Court File and Parties

COURT FILE NO.: CV-21-00665816-00CL DATE: 2022/02/02

SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

RE: VHGCC-14 LP and VHGCC-15 LP, Applicants AND: 2308451 Ontario Inc. and Himelfarb Proszanski LLP, Respondents

BEFORE: C. Gilmore, J.

COUNSEL: David Taub and Anisha Samat, Counsel for the Applicants Ronald Lachmansingh, Counsel for the Respondents Robert Drake for the non-parties LP1, LP2, and LP5

HEARD: January 22, 2022

ENDORSEMENT

Introduction

[1] This is an Application brought by VHGCC-14 LP (“LP3”) and VHGCC-15 LP (“LP 4”), who are limited partners of the VHGCC-7 LP limited partnership (“VHLP”). The Applicants seek relief against a group of limited partners and the Respondent 2308451 Ontario Inc. (“230”). 230 is the General Partner of VHLP. The remaining limited partners, LP1, LP2 and LP5 are controlled by the principal of the General Partner (“GP”), Mr. Shafiei.

[2] The specific relief sought by the Applicants is set out below:

(a) An Order directing the GP to proceed to Arbitration before David McCutcheon in order to arbitrate the Applicants' disputes in accordance with their Notice of Arbitration dated May 21, 2021 (and any disputes which may be raised by the GP) and in furtherance thereof,

(i) To complete the Terms of Appearance previously delivered by Mr. McCutcheon to the parties; and

(ii) To pay its share of the Arbitrator's retainer fee.

(b) An interim, interlocutory and final Order restraining the Respondents from distributing or disposing of any of the Sale Proceeds (defined below) received and now held in trust by the Respondent Himelfarb Prozanski LLP ("HP") without the written consent of the parties, order of the Arbitrator, or further Order of this Court, save and except for:

(i) Payments to third party arm's length trade creditors; and

(ii) Any payments authorized by a court of competent jurisdiction.

(c) An Order requiring the Respondent GP to repay into the HP trust account any portion of the Sales Proceeds which HP has paid out of trust from or after May 11, 2021, excluding permitted payments described in subparagraph 1(b) herein;

(d) In the alternative to paragraphs 1 and 2 herein, an interim, interlocutory and final Order requiring HP to pay the Sale Proceeds into Court or into the trust account of Robins Appleby LLP ("RA"), pending any of (a) the written consent of the parties for payment out of court; (b) an order of an Arbitrator, as described below that the funds be paid out of court, or (c) further Order of this Court;

(e) An Order that the affidavit of Mohammad Mehdi Haj-Shafiei (“Mr. Shafiei”) sworn October 29, 2021 be struck as a result of 230’s failure to produce him for cross-examination.

Background Facts

[3] VHLP was formed in 2017 to acquire and develop the Victoria Harbour Community Project (“the Project”). The Respondents are the General Partner (“GP”) and counsel for the GP. The Project and the lands on which the Project was located were sold on January 23, 2021 and closed on March 10, 2021. This dispute relates primarily to the Sale Proceeds from that sale being the sum of $1,509,065.47. The Sale Proceeds were paid into the trust account of HP.

[4] On July 6, 2021 the certain third-party creditors of the Project brought an Application on the Civil List (“the Creditors’ Action”). They sought payment out of the Sale Proceeds of $667,797.42 and a distribution in accordance with their Notice of Application.

[5] On July 8, 2021 a third party, namely Zhaoxian Hou (“the Hou claim”), claimed real estate commission from the sale proceeds and brought a motion in Newmarket. On July 9, 2021 the Court ordered that the sum of $214,700 be paid into Court from the Sale Proceeds pending determination of that action.

[6] On July 23, 2021 the matter came before me to schedule the within hearing. Given the disputes between the parties I ordered that the Sale Proceeds be preserved in the HP account until the hearing date or further Order of the Court (the “Preservation Order”).

[7] On October 27, 2021 the matter came before Justice Pattillo to fix a litigation timetable. Justice Pattillo was requested to consider a consolidation of the Creditors’ Action with the within Application. He refused on the grounds that they were two separate claims. Justice Pattillo continued the July 23, 2021 Preservation Order and urged the parties to attend arbitration.

