Jo Lynne Enterprises Ltd. et al v. Dallo Enterprises Ltd. et al

2000 BCSC 1676 Citation: Jo Lynne Enterprises Ltd. et al v. Dallo Enterprises Ltd. et al Date: 20001121 2000 BCSC 1676 Docket: L002319 Registry: Vancouver IN THE SUPREME COURT OF BRITISH COLUMBIA BETWEEN: JO LYNNE ENTERPRISES LTD. AND 4J ENTERPRISES LTD. PETITIONERS AND: DALLO ENTERPRISES LTD., FRJ ENTERPRISES LTD., HOLLY PARK LANE ESTATES LTD., 391830 B.C. LTD., 3191831 B.C. LTD. AND 391854 B.C. LTD. RESPONDENTS REASONS FOR JUDGMENT OF THE HONOURABLE MR. JUSTICE CLANCY Counsel for the Petitioners: W. Holburn, Q.C. J. Rost Counsel for the Respondent, Dallo Enterprises Ltd.: Counsel for the Respondent, FRJ Enterprises Ltd. R.W. Taylor C.D. Veinotte S. Dunlop J. McLean Date and Place of Hearing: Vancouver, B.C. November 6, 2000 [1] Jo Lynne Enterprises Ltd. ("Jo Lynne") and 4J Enterprises Ltd. ("4J") have been partners in a partnership which carried on business under the name Fraserview Court Apartments. Their other partners are Dallo Enterprises Ltd. ("Dallo") and FRJ Enterprises Ltd. ("FRJ"). Jo Lynne and 4J bring this petition for the following relief: (a) a declaration that the partnership is dissolved; (b) an order that the affairs of the partnership be wound up and the properties owned by the partnership be sold; and (c) an order appointing John Bottom ("Mr. Bottom") of Bottom & Associates as a receiver without bond or security to sell the partnership properties on the terms set out in the petition and to hold the proceeds from the sale of the properties in an interest bearing trust account in trust for the partnership pending further order of the court. [2] Additional terms are sought as well. The specific relief claimed in the petition in respect of the appointment of Mr. Bottom as receiver is as follows: (a) an order appointing John Bottom of Bottom & Associates as a Receiver without bond or security (the "Receiver") to do the following things: (i) the Receiver shall have exclusive conduct of the sale of the Properties and is at liberty to have the Properties appraised and offer the Properties for sale and to accept offers subject to court approval, and to do all things incidental to the sale of the Properties, including to list the same with one or more duly licensed real estate agents or firms, and to pay such agent or firm who may arrange the sale of the Properties a commission of no more than seven percent (7%) of the first $100,000.00 and two and one-half percent (2.5%) of the balance of the gross selling price plus any Goods and Services Tax payable, such commission to be paid from the proceeds of the sale; (ii) the proceeds of sale of the Properties, net of expenses reasonably incurred by the Receiver, be held by the Receiver in an interest bearing trust account in trust for the partnership pending further order of the court; (iii) the Receiver pay his costs, charges and expenses as well as his accounts on an interim basis from any monies received, subject to assessment; (iv) the Receiver prepare, or alternatively engage the Partnership's accountants Arthur Anderson to prepare, an accounting of the capital accounts with respect to each of the Partners subject to Court approval, or the agreement of the Parties; (v) the Partners shall give the Receiver access to all books, documents, papers and records needed by the Receiver for the accounting; (vi) the capital accounts be equalized from the Partnership assets, including the proceeds of sale of the Properties, in accordance with the accounting; (vii) the assets of the Partnership, including the proceeds from the sale of the Properties, be divided amongst the Partners in accordance with the accounting and their respective entitlement under the Partnership Agreement subject to Court approval, or the agreement of the Parties; (viii) the Receiver may retain and employ persons to assist him in doing anything authorized by this Order; (ix) no action or proceeding may be taken or continued against the Receiver without leave of the Court; (x) the parties or the Receiver have liberty to apply for further directions. [3] The respective interests of the parties in the partnership are as follows: Jo Lynne 15 percent 4J 18.33 percent Dallo 33.33 percent FRJ 33.33 percent Jo Lynne and 4J have common ownership and act in concert. [4] Certain property located in Burnaby, B.C. is registered in the names of the partners and not the partnership. There is no suggestion, however, that it is not partnership property. [5] Holly Park Lane Estates Ltd. holds property in Surrey, B.C. on a bare trust for the partnership. [6] 391830 B.C. Ltd., 391831 B.C. Ltd. and 391854 B.C. Ltd. respectively hold properties located in Fernie, B.C. by way of bare legal title in trust for the partnership. [7] Apartment buildings are located on the properties in Burnaby and Fernie. The property in Surrey is bare land. The 1998 assessed value of all of the properties is approximately $10 million. The Fernie properties are subject to a mortgage in favour of HSBC Trust Company (Canada) Inc. ("HSBC"). Montreal Trust Company of Canada ("Montreal Trust") holds a mortgage over the Burnaby property. [8] Others