA and the Partnerships Act RSO 1990, C,P.5, that does not preclude access to the common law. (para. 43) Pepall J.A. referred to Kingsberry Properties Ltd. Partnership, Re (1997) 3 CBR 94^th) 124 ; aff’d. by ONCA.

Limited Partners

A limited partnership (“LP”) is an investment vehicle for passive investment where the liability of the limited partners is restricted compared to those of the general partner(s). Limited partners do not have ownership rights in the property of the LP. Limited partners are entitled to their contribution and any profit on it, after satisfaction of all creditor claims. Limited partners may inspect books and records, obtain an accounting and obtain dissolution of the LP by court order. They may also examine the state and progress of the business, seek advice as to its management and act as a contractor, agent or employee or surety for the LP. (para. 44)

A limited partner may lose its limited liability if it takes part in control of the business pursuant to LPA s. 13. (para.45) A limited partner who is not involved in control of the business has limited liability to the extent of their contribution to the partnership and they are not taxed at the partnership level. (para. 46)

General Partners

General partners manage and control the affairs of the LP. As such, they are fully liable to the LP’s creditors and they have the rights and obligations of an ordinary partner, including owing fiduciary duties to their limited partners. (paras. 47 & 48)

Limited Partnerships

Although an LP is not a separate legal entity, it can sue and be sued. (para. 55) This was codified by rule 8.01 of the Ontario Rules of Civil Procedure. The law allows an LP to act as a distinct separate entity for certain purposes. (para. 55) The General Partner is responsible for the proceedings by or against the LP. (paras. 56 & 57)

The problem arises when the GP is the wrongdoer.

Derivative Actions

At common law, the derivative action was designed to counteract the Rule in Foss v Harbottle. Over the years, the common law developed to allow a shareholder to seek to bring a derivative action in the name of or on behalf of the corporation; the claim is “derived” from the shareholder’s interest in the corporation. (para. 61)

Eventually the right to seek leave to bring a derivative action was included in the business legislation. In order to succeed, the shareholder must bring a leave application on notice to the company directors and the court must be satisfied that a three-part test is met; 1) the officers and directors will not bring the action; 2) the complainant is acting in good faith; and 3) it appears in the best interests of the corporation that the action be brought. (para.62)

Pepall J.A. reviewed case law setting out when leave for this extraordinary remedy will not be granted such as when there is an adequate alternative remedy. (para. 63) The LPA was not amended to include a derivative action remedy. (paras. 64–69)

The ONCA reviewed Molchan v Omega Oil & Gas Ltd., 1988 CanLII 103 (SCC) where the SCC held that GPs owe a fiduciary duty to their limited partners. (para. 48)

Referring to the Molchan case, the ONCA noted that the SCC did not suggest that a limited partner lacked standing to bring a derivative action against the GP. (para. 67)

Applying the Molchan analysis, Pepall J.A. held that in this case: 1) the GP is responsible for managing the LP and this includes suing third parties in the name of the LP and 2) limited partners have the standing to sue the GP in the event of breach of the partnership agreement. (para 83)

The ONCA held that derivative actions against Binscarth GP and Grant were not required because the respondents can pursue direct claims in their own names against both. The Partnership Agreement contemplated a direct cause of action for breach of fiduciary duties by the GP. This allowed the limited partners who want to pursue these claims to do so and leaves out the limited partners who do not. (paras. 84–86) Because a derivative action is an extraordinary remedy available when no other recourse exists, there was no need for equity to intervene to authorize the derivative action. The appeal was allowed on the first issue. (paras. 87–90)

Derivative Action against Third Parties

A GP can pursue third parties for wrongs committed against an LP. If the GP fails to act, as in this case, there may be an equity gap. The respondents alleged that Colligan unlawfully converted some LP assets to her own use and was negligent and self-serving in her role as project manager of the renovations at the Home. They also alleged that Colligan, 186 and 975 participated in, benefitted from and were unjustly enriched by Grant’s misuse of the LP assets.

Pepall J.A. held that some claims against the third parties such as knowing assistance and knowing receipt could be pursued directly by the limited partners as the courts have held in other cases that third parties can be liable as “constructive trustees”.

Some of the other claims against the third parties may require equity to intervene and allow for a derivative action, if the court is satisfied that the three-part test is met. (para. 103)

When considering the three-part test, the court must also consider whether the GP’s failure to act is unreasonable or in bad faith, the existence of any conflict of interest between the GP and the proposed third-party defendant, whether a strong prima facie case against the third party exists and whether non-derivative remedies are available. (para. 104)

The ONCA was satisfied that the respondents met the test for a derivative action against the third parties.