[8] On January 11, 2022 Justice Sanfilippo ordered the sum of $667,797.42 be paid into court to the credit of the Creditors’ Action. LP3 and LP4 do not accept the Creditors’ claims but did not oppose the payment into Court. Justice Sanfilippo also ordered that a mediation be held in the Creditors’ Action prior to May 30, 2022. The mediation was to include the parties to that action and any other parties that counsel believed should be included.

[9] On January 17, 2022 the Respondents scheduled a Case Conference to request an adjournment of this hearing. The Respondents submitted that the individual instructing counsel for the GP was also the instructing principal on behalf of LP4. The same person was also instructing counsel for LPs 1, 2 and 5. The Respondents took the position that the corporate authority issue required resolution before this hearing could proceed. The Respondents also argued that certain funds already advanced to LP3 and LP4 be returned as a condition of arbitration and that the GP receive litigation and expense funding.

[10] Justice Kimmel denied the adjournment request and found that the issues raised by the Respondents could be dealt with by this Court, as a condition of the arbitration, or by the arbitrator himself.

[11] The Applicants seek to arbitrate the dispute as provided by the terms of the Limited Partnership Agreement (“the LP Agreement”). The Applicants delivered their Notice of Arbitration on May 21, 2021. The Respondents initially agreed to the arbitration and to the proposed arbitrator Mr. David McCutcheon of Arbitration Place. The Respondents later demanded certain terms be attached to the arbitration and by way of letter dated June 28, 2021 confirmed their refusal to arbitrate unless certain terms were agreed upon.

The Disputes

1) The Creditors’ Claims

[12] The GP proposed to include the third-party creditor claimants in the arbitration. Counsel for the Applicants proposed that the issue of whether the non-party creditors be included in the arbitration be put before the arbitrator. The Respondents refused.

[13] Justice Pattillo took the view that this Application and the Creditors’ Action must remain separate and should not be consolidated. Over $800,000 of the proceeds has now been paid into Court as a result of the Creditors’ Action and the Hou Action.

[14] According to counsel for the Applicants, the Creditors are not interested in participating in the arbitration related to this Application.

2) Mr. Shafiei’s October 29, 2021 Affidavit

[15] The Respondents refused to permit the Applicants to cross-examine Mr. Shafiei on his affidavit sworn October 29, 2021 because of the corporate authority issue in relation to LP4. The Applicants take the view that this is contrary to the Rules and that the affidavit should be struck.

[16] The issue is much less pressing than it was given that the issues raised in Mr. Shafiei’s affidavit are largely no longer relevant.

3) The Corporate Authority Issue

[17] The GP of LP4 is 10507130 Canada Inc. (“105”). Mr. Shafiei is a director and 50% shareholder of the GP. Min Zou is the other director and 50% shareholder of 105. Up until November 2021 Ms. Zou was signing documents on behalf of LP4 as President of 105. In fact, she signed the Release which is the subject of another dispute in this Application.

[18] The Respondents have provided corporate documentation confirming that Min Zou is a shareholder and director of 105 but not an officer. The Respondents take the position that counsel for the Applicants had no authority to commence this Application on behalf of LP4 nor did Min Zou. The Respondents view the corporate authority issue as a threshold one which must be resolved prior to arbitration.

[19] The Applicants submit that Min Zou properly retained Robins Appleby for LP4 in her capacity as President of 105, the GP of LP4. She had authority to bind LP4. However, if the evidence submitted by the Respondents is correct that Min Zou had no authority to bind LP4, then the Release signed by Min Zou is also invalid.

[20] The Applicants submit that if the corporate authority of LP4 remains an issue, it can be dealt with by the Arbitrator as it falls within the scope of the arbitration agreement clause which is extremely broad.

[21] The Respondents do not agree. Their view is that the arbitration clause in the LP Agreement does not encompass governance issues related to a limited partner. Without clarity as to who is the instructing partner of LP4, the arbitration cannot proceed. The Respondents submit that this is a threshold issue which should be decided by this Court prior to arbitration. As well, if LP4 had no authority to commence this Application and is not represented by counsel, the arbitration cannot realistically proceed.

