Court of Appeal for Ontario

DATE: 20240703 DOCKET: C70888 & COA-22-CV-0468

Pepall, van Rensburg and Monahan JJ.A.

BETWEEN

Binscarth Holdings LP, Toronto West Medical Centre Inc., Credit Valley Professional Building Inc., 2794071 Ontario Inc. and 1995 Billy Mitchell Blvd. Inc. Plaintiffs

and

Grant Anthony, Binscarth Holdings GP Inc., 1862438 Ontario Inc., 975393 Ontario Inc. and Laura Colligan Defendants

Counsel: Mark Wainberg, for the appellants (C70888) Greg Anthony, Glen Anthony, Gary Anthony, Anne Anthony, John Anthony and Guy Anthony, and for the respondents (COA-22-CV-0468) Binscarth Holdings LP, Greg Anthony, Glen Anthony, Gary Anthony, Anne Anthony, John Anthony and Guy Anthony Scott C. Hutchinson, Eric Brousseau, David Postel and Gordon Vance, for the respondents (C70888) Grant Anthony, Binscarth Holdings GP Inc., 1862438 Ontario Inc., 975393 Ontario Inc. and Laura Colligan, and for the appellants (COA-22-CV-0468) Grant Anthony and Binscarth Holdings GP Inc.

Heard: September 26-27, 2023

On appeal from the order of Justice Jana Steele of the Superior Court of Justice, dated June 8, 2022, with reasons reported at 2022 ONSC 3426.

Pepall J.A.:

Introduction

[1] The key issue engaged by these two appeals is whether some limited partners may bring a common law derivative action on behalf of a limited partnership. The motion judge granted leave to the limited partner respondents to bring a derivative action on behalf of the limited partnership, Binscarth Holdings LP (“Binscarth LP”), against the appellant general partner, Binscarth Holdings GP Inc. (“Binscarth GP”), and its sole director, the appellant Grant Anthony, but denied the respondents leave to bring a derivative action against three third parties.

[2] The appellants appeal from the order granting leave to bring a derivative action against Grant and Binscarth GP. The respondents, Greg, Glen, Gary, Anne, John, and Guy Anthony are limited partners in Binscarth LP and are Grant’s siblings. In addition to responding to Grant and Binscarth GP’s appeal, the respondents appeal from the order denying them leave to sue the three third parties. Although there are multiple appeals, I will refer throughout to Grant and Binscarth GP as the appellants, the six limited partners as the respondents, and the three third parties as the third parties.

[3] For the reasons that follow, I would allow both the appellants’ and the respondents’ appeals.

Facts

(1) The Parties

[4] Frank Anthony, who died in 2014, and his wife, Jine Anthony, who died in March 2018, had several children, six of whom are the respondents and one of whom is the appellant, Grant. Two other siblings are deceased.

[5] During their lifetimes, Frank and Jine amassed considerable property. In 2011, by filing a declaration under the Limited Partnerships Act, R.S.O. 1990, c. L. 16 (“LPA” or the “Act”), Frank established Binscarth LP to hold most of their real estate. Frank formed Binscarth GP to serve as the general partner of Binscarth LP, and the Anthony Control Trust to hold 100 percent of the shares of Binscarth GP. The beneficiaries of the Anthony Control Trust are Grant and the six respondents, among others. Grant is the sole director of Binscarth GP and the sole surviving trustee of the Anthony Control Trust. Grant also owns or controls 27 percent of the partnership units in Binscarth LP. The respondents own or control 54.5 percent of the partnership units in Binscarth LP. The remaining 18.5 percent is held by other members of the Anthony family.

[6] Directly or indirectly, Frank and Jine bequeathed their assets to Binscarth LP, which now owns and manages approximately 3.2 million square feet of commercial real estate worth over $200 million. Binscarth LP also owns Frank and Jine’s former matrimonial home, a sizeable property located on Binscarth Road in Toronto. Grant has resided at the Binscarth home since May 2018.

[7] As mentioned, the motion judge denied the respondents leave to bring a derivative action against three parties. They are 1862438 Ontario Inc. (“186”), 975393 Ontario Inc. (“975”), and Laura Colligan. 186 is a private Ontario corporation, of which Grant is the sole officer, director, and shareholder. Pursuant to a Management Agreement dated January 1, 2012, 186 is required to provide management services to Binscarth LP.

[8] 975 is a private Ontario corporation. Grant is the sole officer, director, and shareholder of 975. The motion judge stated that Grant’s evidence was that 975 had no relationship to Binscarth LP or to the other proposed corporate parties.

[9] Laura Colligan is a real estate broker who was initially retained to list the Binscarth home for sale and subsequently hired by Grant as a project manager to oversee its renovations. The respondents maintain that she is Grant’s girlfriend and common law spouse and currently resides with Grant at the Binscarth home.

(2) The Respondents’ Proposed Derivative Action

[10] The respondents raise six issues to be addressed in their proposed derivative action.

[11] First, they submit that Grant has taken excessive remuneration, including fees and commissions received by 186 and 975 for over $4.5 million. Second, they challenge Grant’s failure to sell, or pay rent for living at, the Binscarth home and for expenses related to the property. More specifically, after Jine died, the Binscarth home was offered for sale for $18 million from July to September 2018. The listing agent was the third party, Colligan. Since 2019, the property has been occupied exclusively by Grant, Colligan, Colligan’s daughter, and Grant’s personal staff without any payment of rent to Binscarth LP. The respondents complain that household expenses, mortgage payments, property taxes, insurance, and utility costs are being improperly paid by Binscarth LP as are staffing, groceries, and household supplies. The respondents state that the fair market value of the Binscarth home is $16 million and the rental value is at least $30,000 per month, plus utilities, maintenance, and insurance.

