Delta Hotel, Whistler: Court finds trust breached but rules against dissollution of partnership

 

Date of Release: May 26, 1995                      No. C891212

                                            Vancouver Registry

IN THE SUPREME COURT OF BRITISH COLUMBIA

BETWEEN:                           )

                                  )

Village Gate Resorts Ltd.           )

                                  )

                                  )

                   PLAINTIFF     )        REASONS FOR JUDGMENT

                                  )

AND:                               )

                                  )         OF THE HONOURABLE

Andrew Moore, Thomas Morrison,      )       

Rolf Gillardon, et. al.         )

                                 )         MR. JUSTICE LOWRY

                   DEFENDANTS         )                                                                       )      

AND:                               )     

                                  )

Barbican Properties Inc., et. al.     )

                                 )

                  DEFENDANTS BY        )

                  COUNTERCLAIM

                       

Counsel for the Plaintiff and                                       

BPYA 138 Holdings Ltd., both               

Defendants by counterclaim:          William B. McAllister Q.C.

                                               Brenda J. Brown           

Counsel for certain of the                                            

Defendants:                                     Douglas G.S. Rae          

                                              Thomas R. Manson          

                                            Andrew D. Borrell         

Counsel for Barbican Properties    

Inc., Defendant by counterclaim:        George K. MacIntosh Q.C.


                                                Lisa A. Warren            

                                                             

Heard at Vancouver:          April 25-28, May 2-3, 9-13, 16-19,                                  24-27,and 31, September 12-16, 19-20,

                           December 12-14, 1994, February 8-9,

                                21-24, 27-28, March 1-4, 1995.       


                            (41 days)


1              This action arises out of an attempt that was made six years ago to dissolve a limited partnership. Some of the limited partners sought a dissolution on the ground that the general partner was in default of its obligations under the partnership agreement in respect of a particular transaction because it had failed to act honestly, in good faith, and in the best interests of the limited partners. The partnership agreement provides that the limited partners may, by extraordinary resolution, dissolve the partnership if the general partner is in default of its contractual obligations in a material way. On the application of the general partner, the court enjoined the limited partners from passing a resolution to dissolve pending a trial to determine their right to do so. Since then the partnership has continued to operate; the determination to be made was for a time mutually put to one side. Now, at what has been a long and, regrettably, disjointed trial, a broad range of disputed allegations are made against the general partner and the corporate entities by which it has at various times been controlled from 1982 to the present. They are allegations of breaches of statutory, contractual, and equitable duties owed to the limited partners which are said to entitle them to the relief sought: a dissolution, an accounting, and damages.

2              The central question is whether a case for a dissolution now has been made out.    

       THE PARTNERSHIP AND THE CASE FOR ITS DISSOLUTION

3              The Whistler Mountain Inn Limited Partnership was formed to operate the first of two phases of the Delta Mountain Inn hotel complex which is located in what has become a world class ski resort area. The first phase, an eight story tower, opened in 1982; the second, a low rise adjacent building, in 1987. The two phases are operated by the same manager, Delta Hotels Ltd. ("Delta"), as one hotel employing a common infrastructure.

4              Phase I is subdivided into 166 strata lots all of which are guest rooms save for three that are food and beverage facilities (the "FBT" space). The limited partners are the owners of the guest or sleeping room lots. The lots are leased to the general partner for the benefit of the partnership on a long term basis to be used for the operation of a hotel business for profit. About 48% of the lots are held by 82 partners. The balance are held by one partner, BPYA 138 Ltd. ("BPYA"), which is a part of a large corporate conglomerate based in Hongkong known as the Lai Sun Group. BPYA is also the owner of Phase II, the retail store space in the hotel, and, the FBT space.

5              The general partner is Village Gate Resorts Ltd. ("Resorts"). It is a wholly owned subsidiary of BPYA. Resorts contracts with Delta for the management of the entire hotel complex.

6              The development of the complex began in 1980. Phase I was built and the strata lots were promoted and sold by the developer through various affiliated companies (the "Maple Leaf" companies) which owned and controlled the general partner until 1985. The project was financed by the Royal Bank and the provincial government. By 1985 the developer had run out of money. Barbican Properties Inc., through companies it held (the "Barbican" companies), acquired the developer's position. It built Phase II. It controlled the general partner from 1985 until early 1989 when its interests were sold to the Lai Sun Group (i.e., BPYA). That sale is the transaction that led to the attempt by some of the limited partners to dissolve the partnership by extraordinary resolution six years ago.

7              In late 1989, the Lai Sun Group purchased 49.9% of Delta Hotels.

8              There are a series of lengthy, convoluted agreements that bear on the interest held by each of the limited partners some aspects of which would tax the comprehension of even the most knowledgable commercial solicitor. The partnership agreement contains the following clause pertaining to dissolution (7.17):

     The Limited Partners may by Extraordinary Resolution: ...

b) dissolve the Partnership; ...

provided that the powers ... referred to herein shall not be exercised without the express consent of the General Partner unless the General Partner is in default in a material way hereunder ...