are involved but, for the purposes of these proceedings, Niele Jiwan is the controlling mind of Dallo and Aly Jiwan controls FRJ. They are related. [9] There is outstanding litigation. A number of actions involving the partners and various individuals have been commenced. Allegations of a serious nature have been made against partners and individuals. One action brought by FRJ alleges conversion, fraudulent misrepresentation and breach of fiduciary duty as against Dallo, Neile Jiwan, Jo Lynne, 4J and John Hoegg, the principal of Jo Lynne and 4J. FRJ also seeks to have the entitlement of each partner to the partnership assets determined at trial. It is expected that the actions will be heard together in April 2001. [10] The specific allegations made by FRJ include: (a) as against Dallo, Hoegg, Jo Lynne, 4J and Niele Jiwan, misappropriation or participation in misappropriation of assets belonging to the partnership. Particulars include the receipt of financial "kickbacks" from suppliers, issuing and cashing cheques to their own personal account and credit, forging endorsements on cheques and cashing them to their own account, receipt of secret commissions, receipt of unearned, excessive or improper management fees and receipt of benefits and services paid by the partnership which were not valid partnership expenses; (b) as against Dallo, Niele Jiwan, Hoegg and others, participation generally in arrangements and schemes whereby monies or benefits which should properly have been retained by the partnership were received by the named defendants; (c) as against Dallo, Hoegg, 4J, Jo Lynne and others, preparation and issuance of inaccurate business records of the partnership and FRJ thereby concealing misappropriations, making of misrepresentations fraudulently and trying to prevent FRJ from discovering the misappropriations. [11] Dallo supports Jo Lynne and 4J in its petition. It, too, wishes to wind up the affairs of the partnership. Jo Lynne, 4J and Dallo have all expressed the view that they no longer wish to continue in a business relationship with each other and with FRJ. Jo Lynne and FRJ allege that the litigation has destroyed the business relationship among the parties. Niele Jiwan, on behalf of Dallo, concurs in that assessment. In his affidavit, he states that the partnership has been destroyed by litigation. [12] Since October 1997, Aly Jiwan has been involved in the daily business and operations of the partnership. In effect, he has managed the partnership properties. He states that he did so on his own initiative as there was no interest on the part of the other partners. To date, he has received no monetary compensation or benefits. He deposes that the current net income before depreciation generated by the revenue properties is approximately $475,000 per annum. The partnership has assets of approximately $1,200,000 in cash and GICs in addition to the revenue properties and the Surrey property. [13] On December 11, 1998, FRJ gave notice to the other partners "... of dissolution of the partnership effective December 30, 1998 ("the Dissolution Date") the fiscal year end of the partnership." On December 17, 1998, FRJ wrote to the other partners making reference to the partnership agreement and stating that "In accordance with clause 6 of the partnership agreement and the provisions of section 25 of the Partnership Act notice is hereby given of the termination of the partnership effective as of December 30, 1998, ...". [14] It is acknowledged that Mr. Bottom is well qualified to act as receiver. Whether the Partnership is Dissolved [15] There is no serious dispute as to whether the partnership is dissolved. FRJ has not resiled from its notices of dissolution. The Partnership Act, R.S.B.C. 1996, c. 348, s. 29 provides: If no set term has been agreed on for the duration of the partnership, any partner may end the partnership at any time on giving notice to all the other partners of his or her intention to do so. [16] FRJ was entitled to end the partnership and did so. [17] Jo Lynne and 4J are entitled to a declaration that the partnership is dissolved. Whether the Partnership Should be Wound Up and the Properties Sold [18] FRJ takes the position that there is no compelling reason to wind up the affairs of the partners at this time. It urges the court to defer any such action until the outcome of the litigation is known. Until the actions are resolved, FRJ says it will not be possible to determine the true value of each partner's capital account. At the present time those capital accounts stand as follows: (a) Jo Lynne is owed $160,000; (b) 4J owes $50,000; (c) Dallo owes $500,000; (d) FRJ owes $375,000. [19] It is conceded by all partners that there must be a resolution as to the capital accounts before there can be a distribution of partnership assets. FRJ wishes to wait for the outcome of the litigation. Jo Lynne, 4J and Dallo contend that the winding up is inevitable. They wish to have the process started by sale of the assets. On further application, it says the proceeds, or sufficient of them to satisfy any potential claims, can be set aside to await resolution