4) The Distribution Agreement and the Release

[22] After the sale of the subject property took place, the Applicants agreed to receive certain funds that were in excess of their percentage share in exchange for signing a Distribution Agreement and a Release. That Release prevents the Applicants from taking action against their partners which is exactly what they are doing in the within Application. The Respondents therefore require that the Applicants return monies they have already received under the Distribution Agreement as a pre-condition to arbitration.

[23] Given the corporate authority issues in relation to LP4 and the question related to Ms. Zou’s authority to sign the Release, this should be a threshold issue for the arbitrator.

[24] The Applicants view this as an issue which can dealt with by the arbitrator and should not be a condition precedent to arbitration. In any event, the Applicants claim they have not received all of the sale proceeds to which they are entitled. Their position is that HP distributed sales proceeds to other parties without authorization and those funds should be returned as well. There is also the issue of Ms. Zou’s authority to sign the Release which is now contested by the Respondents.

5) Expenses and Legal Fees Claimed by the GP

[25] The GP is entitled to legal expenses, arbitration expenses, and operating expenses pursuant to the LP Agreement. The GP has not been able to access the sale proceeds due to the Preservation Order. The GP seeks reimbursement for these expenses. The expenses include $80,000 for legal fees, $11,500 in consulting fees and approximately $5,000 in accounting fees.

[26] The Applicants view the conduct of the GP in this Application as amounting to bad faith and wilful misconduct. The GP is not entitled to reimbursement under the LP Agreement where there is bad faith. By way of example, the Applicants point to Mr. Shafiei’s refusal to be cross-examined, disregarding Justice Pattillo’s direction that the matters be arbitrated, claiming Min Zou lacks authority over LP4 after recognizing that authority for over two years, and continuing to delay and complicate this Application.

[27] The Applicants do not contest the GP’s right to receive legal fees in relation to the Creditors’ Action and the Hou action. The Applicants seek transparency with respect to invoices for those fees.

6) Residency Issues

[28] Section 3.1 of the LP Agreement provides that [e]ach of the Limited Partners represents and warrants to and covenants with each of the [General and Limited] Partners that ... such Limited Partner is not and shall not become a "non-resident" of Canada within the meaning of the ITA.

[29] Section 4.14 of the LP Agreement provides as follows:

A Limited Partner which intends to become a non-resident, prior to its becoming a non- resident, is required to transfer its LP Units to a person resident in Canada within the meaning of the ITA, provided that any such transfer shall be in compliance with the provisions of Article 8 of this Agreement. If any such transfer is to a person which is not then a Limited Partner, then such person shall agree in writing to be bound by all provisions of this Agreement as a Limited Partner and shall agree to be bound by all obligations of the Limited Partner from which the LP Units were transferred.

[30] According to the Respondents, Ms. Zou and Mr. Jiang reside in China and are non-residents of Canada. If they are non-residents, they have no standing in this Application and must return their units or pay security for costs.

[31] The Applicants view this issue as irrelevant to the Application. Min Zou’s address is in Ontario as is Mr. Jiang’s. If necessary, the matter should be included in the arbitration. The Applicants note that the Respondents did not move for security for costs.

Analysis and Ruling

Issue #1 – Should the Parties Proceed to Arbitration?

[32] Article 14 of the LP Agreement sets out as follows:

14.1 Arbitration

Subject to the exception under Section 14.9(b), in the event of any dispute, claim, question or difference between or among any parties hereto relating to any matter, covenant, commitment or agreement provided for in this Agreement, including the applicability of this Section 14.1, or arising between or among Partners relating to the Limited Partnership which the parties are unable to resolve by discussion and negotiation, any party may by written notice (an "Arbitration Notice") to the other parties, require same to be settled by arbitration pursuant to and in accordance with the following provisions:

(a) the arbitration tribunal shall consist of one arbitrator appointed by mutual agreement of the parties involved who is qualified by education and training to pass upon the particular matter to be decided, or in the event of failure to agree within ten (10) Business Days from the giving of the Arbitration Notice, any party involved may apply to a Judge of the Ontario Superior Court of Justice to appoint an arbitrator;