9              During both the Barbican and the Lai Sun periods, Resorts has had no employees. It was operated from 1985 to 1989 out of Barbican's offices by employees of Barbican and from 1989 to the present it has been operated by employees of companies in the Lai Sun Group. Those who were primarily responsible for discharging its obligations as the general partner in the Barbican period were the president and controller of Barbican: Alvin Poettcker and John Brown. They have been replaced in the Lai Sun period by a senior administrator for some of the Lai Sun Companies operated out of the group's Vancouver office and the controller for those companies: Kraven Tam and Timothy Koo.    

10             The Delta Mountain Inn is now said to be a twelve million dollar per year business with the partnership's share of gross revenues being five and a half million dollars annually. Resorts is currently realizing an annual profit derived from its management fee of about $450,000. But many, if not most, of the individuals who hold 48% of the strata lots in Phase I regard their purchase as a very unsatisfactory investment. They bought what was promoted as an interest in a first class hotel with a personal use component. They invested at or near the height of the real estate market at Whistler, lured by optimistic projections of operating profits that would offset the cost of financing and, for many, considerable tax advantages that might be taken. The market deteriorated dramatically in the early 80's, however, and the anticipated level of profit did not materialize. Indeed, there was no distribution to the partnership at all until 1987. There has been virtually no prospect of selling Phase I lots individually without accepting very substantial losses. In addition, some of the limited partners consider themselves the victims of broken promises they attribute to the developer with respect to opportunities they were to be given to participate in Phase II and in respect of the personal use of their strata lot units in particular.   

The Position Taken by Those Who Seek to Dissolve

11             Most, but not all, of the 82 limited partners who hold 48% of the strata lots in Phase I (seven of which have testified at the trial) join in seeking to have the partnership dissolved. They contend that there has been a long history of misconduct attributable to the general partner and to its owning and controlling affiliates.

12             In the Maple Leaf period from 1982 to 1985, they say that, contrary to the partnership agreement, Resorts was insolvent and, contractually, that served to terminate the partnership more than ten years ago such that, although it has continued to operate, it is now to be dissolved.

13             As to the Barbican period, they say the interests of the limited partners were ignored and the powers of the general partner were wrongly used in respect of the acquisition of the Maple Leaf position, the development of Phase II, and the ultimate sale to the Lai Sun Group, all to the benefit of Barbican's shareholders. They say in addition that the general partner failed to keep accurate financial records of their personal use charges.

14             Then, in the Lai Sun period, they say the hotel has been operated without regard to the obligations of the general partner to the partnership and that has been accentuated by the conflict of interests inherent in the ownership structure. They say the trust obligations associated with the partnership's assets have been ignored; the general partner's allocation of operational costs has been contrary to the interests of the limited partners; the interest acquired by the Lai Sun Group in Delta was not disclosed to the partnership; and the general partner's compliance with certain partnership resolutions has been refused.

15             With respect to the obligations said to have been breached in their case against Resorts, these partners rely on the trust provision and several other specific provisions of the partnership agreement. They rely as well on what they maintain is the broad fiduciary obligation borne by a general partner to act in the best interests of the limited partnership. The obligation is codified in s. 22 of the Partnership Act, R.S.B.C. 1979, c. 312 and it was expressly incorporated in the partnership agreement (5.05):

     The General Partner covenants that it will exercise the powers and discharge its duties under this Agreement honestly, in good faith, and in the best interests of the Limited Partners and exercise the care, diligence and skill of a reasonably prudent person.

It is, they say, an obligation with which a general partner is always burdened subject only to the extent its duty may be modified by the partnership agreement: 337965 B.C. Ltd. v. Tackama Forest Products Ltd. (1992), 67 B.C.L.R. (2d) 1 (C.A.). They cite the following from R.C.I. Banks, Lindley & Banks on Partnership, 16th. ed., (Sweet & Maxwell: London, 1990) (pp. 410 and 412.) concerning the meaning of good faith in respect of partnerships generally:

Perhaps the most fundamental obligation which the law imposes on a partner is the duty to display complete good faith towards his co-partners in all partnership dealings and transactions.

                  . . .

Good faith requires that a partner shall not obtain a private advantage at the expense of the firm. He is bound in all transactions affecting the partnership, to do his best for the common body, and to share with his co-partners any benefit which he may have been able to obtain from other people and in which the firm is in honour and conscience entitled to participate.

They add that the obligation carries with it a specific duty which is codified in s. 58 of the Act to disclose true and full information of all things affecting the limited partnership.

16             It is then their contention that Resorts has been, and continues to be, materially in default of the contractual, equitable, and statutory obligations of the general partner such that they are entitled to dissolve the partnership.

17             Their case against Barbican and BPYA is advanced in the alternative. They first contend that, by virtue of their control of Resorts, Barbican and then BPYA were the de facto general partners and owed the same fiduciary obligation as Resorts. The limited partners are precluded from participating in the management of the partnership's business and have been vulnerable to the power Barbican and BPYA have exercised through Resorts. Support for the existence of a direct fiduciary duty is said to be found primarily in the recent decision of the Supreme Court of Canada in Hodgkinson v. Simms (1994), 117 D.L.R. (4th) 161. On this basis Barbican and BPYA are said to be liable to account for the general partner's breached obligations.