of the issues following the trials. [20] There are a number of specific submissions that must be addressed. When FRJ gave notice of dissolution, their solicitors advised that the dissolution would have no tax effect on FRJ but Dallo would be required to immediately pay approximately $300,000 and Jo Lynne and 4J would face tax consequences of approximately $50,000. There is general agreement that there would be adverse tax consequences associated with a sale of the partnership assets if that sale occurs before December 31, 2000, unless a sale price substantially in excess of what could reasonably be anticipated is obtained. The tax consequences after January 1, 2001, are by no means certain. FRJ advanced an argument that the sale of the partnership assets could trigger tax consequences of $2.5 million to the partnership. If the partnership continued by reason of the purchase of the assets by one or more of the partners, those tax consequences could be avoided. FRJ wishes to wait until after the litigation so that it can better determine its tax position before deciding whether or not it wishes to be a purchaser. [21] Jo Lynne, 4J and Dallo are content to have the properties advertised for sale. If the partners then wish to make an offer to purchase, they can take the tax consequences into account. Even assuming that FRJ's position is correct, those parties are prepared to take the potential tax liability into account at this time, rather than after the litigation is concluded. [22] Jo Lynne and 4J are not interested in purchasing the partnership assets. Dallo is interested only on certain terms, the details of which have not been disclosed to the court. [23] It seems to me that the positions the parties take at this stage are only that. It cannot be said with any certainty what will occur if the property is put up for sale. Self interest will undoubtedly govern their positions if a sale takes place. [24] I conclude that the benefits of waiting for the outcome of the litigation before the property is offered for sale may be illusory. There is no guarantee that FRJ would be a purchaser no matter what the outcome of the litigation. If they were to make an offer, it seems only logical that if FRJ takes the tax benefit, there would be a corresponding adjustment in the purchase price. The selling partners would still suffer tax consequences. [25] Whether or not that analysis is correct is of little import. The simple fact is that two-thirds of the partners say that the litigation has poisoned the relationship to the point where the partnership cannot be maintained. By delivering notice of dissolution, FRJ has confirmed that it shares that opinion. The real issue is the timing of the order for winding up. [26] Apart from the tax consequences, a further reason for delay advanced by FRJ is that the management of Aly Jiwan has resulted in substantial profits. FRJ says there is, therefore, no compelling reason to sell the assets at this time. Jo Lynne and 4J contest the allegation that the stewardship of Aly Jiwan has resulted in profit. They say that the buildings have not been properly maintained. They say, as well, that any increase in profits under the management of Aly Jiwan is explainable by payments made prior to 1997 to the partners, for tax purposes and management fees. They say the suggestion that partnership revenue has increased is incorrect. They are not happy with the involvement of Aly Jiwan as manager. They acquiesed in his management to this time but refer to his involvement as a caretaker operation. They and Dallo contend that the acrimony between the partners prevents any rational long term planning for the business enterprise. [27] The fact that the partnership is dysfunctional is illustrated by the difficulties in which the partners find themselves. Payment out of any monies now requires the signatures of each of the holders of a one-third interest. Since the parties cannot agree on matters, that is a continual problem for the partnership. [28] Additionally, the partners cannot agree on renewal of the mortgage on the Fernie properties. That mortgage is now in a position where the mortgagee could commence foreclosure proceedings. Despite that, it is apparent that the mortgage will not be renewed. Not all of the partners are willing to make a further commitment. [29] FRJ has suggested that the surplus funds in the amount of $1.2 million are sufficient to pay out the mortgage. They ask for an order that the monies be utilized for that purpose. The response of the other partners is that payment of the mortgage debt does not provide a solution. To pay one debt may only mean that other creditors would move to recover monies due to them. They say the true answer is to sell the assets and retire the debts in an orderly fashion. [30] Yet another argument advanced by FRJ is that an order for winding up could trigger default of the Montreal Trust mortgage on the Burnaby property. That seems unlikely since the mortgage was granted by the individual partners as to their respective interests and not by the partnership. [31] No authorities of particular assistance were provided