[12] Third, the respondents allege that Grant and Colligan, at Binscarth LP’s expense, have conducted unnecessary and overpriced renovations, redecorating, and refurnishing of the Binscarth home even though such expenditures will not enhance the value of the property. They argue that renovations and redecorating of the home costing in excess of $1 million have been done for the benefit of Grant and Colligan and state that the property ought to have been sold or leased. Fourth, the respondents submit that Grant has caused Binscarth LP to provide 975 with an unsecured revolving line of credit that has had an outstanding balance as high as $5.5 million. The respondents state that 975 only makes sporadic interest payments to Binscarth LP at under market rates and interest is not compounded. Fifth, the respondents argue that Grant caused 186 to purchase the partnership units of their brother Garren contrary to the provisions of the Management Agreement and the Amended and Restated Limited Partnership Agreement (the “Limited Partnership Agreement”). Sixth, they maintain that inflated fees have been paid to Colligan by Binscarth LP.

[13] The respondents assert that Binscarth GP is a faithless fiduciary that has breached duties owed to Binscarth LP. They allege that Grant has used his absolute control for personal gain. They state that 186 has control over Binscarth LP and is a proper defendant, as are Colligan and 975. In their amended notice of motion, the respondents base their request for leave to commence a derivative action on breach of fiduciary duty, breach of trust, breach of contract, breach of statutory duties, conversion, unjust enrichment and gross negligence. In their factum and oral submissions, they argue that 186 breached its contractual and fiduciary duties, committed the tort of conversion, and was unjustly enriched by paying fees and commissions to itself and to 975 that were prohibited by the Limited Partnership Agreement, the Management Agreement, and statute. 975 allegedly committed the tort of conversion and has been unjustly enriched by receiving improper loans, commissions, and the improper set-off of interest. The respondents state that Colligan unlawfully converted Binscarth LP’s assets to her own use and was negligent and self-serving in her role as project manager of the renovations at the Binscarth home. The respondents also argue that each of Colligan, 186, and 975 participated in, benefited from, and was unjustly enriched by Grant’s misappropriation and misuse of assets of Binscarth LP.

[14] The relief sought in their proposed derivative action includes occupation rent, an order for the sale of the Binscarth home, damages, an accounting, a tracing order, and removal of Binscarth GP. The respondents also seek to have their legal costs paid by Binscarth LP.

(3) The Limited Partnership Agreement

[15] The Limited Partnership Agreement, dated January 1, 2012, is among Binscarth GP, the Trustees of the Anthony Family Trust, and each party who became a limited partner. Binscarth LP is the subject matter of the Limited Partnership Agreement and not a party to it.

[16] The purpose of Binscarth LP is to hold and manage the assets of the Anthony Family Trust and to make, manage, and dispose of investments in real estate.

[17] Article 10 of the Limited Partnership Agreement describes the functions and powers of the partners and the management of Binscarth LP. The management and operation of Binscarth LP are vested exclusively in Binscarth GP. Among other things, Binscarth GP makes all decisions on behalf of Binscarth LP, and conducts the day-to-day relations of Binscarth LP with other persons. This includes handling, prosecuting, and settling any claims of Binscarth LP. Binscarth GP may cause Binscarth LP to make distributions to the limited partners on an annual basis in Binscarth GP’s sole discretion, together with funds to pay taxes: Article 8.

[18] Binscarth LP is to pay all costs of the partnership and Binscarth GP, including both the annual management fee of the manager, which is the third party 186, and the expenses of any property managers appointed by 186.

[19] Article 10.7 provides for the duties and liability of Binscarth GP:

(a) The General Partner will, and will use its reasonable best efforts to cause the Manager to, exercise its powers and discharge its duties under this Agreement honestly, in good faith and in the best interest of the Partnership. (b) Except as otherwise provided in the Act, the General Partner has the liabilities of a partner in a partnership without limited partners to (i) persons other than the Partnership and the other Partners and (ii) subject to the other provisions of this Agreement, the Partnership and the other Partners.

[20] In contrast, Article 10.6 restricts the powers of a limited partner. Among other things, it provides that no limited partner shall take part in the management or control of the activities of Binscarth LP.

[21] Article 12 provides for the liabilities and indemnification of the partners. Dealing first with Binscarth GP, Article 12.1 states:

The General Partner shall exercise its powers and discharge its duties under this Agreement honestly, in good faith and in the best interests of the Partnership, as a fiduciary and shall exercise the care, diligence and skill that a reasonable investment manager would exercise in comparable circumstances and as would the director of a company in comparable circumstances.

[22] Under Article 12.3, the liability of Binscarth GP for the debts, liabilities, losses, and obligations of the limited partnership shall be unlimited. The thrust of Article 12.4, entitled “No Liability to Partnership or Limited Partners”, is that none of Binscarth GP, 186, or their affiliates [1] shall be liable to any limited partner or Binscarth LP in the absence of fraud, wilful misconduct, gross negligence, material breach of the Limited Partnership Agreement, or breach of fiduciary duty. For other claims, Binscarth GP, 186, and their affiliates receive an indemnification, the satisfaction of which is limited to the assets of Binscarth LP.

[23] As for the limited partners, subject to certain caveats, the liability of a limited partner is restricted to the limited partner’s share of any undistributed income of Binscarth LP. Specifically, Article 12.2(a)(iii) states:

[N]o Limited Partner shall be liable pursuant to this Agreement to the General Partner, the Partnership or any other person for an amount in excess of such Limited Partner’s share of any undistributed income of the Partnership.

[24] In addition to limited liability, the limited partners may have some entitlement on the dissolution of Binscarth LP. Though the process for initiating dissolution is constrained under the terms of the Limited Partnership Agreement, pursuant to Article 13.2, upon dissolution, the assets of Binscarth LP are to be disposed of by Binscarth GP, or a receiver, on commercially reasonable terms. The proceeds of this sale are then to be used to pay the debts and liabilities of Binscarth LP and a reserve is to be established to pay for any debts, liabilities, and expenses of the partnership. Following this, the remaining net proceeds are to be distributed to the limited partners according to the distribution priorities set out in Article 8.