(b) the arbitrator shall be instructed that time is of the essence in proceeding with his/her determination of any dispute, claim, question or difference and, in any event, the arbitration award must be rendered within thirty (30) days of the submission of such dispute to arbitration;

(c) the arbitration shall take place in Toronto, Ontario;

(d) the law to be applied in connection with the arbitration shall be the laws of Ontario, including its conflict of law rules, except that any issue to which the Act applies, shall be determined in accordance with the Act, and the arbitrator shall have no right to dispense with the law in arriving at his or her, meaning that the legal term of art of ex aequo et bono shall be inapplicable;

(e) in its arbitration award, the arbitrator may award any remedy for any breach of this Agreement that might have been awarded by the Ontario Superior Court of Justice except where the remedy for such breach has been expressly limited by this Agreement; the arbitration award shall be given in writing, and shall be final and binding on the parties and not subject to any appeal on a matter of law, a matter of fact, or a matter of mixed fact and law;

(g) the arbitration award shall deal with the question of costs of arbitration and all matters related therein;

(h) judgment upon the award rendered may be entered in any court of competent jurisdiction, or, application may be made to such court for a judicial recognition of the award or an order of enforcement thereof, as the case may be;

(i) nothing herein will prevent the party who gave the Arbitration Notice from applying for injunction relief pending such arbitration proceeding; and any arbitration hereunder shall be conducted in accordance with the provisions of the Arbitration Act, 1991 (Ontario) (as it may be amended or re-enacted from time to time) except as varied or excluded by the provisions of this Section 14.1.

(k) The arbitrator shall have the minimum of fifteen (15) years of experience in related legal services and it is preferable for the arbitrator to be able to provide services in Mandarin Language.

[33] It is undisputed that all the parties to this Application signed the LP Agreement and agreed to the terms of section 14.1. A Notice of Arbitration was delivered to the Respondents by way of letter dated May 21, 2021.

[34] There can be no doubt that there is a dispute between the parties related to the distribution of the Sale Proceeds. As such, the parties are bound to proceed to arbitration in accordance with the LP Agreement. The Respondents do not contest the requirement for arbitration, per se. Their concerns relate in large part to the parameters of the arbitration and certain conditions which they seek to impose on the process.

Issue 2 – Issues to be Determined on Arbitration

[35] What remains to be determined is the following:

a. Should the Applicants be required to repay funds already received under the Distribution Agreement before proceeding to arbitration or should the issue of the Release be dealt with by the arbitrator as a threshold issue?

b. Should the corporate authority issue in relation to LP4 be determined as a preliminary issue by this Court or is it encompassed by section 14.1 of the LP Agreement?

c. Should the residency issues be dealt with by the arbitrator?

d. Should the Creditors be included in the arbitration?

e. Should all funds remain in trust with HP pending the arbitration decision?

f. Should the GP be paid its legal fees and expenses to date?

[36] I agree with the Applicants that the ambit of the arbitration as set out in section 14.1 is very broad and can reasonably be interpreted to include ancillary issues. Further, the competence-competence principle as articulated in Ontario Medical Association v. Willis, 2013 ONCA 745 gives precedence to the arbitration process and holds that arbitrators should be allowed to exercise their power to rule first on their own jurisdiction (paragraph 20).

[37] There will be nothing to arbitrate if the Sale Proceeds (that have not already been paid into Court) are distributed as that is the very heart of the parties’ dispute. The funds must continue to be held by HP pending the arbitration and the arbitrator’s decision.

[38] The dispute in relation to the Sales Proceeds is also tied to the Respondents’ insistence that the Applicants repay what they received under the Distribution Agreement before any arbitration can proceed, or alternatively that the Applicants have already received their share as a result of the release signed concurrent with the Distribution Agreement.

[39] The Applicants’ position is that the LP Agreement does not require the limited partners to sign a release and that imposing that condition was a breach of the GP’s fiduciary duty. Whether or not the Release is binding should be a preliminary issue to be decided by the Arbitrator. If the Release is determined to be binding, the matter may become merely a claims process in relation to Creditors. If the release is not binding, the Applicants need not pay back any previously received funds and the dispute would continue with respect to the balance of proceeds.

