The Crestmark Developments Limited Partnership Petitioner v. Greata Ranch Developments Limited Partnership, Greata Ranch Holdings Corp and Concord Okanagan Developments Ltd. in, 2018 BCSC 932

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: The Crestmark Developments Limited Partnership v.

Greata Ranch Developments Limited Partnership, 2018 BCSC 932 Date: 20180607 Docket: S177033 Registry: Vancouver Between: The Crestmark Developments Limited Partnership Petitioner And Greata Ranch Developments Limited Partnership, Greata Ranch Holdings Corp and Concord Okanagan Developments Ltd. in their capacity as general partners of the Greata Ranch Developments Limited Partnership, and Greata Ranch Development Corporation in its capacity as limited partner of the Greata Ranch Development Limited Partnership Respondents Before: The Honourable Mr.

Justice Crossin Reasons for Judgment Counsel for the Petitioner: David E. Gruber Nicholas T. Hooge Counsel for the Respondents: Irwin G. Nathanson, Q.C. Geoffrey B. Gomery, Q.C. Place and Date of Trial/Hearing: Vancouver, B.C. December 7, 2017 Place and Date of Judgment: Vancouver, B.C. June 7, 2018 Table of Contents I. Introduction .. 3 II. Background .. 3 III. The Proposed Grounds of Appeal .. 8 IV: Legal Framework .. 9 Leave to Appeal on Questions of Law .. 9 V. Discussion .. 13 The First and Second Proposed Grounds . 13 The Third Proposed Ground . 21 The Fourth Proposed Ground . 23 VI. Conclusion .. 24 I.

Introduction [ 1 ] The petitioner, Crestmark Developments Limited Partnership (“Crestmark”) seeks leave to appeal pursuant to s. 31 of the

Arbitration Act , R.S.B.C. 1996, c. 55, on four proposed questions of law arising from an arbitral award (the “Award”) made by arbitrator K.C. Mackenzie (the “Arbitrator”) on June 2, 2017. [ 2 ] Crestmark contends that the Arbitrator erred in determining that Crestmark was entitled to repayment of a $6 million loan it made to the Great Ranch Developments Limited Partnership, which partnership has been dissolved, only after the repayment of third party creditors.

Crestmark submits this distribution priority is precluded by certain provisions of the Partnership Act , R.S.B.C. 1996, c. 348. [ 3 ] Crestmark further contends that the Arbitrator erred in his determinations regarding the express and implied terms of the loan, specifically related to the timing of repayment and the payment of interest. [ 4 ] The respondents take the position that leave to appeal on all four questions should be denied on the basis that the proposed grounds do not raise questions of law. [ 5 ] Alternatively, if they are found to raise questions of law, the respondents argue that the court should exercise its residual discretion to deny leave.

II. Background [ 6 ] On January 30, 2007, Greata Ranch Holdings Corp. and Greata Ranch Development Corporation (collectively, the “Greata partners”) entered into a limited partnership agreement (the “LPA”) with Crestmark and Concord Okanagan Developments Ltd. (collectively, the “Concord partners”) to form the Greata Ranch Developments Limited Partnership (the “Partnership”). [ 7 ] Broadly, within the Partnership structure, the interests of the Greata partners were aligned, and the interests of the Concord partners were separately aligned.

Each group had one general partner and one limited partner in the Partnership. [ 8 ] The Partnership was formed for the purpose of constructing a high end real estate development (the “Project”) on a property bordering Okanagan Lake near Summerland, British Columbia (the “Property”). [ 9 ] Upon formation, the Partnership entered into an agreement with one of the Greata partners, the Greata Ranch Development Corporation, to purchase the Property. The agreed purchase price was $16.75 million.