18             It is then contended that, in any event, Barbican and BPYA knowingly participated in breaches of fiduciary duties attributed to Resorts and can be held liable to the limited partners. The contention is that the equitable principle stated in Barnes v. Addy (1874), 9 Ch. App. 244, that those who become constructive trustees as recipients of property they know to be impressed with a trust -- those who knowingly become implicated in a breach -- may be held liable to the same extent as the trustee, is as applicable to a breach of a fiduciary duty as it is to a breach of trust: MacMillan Bloedel Ltd. v. Binstead et al. (1983), 22 B.L.R. 255 at 286 (B.C.S.C.). The basic test for the imposition of liability is said to have been stated in Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787 at 808:

Whether personal liability is imposed on a stranger to a trust depends on the basic question of whether the stranger's conscience is sufficiently affected to justify imposition of personal liability.

On this basis it is said that, by virtue of their exclusive control over Resorts, first Barbican and then BPYA have been implicated, indirectly, in the breaches of duty attributed to the general partner and have incurred liability to the limited partners in the result.

19             The limited partners who join in the action seek first a declaration of material default on the part of Resorts and then a dissolution either by extraordinary resolution (in respect of which the partnership agreement limits BPYA, in the circumstances now prevailing, to 20% of the vote) or by court order as provided by s. 38 of the Act. Further, they seek an accounting from 1985 to date against Resorts, Barbican, and BPYA. No action is taken against the Maple Leaf companies but these partners seek to recover from Resorts the profits derived from the management fees it received for the past ten years.

The Position of Resorts and Its Affiliates

20             Put most simply, Resorts, Barbican, and BPYA take the position that the allegations made are not supported by the evidence and that no duty owed, statutory, contractual, or equitable has been breached by the general partner. They maintain that those who controlled the general partner could not have any liability to the limited partners in any event. They say these limited partners are frustrated over what have turned out to be very poor investments and, having concluded that the dissolution of the partnership is now their best recourse, they have used this action as a platform to search for grounds whereby they can transfer at least some of their misfortune to others. Emphasis is attached to the fact that these partners have amended their pleadings many times in what is said to have been an attempt to find a basis for the relief they seek. They sought to amend at trial, more than once, even after they had closed their case. Some amendments were allowed and led to adjournments that are in part the reason for the disjointed nature of the trial. Their case has been characterized as a moving target on which it has been difficult to focus. Both Barbican and BPYA maintain that as these partners have finally put their pleaded case it cannot succeed. They maintain that, in the periods during which they have controlled Resorts, the obligations of the general partner have been properly discharged.

                          THE ISSUES

21             The issues as argued can be broadly stated as follows:

    

1) Has the general partner breached any of

its obligations to the limited partners and is

it in breach now?

          

    

2) If so, do any breaches attributable to the

general partner, viewed separately or

together, constitute a default in a           

material way as that term is employed in the

partnership agreement?

3) Have the companies by which the general

partner was controlled from time to time

incurred liability to the limited partners by

virtue of any breach of the general partner's

obligations?

4) Should an order for dissolution of the

partnership be made?

5) What, if any, accounting should be ordered?

         

22             Throughout the trial, and particularly in argument, importance has been attached to the way in which the case against the general partner and those by which it has been controlled has been framed on the pleadings as finally amended. It is therefore essential that I make reference to the pleadings but I wish to say at the outset that the deficiencies that become evident are in no way a product of deficient drafting. Quite to the contrary, they are a reflection of nothing other than the inventive approach counsel have taken, on the evidence adduced in the course of the trial, in attempting to build a case for dissolution.

23             With this in mind, I proceed to consider the alleged wrongful conduct attributed to Resorts, Barbican, and BPYA in respect of each of the three controlling periods. I then consider whether there is any default attributable to the general partner which can be said to be material. Thereafter I determine whether the partnership should be dissolved and assess what if any other relief those who seek a dissolution are otherwise entitled to against Resorts, Barbican, or BPYA.

24             I endeavour to address each allegation argued, regardless of the pleadings, except where I consider the evidence sufficiently unsatisfactory to permit a proper adjudication.

 (More)

Case Studies, Pendrell Place: Early leaks continue; no money for repairs

Internal documents provide an irrefutable source regarding the history of leaks at Pendrell Place and the subsequent appropriate and inappropriate responses of the Owners of the Strata Corporation to reports of leaks and rot at Pendrell Place.

Documents dated in 1995 provide evidence that the Owners of the Pendrell Place Strata Corporation were notified about the financial implications of leaks.

An early warning was sounded on May 15, 1995 in a Notice to the Owners from Vancap Realty Management, the property managers for Pendrell Place.

With respect to the pending AGM, Ms. Sharon Dewar of Vancap stated that as at March 31, 1995, "the Strata Corporation has only $2,000 at their disposal in cases of emergency, and that is not enough."

There was also fair warning that historical losses had been incurred to pay major expenses to roof leaks and leaking balcony membranes, with such repairs likely to continue "this year and next".

Less than a year later, these warnings were to become a reality.