[40] Disputes in relation to the amount owed to Creditors continue to be outstanding. While I understand Justice Pattillo’s position on consolidating this Application with the Creditors’ Action, I see no reason why the Creditors’ claims could not form part of the arbitration. Indeed, it may be difficult to determine what portion of the proceeds remain without first determining which creditors have a valid entitlement to the proceeds. This also assumes that the Creditors will want to participate given that they are not parties to this Application. It may be that they wish to pursue their own Application without involvement in this proceeding.

[41] I do not agree that the issue of LP4’s corporate authority must be dealt with by this Court before any arbitration can proceed. Section 14.1 sets out that the arbitration can address whether or not section 14.1 applies. The scope of the arbitration must be dealt with by the arbitrator including a determination of whether LP4 had the authority to commence the Application and sign the Release. If the arbitrator disagrees, he can refer the matter back to this Court.

[42] Whether or not the GP should be paid fees and expenses pursuant to the LP Agreement is also an issue which the Arbitrator can decide. The Applicants’ position is that the GP has acted in bad faith and therefore not entitled to indemnification. The Applicants provided many examples of what they allege is bad faith on the part of the GP. Evidence on these points will need to be introduced and a finding made by the Arbitrator. This Court is not in a position to make any findings in relation to allegations of bad faith based on the record before it.

[43] As for the residency issue, this appears to be a last-minute complaint raised by the Respondents. It was not raised before me or Justice Pattillo during scheduling appointments. As both Ms. Zou and Mr. Jiang have Ontario addresses, evidence will have to be presented to the arbitrator to satisfy him that Ms. Zou and Mr. Jiang conform to the residency requirements under section 3.1 of the LP Agreement. It may make sense to combine this with the corporate authority issue.

Ruling and Costs

[44] Given all the above, I make the following Orders:

a. This matter will proceed to arbitration with Mr. David McCutcheon of Arbitration Place. The arbitration will be scheduled forthwith.

b. In the event that Mr. McCutcheon is no longer willing or able to conduct the arbitration, counsel will consult for a period of two weeks to choose a qualified alternate. In the event counsel cannot agree on an alternate, I will choose the arbitrator after receiving brief written submissions from counsel.

c. On consent, the cost of the arbitration shall be paid from the Sale Proceeds in trust with HP.

d. On consent, the GP’s legal fees only in relation to the Hou Action and the Creditors’ Action shall be paid from the Sale Proceeds so long as copies of all accounts for such fees are provided to the Applicants’ counsel.

e. The following issues will form the subject of the arbitration in addition to any further issues agreed upon by the parties or determined by the arbitrator:

i. Whether corporate authority issues in relation to LP4 are properly within the scope of section 4.1 of the LP Agreement and if so, a determination of such issues based on a process determined by the arbitrator.

ii. The enforceability of the Release signed by the Applicants and whether any funds are required to be returned by them as a condition of arbitration.

iii. The Creditors’ claims subject to the participation of the Creditors as non-parties.

iv. The GP’s entitlement to indemnification for legal fees and expenses other than in relation to the Hou and the Creditors’ Action.

v. Whether Ms. Zou and Mr. Jiang meet the residency requirements of the LP Agreement.

vi. The amount owed to the Applicants from the Sale Proceeds after consideration of all other outstanding issues.

f. This Order is not intended to restrict the arbitrator in any way in terms of determining the order in which the outstanding issues will be heard, whether further issues should be included in the arbitration, or the process to be used.

[45] Both parties provided Costs Outlines and made oral submissions on costs at the end of the Hearing. It did not come to my attention until later that the Respondents made an Offer to Settle. As such, upon the release of these Reasons, the Offer to Settle is to be uploaded to Caselines forthwith. Mr. Lachmansingh may provide a one-page written submission with his Offer to Settle with respect to his position on how the Offer affects his request for costs. Mr. Taub may provide a one-page response with respect to the Offer within two days of Mr. Lachmansingh’s submissions. All documents to be uploaded to Caselines. I will release brief Reasons in relation to Costs shortly thereafter.

C. Gilmore, J.

Date: February 2, 2022