[25] For our purposes, key features to be extracted from the Limited Partnership Agreement are therefore:

• Binscarth GP is clothed with extensive powers;
• Binscarth GP must act honestly, in good faith, and as a fiduciary, and exercise care, diligence, and skill;
• no limited partner may take part in the management or control of the activities of the Binscarth LP;
• the limited partners may, as contemplated by the Limited Partnership Agreement, sue Binscarth GP;
• Binscarth GP, the manager, and their affiliates may be indemnified for losses unless they arise out of their own fraud, wilful misconduct, gross negligence, breach of the Limited Partnership Agreement, or breach of fiduciary duty.

Proceedings

[26] The respondents brought a motion for leave to bring a derivative action on behalf of Binscarth LP and four of its portfolio companies (Toronto West Medical Centre Inc.; Credit Valley Professional Building Inc.; 2794071 Ontario Inc.; and 1995 Billy Mitchell Blvd. Inc.) as against Binscarth GP, Grant, Colligan, 186, and 975.

[27] The motion judge granted the respondents’ motion but limited the defendants to Binscarth GP and Grant. She also denied the respondents’ motion for leave to bring a derivative action on behalf of the four portfolio companies.

[28] The appellants sought and were granted leave to appeal the order as against Binscarth GP and Grant to the Divisional Court. The question ordered to be answered on the appeal before the Divisional Court was whether it was legally possible for some limited partners to bring a common law derivative action on behalf of a limited partnership against a general partner. The respondents submit that the Divisional Court did not grant leave to appeal with respect to the derivative action against Grant, and the question to be answered is limited to a derivative action against Binscarth GP. I do not accept this submission. Both Binscarth GP and Grant brought the motion for leave and both were granted leave to appeal by the Divisional Court. The question ordered to be answered should be interpreted expansively to include both Binscarth GP and Grant.

[29] The respondents did not appeal the denial of leave to bring a derivative action on behalf of the four portfolio companies but did appeal directly to this court the motion judge’s order dismissing their proceeding relating to Colligan, 186, and 975. The appellants then obtained an order on consent from this court that the Divisional Court appeal be transferred to this court and be combined with the respondents’ appeal.

Reasons of the Motion Judge

[30] The motion judge determined that there was no statutory right to commence a derivative action under the LPA. However, drawing an analogy with corporate law, she decided that a common law limited partnership derivative action should be available, but only in very limited circumstances. She reasoned that limited partners should look to the common law exceptions to the rule in Foss v. Harbottle (1843), 67 E.R. 189 (Ch.), which had underpinned corporate derivative actions at common law. She explained that the rule prevents shareholders from suing a wrongdoer when their shares lose value due to a wrong to the corporation, subject to certain exceptions.

[31] The motion judge concluded that the only exception that may apply in this case was the fraud exception. This exception permits a minority shareholder to bring a derivative action to redress a fraud where the alleged wrongdoer was in control of the company. Applying the British Columbia Court of Appeal’s decision in Asher Place Senior Residency Limited Partnership v. Balcom, 2021 BCCA 162, 15 B.L.R. (6th) 169, the motion judge reasoned that this included breach of a fiduciary duty.

[32] As the motion judge found that Colligan, 186, and 975 had no legal or de facto control over Binscarth LP, a derivative action against them was not possible. Instead, the narrow fraud exception only permitted a derivative action to be brought on behalf of Binscarth LP against Binscarth GP and Grant.

[33] The motion judge then considered whether leave should be granted to bring a derivative action against Binscarth GP and Grant. She was satisfied that the respondents had a strong prima facie case and sought to bring the action in good faith. She was not prepared to conclude that the proposed litigation was not in Binscarth LP’s best interests.

[34] She granted leave to bring a derivative action against Binscarth GP and Grant and refused leave as against Colligan, 186, and 975.

Issues

[35] The following issues need to be addressed in this appeal:

(a) Did the motion 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? (b) Did the motion judge err in refusing the respondents leave to bring a derivative action in the name of and on behalf of Binscarth LP against Colligan, 186, and 975?

[36] I will address these two issues in sequence.

Analysis

(1) Proposed Action Against Binscarth GP and Grant

(a) Positions of the Parties

[37] The appellants submit, firstly, that a limited partnership, unlike a corporation, is not a legal person and as such the rule in Foss v. Harbottle and its exceptions are inapplicable. Second, they argue that the rationale for a derivative action does not apply to limited partnerships because while at common law an aggrieved shareholder had no legal redress absent a derivative action, an aggrieved limited partner does. The appellants submit that limited partners have both statutory and contractual rights and can sue the general partner directly. As such, there is no equitable gap to be filled by granting leave to a limited partner to sue in the name of the limited partnership. Third, the appellants submit that there are pragmatic reasons to abstain from recognizing a derivative action in limited partnerships. The legislature has not chosen to include derivative actions in the LPA. Furthermore, in forming Binscarth LP, the limited partners agreed to the rights of the limited partners as described in the Act and the Limited Partnership Agreement, neither of which provides for derivative actions. Lastly, some of the limited partners do not support the respondents’ pursuit of a derivative action.

[38] The respondents take the position that the limited partnership is the proper plaintiff. They rely on Kucor Construction & Developments & Associates v. Canada Life Assurance Co. (1998), 41 O.R. (3d) 577 (C.A.), for the proposition that r. 8.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, recognizes “a partnership as a legal entity for the procedural purpose of suing or being sued in the firm name”: at p. 593.