Of that price, the Greata Ranch Development Corporation received $2 million on closing, $1.5 million in the form of a promissory note, and the balance of $13.25 million was allocated as a contribution to the Partnership’s capital account. [ 10 ]

Section 10.5 of the LPA stipulated that if a certain benchmark for pre-sales of the Project’s strata units was not reached by February 4, 2008, the parties had reciprocal rights to dissolve the Partnership. [ 11 ]

Section 10.5 also provided that if Crestmark elected not to dissolve the Partnership, it would loan the Partnership a total amount of $6 million in order to repay the Greata Ranch Development Corporation for the $1.5 million promissory note, and contribute a further amount of $4.5 million. [ 12 ]

Section 10.5 provides: If the Phase 1 Benchmark is not achieved by February 4, 2008, [Crestmark], at its option, may terminate this Agreement and the [Partnership] created hereby dissolved [ sic ]. If [Crestmark] elects not to terminate pursuant to this

section 10.5 it covenants and agrees by February 19th, 2008 to loan to the [Partnership] sufficient funds to enable the [Partnership] to forthwith: (

a) Pay the undistributed balance of the $4,500,999 payable to [the Greata Ranch Developments Corporation] pursuant to

Section 4.9(a)(

i) hereof; and (

b) Repay the Promissory Note [for $1,500,000] (as defined in the Purchase Agreement).

If the funds referred to above are not received by Greata LP by February 19, 2008 then [the Greata Ranch Development Corporation] at its option may terminate this Agreement and the [Partnership] created hereby dissolved [ sic ]. [ 13 ] The Benchmark sales referred to in s. 10.5 of the LPA were not met by February 4, 2008, and on that date the Partnership’s management committee authorized the Partnership to pay the Greata Ranch Development Corporation the $6 million amount (the “Loan”). [ 14 ] Thereafter a series of letters were exchanged between counsel. [ 15 ] On February 14, 2008, counsel for the Concord partners sent counsel for the Greata partners a cheque in the amount of $6,000,000.

The letter accompanying the cheque declared that the amount provided was advanced as a loan pursuant to s. 10.5 of the LPA and, as there were no fixed terms of repayment specified in the LPA, the Loan was repayable on demand. [ 16 ] Later that day, counsel for the Greata partners returned the cheque and stated that they were not prepared to agree that the Loan was repayable on demand.

The Greata partners asserted that the terms of repayment must in fact be agreed on pursuant to s. 4.4 of the LPA, which provides: [Crestmark] may make, but is not obliged to make, a loan or loans to the [Partnership] at the Interest Rate and on other terms acceptable to the General Partners, such funds as are necessary to enable the Management Committee to carry out the purposes of the [Partnership]. [ 17 ] On February 15, 2008, counsel for the Concord partners responded and disagreed with the necessity of determining repayment

terms pursuant to s. 4.4 of the LPA. They also requested that the Greata partners provide proposed terms for repayment. [ 18 ] On February 18, 2008, counsel for the Greata partners wrote back and requested a trust cheque for $6 million without any mention of repayment terms. [ 19 ] On February 19, 2008, the Concord partners provided the $6 million cheque as requested.

After receiving the cheque, counsel for the Greata partners wrote back and stated: “I wish to clarify that these funds are being received by my client on the distinct understanding that there are no fixed terms of repayment and that any terms of repayment must be agreed upon by the General Partners pursuant to s. 4.4 of the LPA.” [ 20 ] On February 20, 2008, counsel for the Concord partners took the position that it was too late for the Greata partners to impose repayment terms pursuant to the LPA because payment had already been received. [ 21 ] On February 21, 2008, counsel for the Greata partners wrote back affirming their position with respect to the necessity of a determination pursuant to the LPA, and indicated that there was no disagreement that the distribution of the Loan proceeds was unconditional. [ 22 ] No further communications regarding the payment were exchanged. [ 23 ] As is apparent, no express agreement regarding repayment terms was ever reached. [ 24 ] Subsequently, the Project failed to be marketable and various disputes arose. [ 25 ] Crestmark made a demand for repayment of the Loan in February 2015.

