Canadian Home Publishers (General Partner of) v. Colville-Reeves Estate
Citation: 2019 ONCA 314 | 146 O.R. (3d) 27
Court: Court of Appeal for Ontario
Judges: K.N. Feldman, Pepall and Nordheimer JJ.A.
Date: April 24, 2019
Case Summary
Partnership — Limited partnership — Limited partnership dissolved upon death of limited partner — Application judge erring in finding that limited partner's estate was entitled to share equally in residual assets of partnership — Limited Partnerships Act not giving limited partner right to participate in residual value of partnership on dissolution — Application judge erring in importing residual distribution provision in s. 44 of Partnerships Act into Limited Partnerships Act
Parties
Appellant: Canadian Home Publishers Inc., in its Capacity as the General Partner of Canadian Home Publishers
Respondents: Parker et al., in their Capacity as Estate Trustees of the Estate of Colville-Reeves
Counsel for Appellant: Matthew Gottlieb and Ryann Atkins
Counsel for Respondents: Mark Gelowitz, Adam Hirsh and Julian Heller
Background
[1] In 1985, Canadian Home Publishers was formed as a limited partnership, with Canadian Home Publishers Inc., a corporation wholly owned by Lynda Reeves, as the sole general partner, and David Colville-Reeves as the sole limited partner. Lynda and David were married at the time. They became interested in acquiring Canadian House and Home, a magazine, so that Lynda could run it as her own business and David could make use of its tax losses.
[2] There was no written limited partnership agreement. While drafts of a limited partnership agreement were prepared, a written agreement was never executed by both parties. The structuring of the acquisition of the magazine, and the structure of its business as a limited partnership, were handled entirely by David and his team of legal and financial advisors, with a view to maximizing the tax benefits to David. Lynda did not receive any independent legal or financial advice regarding the acquisition of the magazine, or the structuring of the business as a limited partnership. David invested $1.8 million to acquire the magazine. Lynda did not make any capital contribution to the partnership or to the acquisition of the magazine.
[3] It was understood between Lynda and David that they would share equally in the profits of the magazine. There was, however, no agreement, written or oral, as to what would happen on David's death.
[4] Lynda and David divorced in 1991. Various disputes arose between the two. In 1993, David brought an application seeking, amongst other relief, an order (i) removing Canadian Home Publishers Inc. as general partner; (ii) authorizing David to remove his capital from the partnership; and (iii) declaring that David was entitled to compensation for the interest paid on loans that he took to make his capital contribution to the partnership.
[5] That application was heard, and ultimately dismissed, by Lane J.: Colville-Reeves v. Canadian Home Publishers, [1993] O.J. No. 3367 (Gen. Div.), affd [1996] O.J. No. 3675 (C.A.). In the course of his reasons, Lane J. said, at para. 7:
I am satisfied on the evidence that the parties came to an oral agreement the essential particulars of which were as follows.
They would acquire the magazine jointly in a transaction structured in the manner most beneficial to David from a tax viewpoint.
They would, after the third party investor dropped out, be equal partners.
David would make capital contributions to the limited partnership.
Lynda would make no capital contributions to the limited partnership.
Lynda's company, [Canadian Home Publishers Inc.] would be the general partner and would retain Lynda as publisher. She would manage the business.
[6] The issues between Lynda and David remained but the litigation relating to the partnership fell into abeyance. The magazine became financially successful and it appears David was content to receive his 50 per cent of the net profits. By the date of his death, David had received in excess of $26 million. The magazine itself was valued, at one point for sale purposes, in excess of $50 million. The litigation remained in abeyance from 2004 until after David's death on October 25, 2012, when the respondents obtained orders to continue the existing litigation. Once it was apparent that David's estate would be pursuing the old litigation, this application was brought as an initial step to define the rights of the parties. In particular, the appellant sought a declaration that Canadian Home Publishers had been dissolved as a limited partnership upon David's death and that the interest of David's estate in Canadian Home Publishers was limited to payments in respect of David's share of profits to the date of his death and repayment of his remaining capital contribution to Canadian Home Publishers. In effect, the appellant sought a declaration that David's estate did not have any interest in the residual value of Canadian Home Publishers upon dissolution of the limited partnership.
The Decision Below
[7] The application judge made two findings. The first finding was that on David's death, there was no longer a limited partner for the limited partnership and thus the limited partnership was dissolved. As a consequence, the general partner, Canadian Home Publishers Inc., had to wind up the limited partnership, Canadian Home Publishers, and distribute its assets: at paras. 12-13. This finding is not the subject of this appeal.
[8] The second finding was that any residual assets remaining, after distribution of the amounts contemplated by s. 24 of the Limited Partnerships Act, were to be divided as between Canadian Home Publishers Inc. and David's estate on a 50/50 basis: at paras. 16-18.