[39] Moreover, the respondents state that the rule in Foss v. Harbottle applies to limited partnerships. They rely on Covia Canada Partnership Corp. v. PWA Corp. (1993), 105 D.L.R. (4th) 60 (Ont. Gen. Div.), aff’d (1993), 106 D.L.R. (4th) 608 (Ont. C.A.). The respondents also argue that other alternative forms of redress available to the limited partners are not an issue before this court, and in any event, the alternatives of dissolution or damages for breach of contract are unavailable or inadequate. Potential prejudice to limited partners who are not respondents is also not properly before this court according to the respondents and, even if it were, the motion judge found as a fact that a derivative action appears to be in the best interests of Binscarth LP.

(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), 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] 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), 3 C.B.R. (4th) 135 (Ont. C.A.). See also Gemini Group Automated Distribution Systems Inc. v. PWA Corp. (1993), 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] 2 S.C.R. 108, 2014 SCC 39, 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., 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.

Derivative Actions

[59] The rule in Foss v. Harbottle laid the groundwork for the derivative action. Zarnett J.A. described this rule in Tran v. Bloorston Farms Ltd., 2020 ONCA 440, 151 O.R. (3d) 563, at para. 1:

The rule in Foss v. Harbottle (1843), 67 E.R. 189 (U.K.H.L.) prevents shareholders from suing for a loss in the value of their shares brought about by a wrong done to the corporation. The rule, which is well-entrenched in Canadian law, is a consequence of the separate legal personality of the corporation. Just as shareholders (subject to limited exceptions) cannot be sued for acts, debts, defaults or obligations of the corporation, only the corporation has a cause of action for wrongs done to it. [Footnote omitted.]

[60] See also Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, at para. 59.

[61] At common law, the corporate derivative action was “designed to counteract the impact of Foss v. Harbottle”: Rea v. Wildeboer, 2015 ONCA 373, 126 O.R. (3d) 178, at para. 18. [2] Over the years, courts developed a number of exceptions to the rule to allow a shareholder to seek to bring an action in the name of or on behalf of a corporation: see e.g., Edwards v. Halliwell, [1950] 2 All E.R. 1064 (C.A.), at p. 1067, per Jenkins L.J. Such a claim was described as derivative because it derived from the shareholder’s interest in the corporation in circumstances where the shareholders themselves did not have the capacity to sue: see Wildeboer, at para. 18.

[62] However, as Markus Koehnen describes in his book Oppression and Related Remedies (Toronto: Thomson Carswell, 2004), at p. 438, as a practical matter, all of the exceptions to the rule in Foss v. Harbottle were of limited utility. As a result, the statutory derivative action and the oppression remedy were introduced into both U.K. and Canadian corporate statutes, the latter including Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”) and the federal Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”). To obtain leave under either of these two statutes, a complainant must give 14 days’ notice to the company directors of its intention to seek leave and the court must be satisfied that: the directors will not pursue the claim; the complainant is acting in good faith; and it appears to be in the best interests of the corporation that the action be brought: OBCA, s. 246; CBCA, s. 239.

[63] In addressing these factors, some authorities state that leave should not be granted where there is an adequate alternative remedy available to the complainant: Budd v. Bertram, 2018 NSCA 95, 88 B.L.R. (5th) 81, at para. 34; Link v. Link, 2022 NSCA 14, 28 B.L.R. (6th) 1, at para. 55, leave to appeal refused, [2022] S.C.C.A. No. 117; and Crescent (1952) Ltd. v. Jones, 2011 ONSC 756, 82 B.L.R. (4th) 155, at para. 21. In a similar vein, other authorities state that granting leave to bring a derivative action is an extraordinary remedy: Vessair et al. v. Vessair et al., 2022 ONSC 500, 26 B.L.R. (6th) 300, at para. 48; Hevey v. Wonderland Commercial Centre Inc., 2021 ONSC 540, 154 O.R. (3d) 86, at para. 41; Chandler v. Sun Life Financial (2006), 14 B.L.R. (4th) 171 (Ont. S.C.), at para. 20; Zeifmans LLP v. Mitec Technologies Inc., 2019 ONSC 3643, 98 B.L.R. (5th) 90, at para. 76; and Re Loeb & Provigo Inc. (1978), 20 O.R. (2d) 497 (H.C.), at p. 499.

[64] To date, the Ontario legislature and other provincial legislatures have not introduced a derivative action into the LPA or its equivalent. Nonetheless, in some jurisdictions, jurisprudence has developed that recognizes a limited partnership derivative action at common law.

[65] It is helpful to consider the options available to a limited partner faced with arguable claims against a general partner.

[66] As we have seen, an action against the limited partnership is in essence an action against the general partner. As such, the first option to consider is the availability of a suit by a limited partner against the general partner.

[67] In the Supreme Court’s decision of Molchan v. Omega Oil & Gas Ltd., [1988] 1 S.C.R. 348, a limited partner sued a general partner for breach of fiduciary and statutory duties after the general partner sold off partnership lands to a related company. The limited partner brought the action in his own name, directly against the general partner. The majority of the Supreme Court, at p. 350, “assume[d] the highest status of the General Partner under the limited partnership, namely that of a trustee holding the properties of the partnership on behalf of all other partners.” In the circumstances, “the General Partner owe[d] a fiduciary duty to” the limited partner: at p. 371. While the Supreme Court found that, on the facts, there was no breach of that duty, at no point did the court suggest that the limited partner lacked standing to bring the action directly against the general partner.