The Greata partners did not respond. [ 26 ] On March 10, 2015, Crestmark commenced arbitration against the Partnership and the Greata partners for judgment in the amount of $6 million, and interest at the Interest Rate as defined in the LPA.

Crestmark claimed that the Loan was presently due given the demand for repayment made in February 2015. [ 27 ] In response, the Greata partners contended that the Loan should be governed by the provision of the LPA upon dissolution and liquidation of the Partnership’s assets. [ 28 ] The arbitration proceeded in April and May of 2017, and dealt with many issues, including characterization of the Loan and the priority in which Crestmark was entitled to repayment. [ 29 ] It is relevant to note that in a companion arbitration heard at the same time, the Arbitrator considered certain other issues related to the Project and ultimately made a determination that the Partnership be dissolved. [ 30 ] The Arbitrator issued the Award on June 2, 2017.

He rejected Crestmark’s argument that the Loan was presently due as a result of the Greata partner’s failure to respond to the February 2015 demand, and concluded instead that it was governed by the provisions of the LPA; in particular, s. 10.7(c), which outlines the distribution priorities upon sale of the Partnership’s assets. [ 31 ]

Section 10.7(

c) provides: The proceeds from the sale of assets of the [Partnership] will be distributed as follows: (iv) firstly, to payment of all debts and liabilities of the [Partnership] and all expenses of liquidation; (

v) Secondly, to set up such cash reserves, if any, as the Receiver may deem necessary for any contingent liabilities or obligations of the [Partnership]. … (vi) The balance, if any to the Limited Partners in proportion to their respective Interests . [Emphasis added.] [ 32 ] “Interest” as described in s. 10.7(c)(vi) is defined in s. 1.1 of the LPA: “Interest” of a Partner in the [Partnership] means all of that Partner’s interest in the [Partnership], as determined under

Article 3, including, without limitation, all of the Partner’s right, title and interest in and to the assets of the Limited Partnership, in and to all outstanding loans or capital contributions made but he General Partners or a Limited Partner to the [Partnership] and in and to the Partner’s capital account. [ 33 ] Crestmark was a limited partner.

Its Interest under the LPA is further defined by s. 3.1, which provides: 3.1 Nature of Limited Partner’s Interest The Interests of the Limited Partners in the [Partnership] shall include their respective capital accounts together with their respective Proportionate Shares of any undistributed profits of the [Partnership] (after deduction of all losses of the [Partnership]) and their respective interests in the assets of the [Partnership] from time to time representing the same. [ 34 ] The Arbitrator relied on these

definitions. He concluded that “[Crestmark’s] claim for judgment for $6 million and interest is dismissed, and the [L]oan is to be included as part of [Crestmark’s] Interest for the purposes of asset proceeds distribution under s. 10.7(c)(vi) of the LPA.” [ 35 ] In accordance with the ranking in s. 10.7(

c) of the LPA, the Arbitrator’s determination that the Loan fell within the definition of Crestmark’s Interest in s. 10.7(c)(vi) had the result of ranking Crestmark last for repayment of the Loan— after the payment of the Partnership’s debts and liabilities. Debts and liabilities as described in s. 10.7(

c) of the LPA refer to debts owed to third party creditors.

[36] Accordingly, this finding had the effect of subordinating Crestmark’s entitlement to repayment of the Loan to that of thePartnership’s creditors upon dissolution. Crestmark asserts that this result constitutes an error of law in light of certain provisions of thePartnership Act, which govern asset distribution upon the dissolution of a limited partnership. [37] Crestmark also asserts that the Arbitrator erred in his determinations related to the timing of repayment of the Loan and thepayment of interest. III.

The Proposed Grounds of Appeal [38] Crestmark has defined the questions of law arising from the Award as the following: 1. The Arbitrator erred in law in finding that the Loan is to be included as part of Crestmark’s “Interest” for the purposes of assetproceeds distribution under s. 10.7(c)(vi) of the LPA, contrary to ss. 42(1) and 73 of the Partnership Act. 2.