to the court. The decision falls to be decided on the provisions of the Partnership Act and the general principles relating to partnerships. [32] Section 42 of the Act provides: 42(1) On the dissolution of a partnership, every partner is entitled, as against the other partners in the firm and all persons claiming through them in respect of their interests as partners, (a) to have the property of the partnership applied in payment of the debts and liabilities of the firm, and (b) to have the surplus assets after the payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm (2) For the purposes of subsection (1), any partner or the partner's representatives may, on the termination of the partnership, apply to the court to wind up the business and affairs of the firm. Section 47 provides: 47 Subject to any agreement, in settling accounts between the partners after a dissolution of partnership, the following rules must be observed: (a) losses, including losses and deficiencies of capital, must be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits; (b) the assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, must be applied in the following manner and order: (i) in paying the debts and liabilities of the firm to persons who are not partners; (ii) in paying to each partner rateably what is due from the firm to that partner for advances as distinguished from capital; (iii) in paying to each partner rateably what is due from the firm to that partner in respect of capital; (iv) the ultimate residue, if any, must be divided among the partners in the proportion in which profits are divisible. [33] In Lindley & Banks On Partnership, 17th ed. (London: Sweet & Maxwell, 1995) the authors note at pp. 680 and 681: It has already been seen that, in the event of a general dissolution, each partner is normally entitled to insist that all the partnership property is sold, even if the firm's debts and liabilities could be discharged without such a sale. ... The effective presumption in favour of a sale is not, however, absolute, as Lord Lindley explained: The rule as to selling partnership property is merely adopted in order that justice may be done to all parties, when no other course has been or can be agreed upon. It is not an arbitrary rule, inflexibly applied in all cases whether it is necessary or not; and although, if one partner or his representatives insist on a sale, the Court may not be able to refuse to enforce that right, still the Court is always inclined to accede to any other mode of settlement which may be fair and just between the partners. and at p.758, under the heading Principles Which Apply As Between The Partners: (1) Each partner is entitled to have the partnership property applied in liquidation of the partnership debts, and to have any surplus assets divided. (2) Each partner is, in general, entitled to force a sale of all partnership assets which are capable of being sold and to have the value of any unsaleable asset brought into account by the partner who retains it. [34] I conclude that an ongoing partnership relationship among the partners is impossible. The partnership is not mildly dysfunctional as suggested by FRJ. It is dysfunctional and without long term prospects. No fair and just settlement, other than winding up, has been proposed. [35] If there are adverse tax consequences, that is not a matter which should influence the court greatly. FRJ dissolved the partnership. Instead of moving to wind up the affairs of the partners at that time, it chose to take what appears to be an anomalous position that the partnership should continue to function even though it was dissolved. According to the letters of its solicitors, it would have benefited from an early winding up of the partnership. It should not now be heard to complain that it may suffer from winding up at this time. [36] I do not find that the delay in bringing the application to wind up the partnership is a reason to refuse the order. The steps taken in the litigation and consideration of settlement possibilities must have taken some time. It makes some practical sense to bring the application in advance of the litigation. The trial may be adjourned and there may be appeals to higher courts. Resolution of the issues by litigation can well be a long drawn out process. [37] I cannot accept that the costs of appointing a receiver are a valid reason for refusing the order to wind up the partnership. FRJ suggests that costs could reach $500,000. Mr. Bottom has estimated his costs at $20,000. That seems a much more realistic figure, given the limited role envisioned for him by the petitioners. [38] Nor do I accept that there is no prejudice to the petitioners and Dallo. Forcing them to await the outcome of the litigation would remove their control over the use of their funds. They are unhappy with the stewardship of Aly Jiwan. His efficiency is a matter of dispute. Clearly, he has an interest in protecting the assets of FRJ. [39] An early sale should go a long way toward protecting the partners from potential foreclosure proceedings and the attendant expenses and delays. [40] I conclude that an