[68] Similarly, in Alberta, limited partners have been permitted to directly sue the general partner. In 0738827 B.C. Ltd. v. CPI Crown Properties International Corporation, 2013 ABQB 499, 568 A.R. 389, aff’d 2014 ABCA 205, 577 A.R. 25, the plaintiffs were limited partners in a real estate venture. They alleged, among other things, that several defendants, including the general partner, had breached fiduciary duties owed directly to the limited partners and that the general partner did so with the knowing assistance of third parties. The defendants argued that limited partners could not commence individual actions against the general partner. The motion judge sided with the limited partners as, due to the wording of the limited partnership agreement, the general partner had contractually obliged itself to each of the limited partners. In other words, the limited partnership agreement imposed a fiduciary duty on the general partner and the limited partners were entitled to exercise their contractual rights to claim damages as a result of any breach of that fiduciary duty. The motion judge found that a limited partner could sue the general partner and could also bring a claim for knowing assistance against those involved in the general partner’s breach. The Court of Appeal of Alberta affirmed this decision at 2014 ABCA 205.

[69] Consistent with this determination, courts across Canada have routinely permitted limited partners to bring direct actions against their general partner. See e.g., Starratt v. Mamdani, 2015 ABQB 280, 72 C.P.C. (7th) 306, aff’d 2017 ABCA 92, 100 C.P.C. (7th) 197; Esselmont et al. v. Centreville Limited Partnership, 2000 MBCA 27, 148 Man. R. (2d) 119; Thompson Centres Inc. v. Hyde Park Limited Partnership, 2010 ONSC 718, 71 B.L.R. (4th) 10, leave to appeal refused, 2010 ONSC 1764 (Div. Ct.); Merklinger v. Jantree No. 3 Ltd. Partnership, 2004 CarswellOnt 6659 (S.C.); Barnes v. Blackfriar’s Development Inc., 1999 CarswellOnt 4450 (S.C.); Hartley v. Craig (1998), 60 O.T.C. 151 (Gen. Div.); and Spencer et al. v. Targa Capital Inc. et al. (1994), 99 Man. R. (2d) 15 (Q.B.).

[70] The second option to consider is the use of a derivative action. The ability of limited partners to bring a derivative action against general partners and third parties was squarely addressed by the High Court of England and Wales in Certain Limited Partners in Henderson PFI Secondary Fund II LLP v. Henderson PFI Secondary Fund II LP & Ors, [2012] EWHC 3259 (Comm.), [2013] 1 Q.B. 934, a decision recently cited with approval by the England and Wales Court of Appeal in Allianz Global Investors GmbH & Ors v. Barclays Bank Plc & Ors, [2022] EWCA Civ. 353 (Comm.), [2023] 1 All E.R. (Comm.) 20.

[71] Henderson, which was decided in 2012, is the first case to recognize limited partner derivative actions in English law: see Henderson, at para. 18. It involved limited partners seeking leave to bring two types of derivative claims: (i) one against the general partner for entering into an unauthorized investment contrary to its contractual and equitable obligations; and (ii) another against a third-party manager appointed by the general partner arising out of the manager’s breach of contract.

[72] As part of its analysis, the court discussed the nature of derivative claims. The court stated that it was common ground that derivative claims were not limited to the corporate context: at para. 18. They could arise flexibly in other circumstances where the justice of the case demanded it. However, the court noted that “special circumstances” [3] were required to justify a derivative action.

[73] Dealing firstly with the issue of a legal basis for a derivative claim against the general partner, the court held that the limited partners could not bring a derivative claim against the general partner, stating at paras. 29-32:

The Partnership does not have any legal personality, being made up of the partners themselves, including the General Partner. Outside entities may contract with the Partnership, but all that means is that, in the case of an ordinary partnership, all partners are liable on the contract. In the case of a limited partnership, only the General Partner is liable, but that does not affect the nature of the partnership, which is a legal relationship between the partners themselves.

None of the provisions of the [partnership] agreement … provide for the General Partner to be liable to the Partnership as a whole, even if that were possible…. “The Partnership” is used as a convenient shorthand for the body of partners….

The General Partner can therefore be sued by any Limited Partner in respect of its liabilities under the [partnership agreement] and there is no suggestion that this involves management of the partnership business; nor could any such suggestion sensibly be made.

In these circumstances, there is simply no need and no room for a derivative action on the part of the claimants against the General Partner. Each can sue for its own loss on its own claim, without reference to the losses of other limited partners who have chosen not to make such a claim. Why the claimants should wish to pursue a derivative claim is a matter of speculation, but there is no reason why they should represent other Limited Partners who do not wish to be represented nor obtain any protection in costs or exemption from any obligation there might be to indemnify non-consenting partners against any loss suffered by them from the bringing of proceedings in their name.

[74] The court concluded that, where the general partner acts in a manner contrary to the terms of the limited partnership agreement, “there is simply no need and no room for a derivative action” by the limited partners against the general partner: at para. 32.

[75] The court then turned to the derivative claim against the third-party manager. The court found that the claim could not be pursued by any of the limited partners individually but could only be undertaken by the general partner or through a derivative action. To determine whether such an action was available, the court had to consider whether there were “special circumstances” that would “justify the bringing of the claim in the context of the alternative rights and remedies available” to the limited partners: at para. 35. The court found that special circumstances were particularly warranted to ground a derivative action because the limited partnership agreement at issue barred limited partners from taking part in the operation or control of the limited partnership. The court held that the requisite special circumstances could be found in “the irreconcilable conflict of interest on the part of the General Partner” such that “[j]ustice requires [the limited partners] be able to take this step, rather than remove the General Partner with all the drastic consequences that this entails”: at para. 59. The court also noted that, due to the provisions of the limited partnership agreement and the U.K. Limited Partnerships Act, taking a derivative action would eliminate a limited partner’s limited liability for the period during which the claim was pursued.

[76] In approving of this decision in Allianz Global, the England and Wales Court of Appeal noted at para. 58, that “any claim against a third party in relation to damage to a limited partnership fund is a partnership asset and that only the general partner can bring proceedings against the wrongdoer; limited partners could only bring such proceedings on a derivative basis.”