The Arbitrator erred in law in finding that, in the dissolution of the Partnership, the Loan (inclusive of interest at the “InterestRate”) does not fall within the expression “all debts or liabilities” for the purposes of the distribution of asset proceeds under s. 10.7(c)(iv) of the LPA, which is, inter alia, the

interpretation that accords with the Partnership Act’s dissolution provisions. 3. The Arbitrator erred in law in finding that the Loan was subject to the implied terms as set out in the Award and, in so doing,failing to find that the Loan was a demand loan and that payment was due and owing following Crestmark’s demand in February 2015. 4.

The Arbitrator erred in law in failing to enforce a term of the Loan, namely, that the Loan was made at the “Interest Rate” asdefined and mandated in the LPA. [39] It should be noted that the points raised in the first two questions above concerning the impact of the Partnership Act were notraised by Crestmark at the arbitration. IV: Legal Framework Leave to Appeal on Questions of Law [40]

Section 31 of the Arbitration Act allows for appeals to the Court on questions of law arising from an arbitral award if all partiesto the arbitration agree, or if the court grants leave. The decision to grant leave is discretionary: Appeal to the court 31

(1) A party to an arbitration, other than an arbitration in respect of a family law dispute, may appeal to the court on any questionof law arising out of the award if (

a) all of the parties to the arbitration consent, or (

b) the court grants leave to appeal.

(2) In an application for leave under subsection (1) (b), the court may grant leave if it determines that (

a) the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point oflaw may prevent a miscarriage of justice, (

b) the point of law is of importance to some class or body of persons of which the applicant is a member, or (

c) the point of law is of general or public importance. …

(4) On an appeal to the court, the court may (

a) confirm, amend or set aside the award, or (

b) remit the award to the arbitrator together with the court's opinion on the question of law that was the subject of the appeal. [41] In Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, the Supreme Court of Canada clarified the approach toidentifying a question of law for the purposes of granting leave under s. 31 of the Arbitration Act.

The majority provided the followingsummary at paras. 43–45 and 47: [43] The process for characterizing a question as one of three principal types — legal, factual, or mixed — is also well-established inthe jurisprudence (Canada (Director of Investigation and Research) v. Southam Inc., (SCC), [1997] 1 S.C.R. 748, atpara. 35).

In particular, it is not disputed that legal questions are questions “about what the correct legal test is” (Sattva, at para. 49,quoting Southam, at para. 35); factual questions are questions “about what actually took place between the parties” (Southam, at para.35; Sattva, at para. 58); and mixed questions are questions about “whether the facts satisfy the legal tests” or, in other words, theyinvolve “applying a legal standard to a set of facts” (Southam, at para. 35; Sattva, at para. 49, quoting Housen v. Nikolaisen, 2002 SCC33 , [2002] 2 S.C.R. 235).

[44] That said, while the application of a legal test to a set of facts is a mixed question, if, in the course of that application, the underlying legal test may have been altered, then a legal question arises . For example, if a party alleges that a judge (or arbitrator) while applying a legal test failed to consider a required element of that test, that party alleges that the judge (or arbitrator), in effect, deleted that element from the test and thus altered the legal test.

As the Court explained in Southam, at para. 39: . . . if a decision-maker says that the correct test requires him or her to consider A, B, C, and D, but in fact the decision-maker considers only A, B, and C, then the outcome is as if he or she had applied a law that required consideration of only A, B, and C. If the correct test requires him or her to consider D as well, then the decision-maker has in effect applied the wrong law, and so has made an error of law.