[9] In reaching this conclusion, the application judge held that, while s. 24 of the Limited Partnerships Act provided for the distribution of capital contributions and profits on dissolution of the limited partnership, the Limited Partnerships Act was silent in respect of the distribution of the residual assets of the limited partnership. Section 24 of the Limited Partnerships Act reads:
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:
To limited partners in respect of their share of the profits and other compensation by way of income on account of their contributions.
To limited partners in respect of their contributions.
To general partners other than for capital and profits.
To general partners in respect of profits.
To general partners in respect of capital.
[10] As a consequence, the application judge found that there was a gap in the Limited Partnerships Act. He turned to the Partnerships Act, R.S.O. 1990, c. P.5 to fill that gap, since the Partnerships Act is applicable to all partnerships, including limited partnerships. In particular, the application judge referred to s. 44 of the Partnerships Act that provides that the ultimate residue, if any, of a partnership is to be divided among the partners in the proportion in which profits are divisible. Section 44 reads:
In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed:
Losses, including losses and deficiencies of capital, are to be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits, but a partner is not required to pay any loss arising from a liability for which the partner is not liable under subsection 10(2).
The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, are to be applied in the following manner and order,
(a) in paying the debts and liabilities of the firm to persons who are not partners therein;
(b) in paying to each partner rateably what is due from the firm to him or her for advances as distinguished from capital;
(c) in paying to each partner rateably what is due from the firm to him or her in respect of capital.
- After making the payments required by paragraph 2, the ultimate residue, if any, is to be divided among the partners in the proportion in which profits are divisible.
[11] On this basis, the application judge concluded that the residue should be divided 50/50, consistent with Lynda and David's agreement to share equally in the profits of the limited partnership.
Analysis
[12] Before I begin my analysis, I note that the parties appear to be in agreement that the standard of review applicable in this case is one of correctness since the question posed for determination is a question of law. I agree that correctness is the proper standard of review since the question turns on the interpretation of a statute: Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306, at para. 23; Canadian National Railway Co. v. Canada (Attorney General), 2014 SCC 40, [2014] 2 S.C.R. 135, at para. 33.
[13] 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 Limited Partnerships Act. More specifically, he erred in importing into the Limited Partnerships Act the residual distribution provision found in s. 44 of the Partnerships Act. There is no gap in the Limited Partnerships Act that requires reference to the Partnerships Act to be filled.
[14] 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: Limited Partnerships Act, s. 2(2). Further, the Limited Partnerships Act expressly sets out the rights and obligations of general partners and of limited partners.
[15] 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 Limited Partnerships Act 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 Limited Partnerships Act.
[16] First, with respect to the general partner, s. 8 of the Limited Partnerships Act 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 Limited Partnerships Act conferring the same general rights and obligations upon the limited partner.
[17] The Limited Partnerships Act then proceeds to expressly define the rights and the obligations of a limited partner. In particular, s. 9 of the Limited Partnerships Act 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 Limited Partnerships Act, the limited partner's liability is limited to the extent of their capital contribution to the partnership.
[18] 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 Limited Partnerships Act provides:
13(1) 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.
[19] The Limited Partnerships Act 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.
[20] The Limited Partnerships Act does address the priority for payments arising on the dissolution of the limited partnership. I repeat s. 24 of the Limited Partnerships Act 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:
To limited partners in respect of their share of the profits and other compensation by way of income on account of their contributions.
To limited partners in respect of their contributions.
To general partners other than for capital and profits.
To general partners in respect of profits.
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.
[21] On a plain reading of the Limited Partnerships Act, 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 Limited Partnerships Act would have so provided.
[22] 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 Limited Partnerships Act: one is their share of the profits and the other is the return of their contribution (see Limited Partnerships Act, 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] O.J. No. 14, 9 B.L.R. (2d) 275 (Gen. Div.), where Farley J. said, at para. 17:
The limited partnership is an investment vehicle for passive investment by limited partners . . . Limited partners have 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.
[23] 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 Limited Partnerships Act 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 Limited Partnerships Act, 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 Limited Partnerships Act. With respect, the contrary conclusion reached by the application judge does not sit comfortably with the inherent structure of a limited partnership under the Limited Partnerships Act.
[24] 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.
[25] Accordingly, the respondents are not entitled to a 50 per cent share in the residual assets of the limited partnership.
Conclusion
[26] I would allow the appeal, set aside para. 2 of the judgment, and in its place grant judgment declaring that the respondents have no interest in the residual assets of the limited partnership, Canadian Home Publishers, with costs of the appeal to the appellant fixed in the agreed amount of $35,000, inclusive of disbursements and HST.
Appeal allowed.
End of Document