[77] The respondents in this case relied on Covia to support the justification for derivative claims against both a general partner and a third party. That case involved “immense, complicated and detailed litigation”: Covia, at p. 70. One part of the summary judgment motion addressed a claim by a limited partner against another limited partner for breach of fiduciary duty, wrongful interference with the economic interests of the limited partnership, and conspiracy. In a related action, the general partner and the limited partnership were suing the same limited partner defendant for somewhat similar, but not identical, causes of action. Due to the language of the limited partnership agreement, Farley J. found that the limited partners had “implicitly recognized that their limited partnership should be governed by the rule in Foss v. Harbottle” and that therefore their claim was “derivative [of] and in fact subsumed in” the general partner’s claim: at p. 87. Farley J. found that the limited partner’s claim should be subsumed in the parallel limited partnership claim to effect a “practical consolidation” of the two actions: at p. 87. As such, the general partner’s claim continued but that of the limited partners could not. The language of the limited partnership agreement provision referred to by Farley J. gave the general partner the right to pursue legal actions in the name of the limited partnership, to act in the best interests of the limited partnership, and to enforce the rights of the limited partnership.

[78] Given the nature of the factual context, and the practical focus of Farley J.’s order, I do not regard Covia as conclusive authority on the availability of a derivative action to sue a general partner or a third party. The panel was not referred to any appellate authority in Ontario on limited partnership derivative actions.

[79] The respondents and the motion judge also relied on Watson v. Imperial Financial Services Ltd. (1994), 111 D.L.R. (4th) 643 (B.C.C.A.), and Asher Place, to support the availability of a limited partner derivative action.

[80] In Watson, some limited partners in a hotel project brought derivative claims in the name of and on behalf of limited partnerships and also advanced claims as limited partners against a third-party bank alleging that it participated in a breach of fiduciary duty committed by the general partner. The action was dismissed at first instance as disclosing no reasonable cause of action. On appeal, the order dismissing the action brought by the limited partners against the bank was upheld but the derivative claims were allowed to proceed. The court stated at p. 652:

I think the rule in Foss v. Harbottle is applicable here even if it can be successfully asserted that because a partnership is not a legal entity as is a company, the respondent bank owed the duty I have referred to above to the individual partners. The basis of the application of the rule in Foss v. Harbottle is that the harm or damage is done to the partnership itself and whatever loss or damage the individual members of it suffer is as a consequence of and incidental to the fact that they are members of the partnership.

[81] The court held at p. 652, that: “[t]he rule in Foss v. Harbottle applies in a proper case not just to corporations but also to associations of persons such as trade unions, and there are many American authorities which hold that the principle also applies to partnerships.” As it was not clear and obvious that the fraud exception to the rule applied, the derivative claims against the bank were allowed to proceed.

[82] In Asher Place, another case from the British Columbia Court of Appeal, the court again applied the fraud exception to the rule in Foss v. Harbottle and permitted a derivative action to be brought by limited partners on behalf of and in the name of a limited partnership against the general partner based on alleged wrongs committed by the general partner against the limited partnership in the conduct of its business. The court did not consider, as in Henderson, whether the limited partners could sue the general partner directly for breach of the partnership agreement. In these circumstances and for the reasons I address shortly, with respect, I would not follow this decision. [4]

[83] From this review, I draw the following conclusions with respect to the issues under appeal:

(a) the general partner is responsible for managing the limited partnership and this includes suing third parties in the name of the limited partnership. (b) As counterparties to a limited partnership agreement, the limited partners have standing to sue the general partner in the event of breach of the limited partnership agreement and, applying Molchan, breach of the LPA.

[84] Applying these conclusions to this case, I fail to see why resort to a derivative action against Binscarth GP and Grant is required. The respondents can pursue a direct claim in their own names against both. First, this is consistent with the Supreme Court’s decision in Molchan, the Court of Appeal of Alberta decision in 0738827 B.C. Ltd., and Henderson, the leading decision in England and Wales on the subject.

[85] Second, the Limited Partnership Agreement contemplates such a cause of action by providing that Binscarth GP owes a fiduciary duty to the limited partners.

[86] Third, a direct action would not bind those limited partners who opt not to participate in the litigation. Each limited partner can assert their own claim. This enables those limited partners who wish to participate in the action to do so and, those who do not, to demur.

[87] Lastly, derivative actions are extraordinary in nature and leave need not be granted where other recourse exists. The essence of the claims the limited partners assert against Binscarth GP and Grant are breach of fiduciary duty and breach of the Limited Partnership Agreement. The relief available for breach of fiduciary duty is flexible and broad and if the limited partners are successful, an appropriate and responsive remedy may be fashioned by the trial judge: Hodgkinson v. Simms, [1994] 3 S.C.R. 377, at pp. 453-54; Mady Development Corp. v. Rossetto, 2012 ONCA 31, 344 D.L.R. (4th) 706, at paras. 18-20; and McBride Metal Fabricating Corp. v. H & W Sales Company Inc. (2002), 59 O.R. (3d) 97 (C.A.), at para. 30. In this case, there is simply no need for equity to intervene to authorize a derivative action on the part of the limited partners against Binscarth GP and Grant – there is no gap that needs to be filled.

[88] Although not necessary to decide for the purposes of this appeal, I also note that I fail to see how in these circumstances a limited partner bringing a direct action against a general partner for alleged breaches of a limited partnership agreement or the LPA would amount to an exercise of control or management by those limited partners who wish to pursue the litigation. Section 13 of the LPA states:

(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. (2) For the purposes of subsection (1), a limited partner shall not be 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 this Act.

[89] This suggests that a limited partner who seeks to enforce a general partner’s obligations to the limited partners under their agreement is not presumed to be taking control of the business of the limited partnership. This makes sense as a general partner is not going to sue itself. See also Henderson, at para. 31.