Such an allegation ultimately challenges whether the judge (or arbitrator) relied on the correct legal test, thus raising a question of law (Sattva, at para. 53; Housen, at paras. 31 and 34-35 ). Accordingly, such a legal question, if alleged in the context of a dispute under the Arbitration Act, and assuming the other jurisdictional requirements of that Act are met, is open to appellate review. These “extricable questions of law” are better understood as a covert form of legal question — where a judge’s (or arbitrator’

s) legal test is implicit to their application of the test rather than explicit in their description of the test — than as a fourth and distinct category of questions. [45] Courts should, however, exercise caution in identifying extricable questions of law because mixed questions, by definition, involve aspects of law .

The motivations for counsel to strategically frame a mixed question as a legal question — for example, to gain jurisdiction in appeals from arbitration awards or a favourable standard of review in appeals from civil litigation judgments — are transparent (Sattva, at para. 54; Southam, at para. 36). A narrow scope for extricable questions of law is consistent with finality in commercial arbitration and, more broadly, with deference to factual findings.

Courts must be vigilant in distinguishing between a party alleging that a legal test may have been altered in the course of its application (an extricable question of law; Sattva, at para. 53), and a party alleging that a legal test, which was unaltered, should have, when applied, resulted in a different outcome (a mixed question). … [47] Given these principles, a question of statutory

interpretation is normally characterized as a legal question . In contrast, identifying a question, broadly, as one of contractual

interpretation does not necessarily resolve the nature of the question at issue. Contractual

interpretation involves factual, legal, and mixed questions. In consequence, characterizing the nature of the specific question before the court requires delicate consideration of the narrow issue actually in dispute. In general, though, as the Court recently explained in Sattva, contractual

interpretation remains a mixed question, not a legal question, as it involves applying contractual law (principles of contract law) to contractual facts (the contract itself and its factual matrix) (para. 50) [Emphasis added.] [ 42 ] The court must identify a ground in s. 31(2) that supports granting leave to appeal in the event that a question of law is properly identified. [ 43 ] In this case, the relevant ground for all four proposed questions is submitted to be s. 31(2)(a).

This requires a determination that the importance of the result to the parties justifies the intervention of the court, and that a determination of the point of law may prevent a miscarriage of justice. [ 44 ] In Sattva Capital Corp. v. Creston Moly Corp. , 2014 SCC 53 , the requirements of s. 31(2)(

a) were discussed in detail. The Court’s findings were helpfully summarized by Madam Justice Warren in Conmac Enterprises Ltd. v. 0928818 B.C. Ltd. , 2018 BCSC 360 at para. 27 : [27] In order to rise to the level of a miscarriage of justice for the purposes of s. 31(2)(a), an alleged legal error must relate to a material issue in the dispute, which, if decided differently, would affect the result of the case. Therefore, in deciding whether s. 31(2)(

a) has been met, it is necessary to engage in a preliminary consideration of the merits of the appeal because an appeal with no chance of success would not affect the result of the case. The appropriate threshold for this preliminary assessment is whether the appeal has arguable merit (cannot be summarily dismissed as being without merit) in light of the standard of review on which the merits of the appeal will be judged.

The standard of review applicable to questions of law arising out of a commercial arbitration is reasonableness, unless the question is one that attracts the correctness standard, such as constitutional questions or questions of law of central importance to the legal system as a whole and outside the adjudicator's expertise: see Urban Communications at paras. 58–61 and 63.

Accordingly, "the leave inquiry will ordinarily ask whether there is any arguable merit to the position that the arbitrator's decision on the question in issue is unreasonable, keeping in mind that the decision-maker is not required to refer to all the arguments, provisions, or jurisprudence or to make specific findings on each constituent element, for the decision to be reasonable" : Sattva Capital Corp. v.