order for winding up is appropriate. There will be an order that the affairs of the partnership be wound up and the properties described be sold. Since the parties agree that there may be tax advantages to postponing any sale until after January 1, 2001, no sale of properties will be concluded before that date without leave of the court. Whether A Receiver Should Be Appointed [41] FRJ opposes the appointment of a receiver. It takes the position that if the affairs of the partnership are to be wound up and the properties sold, it should be given conduct of sale of the properties. That suggestion is completely unacceptable to the petitioners and to Dallo. [42] Jo Lynne and FRJ rely on the following passage from Lindley & Banks On Partnership, supra, at p. 669: Lord Lindley wrote: Where one partner seeks to have a receiver appointed against his co-partners, the first thing to ascertain is, whether the partnership between them is still subsisting, or has already been dissolved; for if it is still subsisting no receiver will be appointed unless some special grounds for the appointment can be shown, or unless it is plain that an order for a dissolution will be made; whilst if the partnership is already dissolved, the Court usually appoints a receiver, almost as a matter of course. [43] FRJ quite properly points out that the court retains a discretion as to whether or not the receiver should be appointed. It raises the same argument raised in opposition to the order for winding up the affairs of the partnership. Counsel for FRJ relied on Kerr on the Law and Practice as to Receivers and Administrators, 17th ed. (London: Sweet & Maxwell, 1989). At p. 63 the authors note that the court will not, as a matter of course, appoint a receiver. There must be some special ground for the interference of the court: It must appear that the member of the firm against whom the appointment of a receiver is sought has done acts which are inconsistent with the duty of a partner, and are of a nature to destroy the mutual confidence which ought to subsist between the parties. (p. 63-64) [44] In Pini v. Roncoroni, [1892] 1 Ch. 633, Stirling J. made the same point. He held that the mere fact of dissolution does not give one partner an absolute right to have a receiver appointed. He went on, however, to cite the passage from Lindley & Banks On Partnership which states that the court usually appoints a receiver almost as a matter of course. He looked to the cause shown for the appointment of a receiver and held that where a partner had withdrawn from the partnership a large sum and brought about its insolvency, that was good ground for saying that the plaintiff could no longer trust him. The order for a receiver was made. [45] Similarly here I find that the allegations made against the petitioners and Dallo in the litigation are sufficient grounds for them to no longer trust Aly Jiwan and FRJ. They are serious allegations alleging misconduct of the most serious kind. It is understandable that the appointment of Aly Jiwan to wind up the affairs of the partnership would be opposed. Similarly, if the allegations are well founded the partners cannot be relied upon to wind up the affairs of the partnership in an amicable way. It would be difficult in the extreme for Aly Jiwan to function as receiver. [46] The only sensible solution is to have an independent receiver appointed. Mr. Bottom meets that description. [47] Generally speaking, the party seeking an appointment of a court appointed receiver must satisfy the court that it is just and convenient to do so: Toronto Dominion Bank v. First Canadian Land Corp. (1989), 77 C.B.R. 189 (B.C.S.C.); Korion Investments Corp. v. Vancouver Trade Mart Inc., [1993] B.C.J. No. 2352 (Q.L.) (B.C.S.C.). In the circumstances before me, it is just and convenient to appoint Mr. Bottom as receiver and I so order. [48] The order will provide that he have authority to carry out the tasks set out in paragraph c (i) through (x) set out above with the exception of paragraphs (iv), (v), (vi) and (vii). It is premature to adjust the capital accounts of the partners prior to the conclusion of the litigation. Similarly, division of assets must await the outcome of the litigation or further order of this court. [49] In addition, the partnership is ordered to pay reasonable appraisal costs incurred by Mr. Bottom. He will have no funds available to cover that expense. [50] I am not prepared to order that Mr. Bottom's choice of realtor be approved. That seems unnecessary and has the potential to delay matters. FRJ also suggested that on a sale to a partner of any of the assets, there should be no commission payable. Such an order may unnecessarily hamper Mr. Bottom's efforts. He may, of course, apply for further directions if he chooses to do so. Costs [51] The petitioners have been successful. They are entitled to their costs as against FRJ. Dallo has supported them and should not suffer in costs. However, Dallo should not have their costs as against FRJ as they did not succeed in an application. Costs will follow the event on Scale 3. "D.L. Clancy, J." The Honourable Mr. Justice D.L. Clancy