[90] Accordingly, I would allow the appeal with respect to the first issue. However, as I will explain, I reach a different conclusion on the availability to the respondents of a limited partnership derivative action on the second issue relating to the third parties, a subject to which I now turn.

(2) Proposed Action Against Colligan, 186, and 975

[91] The second issue to address is whether the respondents may bring a derivative action in the name of and on behalf of Binscarth LP against the third parties, Colligan, 186, and 975. The motion judge determined that the narrow fraud exception to the rule in Foss v. Harbottle would not permit the respondents to commence a derivative action against Colligan, 186, and 975. She reasoned that the exception only applied where the alleged wrongdoer controlled the injured entity. As neither Colligan nor 975 had any affiliation with Binscarth LP, the control requirement was not met, and she held, without further commentary, that 186 similarly had no control over Binscarth LP. Accordingly, she dismissed the request for leave to bring a derivative action against those three parties.

(a) Positions of the Parties

[92] The respondents submit, firstly, that 186, by virtue of the Management Agreement, does have legal control over Binscarth LP. Secondly, all three parties are necessary parties to the proceedings. Thirdly, they state that there is no legal bar to bringing a derivative action against third parties who knowingly assisted in, or have received financial benefits from, breaches of fiduciary duty committed by those in control of the limited partnership or who have caused loss to a limited partnership when those in control of the limited partnership have refused to institute legal proceedings against the third parties due to a conflict of interest.

[93] The appellants and the third parties assert that the motion judge correctly held that absent control, a common law derivative action was unavailable. Moreover, she did not make a palpable and overriding error of fact in finding that the proposed third parties had no legal or de facto control of Binscarth LP. They also argue that the issue of whether Colligan, 186, and 975 are necessary parties was not raised before the motion judge and therefore the respondents ought not to be permitted to advance this new issue on appeal. In any event, as the purported common law exception does not permit them to be named defendants in a derivative action absent control, it follows that they cannot be necessary parties. Moreover, there is no evidence or pleading to support a conclusion they are necessary parties. Finally, the appellants and the third parties argue that the issues of knowing assistance in breach of fiduciary duty and knowing receipt are new theories of liability not raised before the motion judge and cannot be used to circumvent the control component of the fraud exception.

(b) Discussion

[94] As mentioned, in limited partnerships the general partner makes decisions on behalf of the limited partnership. In the Limited Partnership Agreement in this case, this explicitly includes the handling, prosecuting, and settling of claims of Binscarth LP.

[95] A general partner may pursue a third party for wrongs committed against a limited partnership. However, if the general partner chooses not to do so, one must consider what remedies, if any, are available to the limited partners.

[96] As discussed, some courts have held that a derivative action is available in such circumstances. For example, in Henderson, the High Court of England and Wales reasoned that where a general partner refuses to take action to redress a wrong, a conflict of interest between the third-party wrongdoer and the general partner may qualify to permit a derivative action to be pursued. In that case, the taking of proceedings against the third party whom the general partner had declined to pursue because it was in an “irreconcilable conflict of interest” amounted to the “special circumstance” that justified a derivative action: at para. 59.

[97] In Watson, the British Columbia Court of Appeal determined that the rule in Foss v. Harbottle applied to limited partnerships, but refused to strike a derivative claim against a third party because it was not clear and obvious that the fraud exception to the rule did not apply in the case. As the court noted, that exception to the rule applies “where what has been done amounts to fraud and the wrongdoers are themselves in control of the company”: Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2), [1982] 1 All E.R. 354 (Eng. C.A.), at p. 358.

[98] As discussed, in the corporate context, derivative actions, including against third parties, are codified in the OBCA at s. 246 and the CBCA at s. 239.

[99] Unlike with the first issue, where limited partners have a direct cause of action against their general partners for breach of contract or the LPA, there is no similar privity of contract or statutory relationship between limited partners and third parties. Subject to the factual circumstances, there may be an equitable gap where third parties have harmed the limited partnership but, illegitimately, the general partner has refused to seek redress.

[100] In this case, unlike the proposed derivative claims against Binscarth GP and Grant, there is such an equitable gap with respect to some claims against the third parties. As mentioned, the respondents argue that 186 breached its contractual and fiduciary duties, committed the tort of conversion, and was unjustly enriched by paying fees and commissions to itself and to 975 that were prohibited by the Limited Partnership Agreement, the Management Agreement, and statute. 975 allegedly committed the tort of conversion and has been unjustly enriched by receiving improper loans, commissions, and the improper set-off of interest. The respondents state that Colligan unlawfully converted Binscarth LP’s assets to her own use and was negligent and self-serving in her role as project manager of the renovations at the Binscarth home. The respondents also argue that each of Colligan, 186, and 975 participated in, benefited from, and was unjustly enriched by Grant’s misappropriation and misuse of assets of Binscarth LP.

[101] The appellants and third parties take issue with the respondents’ reliance on the causes of action of knowing assistance and knowing receipt which they say are new theories of liability. The scope of the submissions before the motion judge is unclear. That said, I am of the view that claims of knowing assistance and knowing receipt could be pursued directly by the limited partners in their individual capacities. This court has long held that “[t]hird parties may be liable as ‘constructive trustees’ if they knowingly receive trust property obtained in breach of trust (the ‘knowing receipt’ cases) or if, without receiving trust property, they knowingly assist in its misapplication (the ‘knowing assistance’ cases)”: Gold v. Rosenberg (1995), 129 D.L.R. (4th) 152 (Ont. C.A.), at p. 154, aff’d on other grounds, , [1997] 3 S.C.R. 767; Waxman v. Waxman, 186 O.A.C. 201 (C.A.), at para. 547. This court has extended this doctrine beyond the trust context: see e.g., Harris v. Leikin Group Inc., 2011 ONCA 790, at para. 8. Alberta courts have specifically applied the knowing participation doctrine to third parties who participate in a general partner’s breach of its fiduciary duties to limited partners: see 0738827 B.C. Ltd., at paras. 68-72. It follows that the respondents’ claims framed as knowing assistance and knowing receipt are not derivative in nature and should be pursued directly in proceedings against the general partner.