Creston Moly Corp. , 2014 SCC 533 at para 75 . [Emphasis added.] [ 45 ] The court retains residual discretion to deny leave even if the statutory criteria of s. 31(2) have been met. [ 46 ] In Sattva , the Court provided the following non-exhaustive list of factors to consider when exercising this residual discretion at para. 91: (

i) conduct of the parties; (ii) existence of alternative remedies; (iii) undue delay; and (iv) the urgent need for a final answer. The Court also noted that this residual discretion should be exercised with caution, particularly when the requirements of s. 31(2)(

a) are met. [ 47 ] The fact that a petitioner intends to raise arguments on appeal that were not argued before the arbitrator militates against granting leave. Arbitration is intended to be final and expeditious, and as stated by Groberman J.A. in VIH Aviation Group Ltd. v. CHC Helicopter LLC , 2012 BCCA 125 at para. 45 : courts should be particularly reluctant to grant leave to appeal from an arbitration on the basis of an issue that was not argued before the arbitrator.

Where parties have deliberately preferred arbitration as the method for resolving disputes, it is to be expected that they will fully argue their cases in that forum. [ 48 ] The reluctance of the court to consider new issues on appeal is intended to prevent prejudice to the party against whom the issue

is raised. The evidence at the original proceeding may not have fully laid the groundwork for the new issue, therefore new issues are more likely to be heard when they raise issues of pure law that can be addressed solely on the record before the court: On Call Internet Services Ltd. v. Telus Communications Company , 2013 BCCA 366 at para. 66 . V. Discussion [ 49 ] The first issue is to determine whether each of Crestmark’s proposed grounds identify a question of law. [ 50 ] In that event, the inquiry under s. 31(2)(

a) at the leave stage is focused on whether the proposed appeal relates to a material issue in dispute, which, if decided differently, could affect the result. [ 51 ] The question is whether there is any arguable merit to the position that the arbitrator's decision on the question in issue is unreasonable.

This question assumes that the standard of review of the Arbitrator’s decision is reasonableness, which Crestmark and Greata agree is the case. [ 52 ] An arbitrator’s decision is reasonable if it falls within a range of possible, acceptable outcomes that are defensible in respect of the facts and the law: Chriscan Enterprises Ltd. v. St. Pierre , 2016 BCCA 442 at para. 32 . [ 53 ] The following is the application of this framework to each of Crestmark’s proposed grounds of appeal.

The First and Second Proposed Grounds [ 54 ] In my view, properly construed, each of Crestmark’s first two proposed grounds of appeal purport to raise the same extricable question of law; namely, whether or not the Arbitrator erred in law by interpreting the LPA without reference to the provisions of the Partnership Act . [ 55 ] In the Award, the Arbitrator reviewed ss. 4.4, 10.5, 10.7(c), 1.1 and 3.1 of the LPA, in order to determine the proper characterization of the Loan.

He found that the $6 million payment was a loan made in accordance with s. 10.5 of the LPA due to the failure of the Project to meet the pre-sale benchmark, and that, as a result, both Crestmark and Greata agreed it was a loan within the terms of s. 4.4 of the LPA for “the purposes of the [Partnership]”. [ 56 ] At the arbitration, Crestmark advanced the argument that absent an agreement on the terms of repayment, a term should be implied that the Loan was payable on demand. In support of this proposition, Crestmark cited China Dragon Fund Ltd. v. FIC Real Estate Fund Ltd. , 2010 BCSC 1698 at paras. 28–29 .

The Arbitrator rejected Crestmark’s argument in this regard. [ 57 ] The Greata partners, in turn, took the position that the Loan was governed by the provisions of the LPA, and in particular, relied on the definition of Interest in s. 1.1 that includes “all outstanding loans or capital contributions made by the General Partners or a Limited Partner to the [Partnership]”. [ 58 ] In response, Crestmark submitted that this definition of Interest should not apply to Crestmark as a limited partner, based on the language of s. 3.1 of the LPA, which is titled “Nature of Limited Partner’s Interest”.