[102] However, the nature of the other claims proposed to be asserted against the third parties are not so limited and consist of the claims discussed in paragraph 100. With these proposed claims it may be necessary for equity to intervene to allow for a common law derivative action.

[103] If leave to proceed with a derivative action is in principle available, what test should be applied to determine whether leave ought to be granted? Given the limited effectiveness of the common law exceptions to the rule in Foss v. Harbottle, departure from those strict parameters is warranted. Borrowing from the requirements for leave contained in the OBCA and the CBCA, but with some adjustments, I would propose that before granting leave to pursue a derivative action on behalf of and in the name of a limited partnership, the court should be satisfied that: (a) the general partner has refused to pursue a claim against a third party; (b) the limited partner is acting in good faith; and (c) it appears to be in the best interests of the limited partnership that the action be brought.

[104] In considering these elements, a court must be sensitive to the context of a limited partnership, the management role of the general partner, the terms of the limited partnership agreement governing the partners, and the provisions of the LPA. In this regard, factors to consider may include: whether the general partner’s failure to act is unreasonable or in bad faith; the existence of any conflict of interest between the general partner and the proposed third-party defendant; the presence of a strong prima facie case against the third party; and alternative, non-derivative remedies that may be available to the limited partner. These are simply some factors to consider and do not represent an exhaustive list.

[105] In this case, the evidence on some of these issues is somewhat ill-defined. The respondents filed a notice of motion and amended notice of motion seeking leave to bring their derivative action but did not include a draft statement of claim. While Ramsay J. ruled that a draft statement of claim was not mandatory, it is preferable that a limited partner seeking leave to pursue a derivative action on behalf of a limited partnership file a draft statement of claim.

[106] Notwithstanding this limitation, based on the record before the court, I am satisfied that the respondents meet the test for obtaining leave to pursue a derivative action on behalf of and in the name of Binscarth LP against Colligan, 186, and 975.

[107] Binscarth GP has certainly implicitly, if not explicitly, declined to take action against the third parties. The respondents appear to be acting in good faith. Binscarth GP and Grant are in an apparent conflict of interest with respect to the three third parties. Grant is the sole director of Binscarth GP, the sole officer, director, and shareholder of both 186 and 975, and the alleged common law spouse of Colligan. The conflict factor weighs heavily in favour of granting leave. The claims proposed to be asserted, as described previously in these reasons, certainly suggest a strong prima facie case against Colligan, 186, and 975. Lastly, although I am mindful of the extensive powers vested in Binscarth GP as detailed in the Limited Partnership Agreement and the LPA, in all of these circumstances, I am persuaded that it appears to be in the best interests of Binscarth LP that the action be brought.

[108] In making this determination, I recognize that it may be that the respondents will opt to simply pursue direct claims for knowing assistance and knowing receipt against Colligan, 186, and 975. I note that they cannot be assured at this stage that the legal costs associated with any derivative action will be borne by Binscarth LP. I do not propose to decide whether the respondents ought to bring a direct action; it is a matter for the respondents to decide. I am satisfied that in principle, a derivative action is available to the respondents if they choose to proceed with that course of action. [5] I would accordingly grant leave to the respondents to proceed with a derivative action against Colligan, 186, and 975 with respect to the claims outlined in para. 100 of these reasons. In this regard and to that extent, I would allow the appeal on the second issue.

Disposition

[109] For these reasons, I would allow the appellants’ appeal and dismiss the respondents’ motion for leave to commence a derivative action against Binscarth GP and Grant. I also would allow the respondents’ appeal and grant them leave to bring a derivative action against Colligan, 186, and 975 as discussed. If the parties are unable to agree, they may file written submissions on costs, not to exceed 3 pages in length, within 10 days of release of these reasons.

Released: July 3, 2024 “S.E.P.” “S.E. Pepall J.A.” “I agree. K. van Rensburg J.A.” “I agree. P.J. Monahan J.A.”

[1] Under Article 1.1 of the Limited Partnership Agreement: “Affiliate means any other person that, directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such specified person.”

[2] The origin of the rule in Foss v Harbottle can actually be traced to some early nineteenth century decisions in the law of partnership: A.J. Boyle, Minority Shareholders’ Remedies, vol. 2 (Cambridge University Press, 2004), at p. 2.

[3] The phrase “special circumstances” appears to emerge from English derivative estate law cases: see e.g., Roberts v. Gill, [2010] UKSC 22, [2011] 1 A.C. 240.

[4] I do not propose to engage in a detailed discussion of American law save to say that many states have passed legislation providing limited partners with the right to pursue a derivative action on behalf of the limited partnership. With the exception of New York, it appears that the limited partner derivative action originated by statute. The statutory limited partnership derivative action was introduced into New York in 1968 following the decision of Riviera Congress Associates v. Yassky (1966), 18 N.Y.2d 540 (C.A.). In Riviera, a number of limited partners brought a representative action in the name of the partnership against the general partners to recover from the general partners damages on behalf of the partnership: at p. 545. The court held that since the general partners would not sue because they were the persons who would be liable for the damages, the limited partners were permitted to initiate the necessary action on behalf of the partnership: at pp. 547-48.

[5] I do not propose to analyze the issue of any potential loss of limited liability. This was not an issue addressed by the motion judge in her reasons nor was it the subject matter of her order, the respondents’ notice of appeal, the amended notice of appeal, or the orders sought in the factums.