Section 3.1 does not list loans to the Partnership as part of a limited partner’s Interest under the LPA. [ 59 ] The Arbitrator concluded however that the language of s. 3.1 is permissive, not exhaustive. The provision provides “[t]he Interests of the Limited Partners in the [Partnership] shall include . . .” [Arbitrator’s emphasis]. [ 60 ] In addition, the Arbitrator noted that Crestmark’s arguments relating to the definition of Interest under the LPA necessarily resulted in the term being defined differently in different parts of the LPA. He came to the view that this

interpretation was not persuasive. [ 61 ] In the result, the Arbitrator concluded that the Loan fell within the definition of Crestmark’s Interests in s. 10.7(c)(vi), not debts and liabilities of the Partnership, and therefore was subject to the lowest priority distribution under s. 10.7(c). That is, below that of the Partnership’s debts and liabilities to third party creditors. [ 62 ] It is apparent that the Arbitrator’s determination that the Loan was part of Crestmark’s Interest under the LPA occasioned a detailed examination of the LPA and the circumstances of how and why the Loan was provided. This portion of his analysis was an exercise in contractual

interpretation. [ 63 ] That said, the Partnership Act provisions at issue bear on the distribution of assets upon dissolution of a limited partnership, and the impact of those provisions on the parties’ contractual rights under the LPA is a question of statutory

interpretation. [ 64 ] I have concluded that the question of whether or not the Arbitrator erred in law by failing to consider relevant provisions of the Partnership Act is an extricable question of law. [ 65 ] I am also of the view that the general question of whether or not an Arbitrator can determine contractual rights without reference to relevant statutes, in this case the dissolution provisions of the Partnership Act , has significant precedential value: Ledcor Construction Ltd. v.

Northbridge Indemnity Insurance Co. , 2016 SCC 37 at para. 41 . [ 66 ] There does not appear to be any authority in British Columbia assessing the effect of these provisions in these circumstances. [ 67 ] In light of this conclusion, regard must now be had to the requirements of s. 31(2)(

a) of the Arbitration Act .

[ 68 ] Determining whether a ruling on the extricable question of law might change the result involves a preliminary assessment of the parties’ positions. [ 69 ] Crestmark takes the position that ss. 42 , 60 and 73 of the Partnership Act impose a mandatory scheme that is not subject to variation. [ 70 ] In particular, Crestmark contends that the Legislature’s express decision to include s. 60 —which resolves ambiguity that exists in other Canadian jurisdictions about whether a debt owed by a partnership to a limited partner can be subordinated, such that it is only payable after debts to third parties—confers the statutory right for Crestmark to receive a proportionate share of the Partnership’s assets along with other creditors; in this case with respect to the Loan. [ 71 ] This right is inconsistent with the provisions of the LPA to the extent that those provisions subordinate the Interests of limited partners, including loans, to those of third parties. [ 72 ] Simply put, Crestmark submits that by virtue of the right conferred by s. 60 of the Partnership Act , the distribution priority in relation to the Loan is determined by ss. 42 and 73 of the Partnership Act , not the LPA. [ 73 ] The Greata partners take the position that these provisions of the Partnership Act do not impose the type of mandatory scheme that Crestmark suggests.

They submit that reading ss. 42 and 47 together, it is clear that the reference to “debts and liabilities” in s. 42 is to third party creditors, not limited partners who are lending money to a limited partnership. [ 74 ] Further, the Greata partners assert that ss. 60 and 73 require an assessment of the relevant partnership agreement in order to determine whether money loaned by a limited partner is to be treated as a loan or as a capital contribution, which determination affects distribution priority under s. 73. [ 75 ] Taken together, they say ss. 42 , 60 and 73 do not support Crestmark’s position that the Partnership Act necessarily overrides distribution priorities agreed upon by the parties. [ 76 ] In the end, the Greata partners submit that Crestmark’s

interpretation of the Partnership Act lacks merit and that the Arbitrator’s decision would be unchanged even if the provisions of the Partnership Act are considered. [ 77 ] I disagree. In my view the extricable question of law relates to a material issue in dispute and could affect the result. [ 78 ] The Arbitrator’s classification of the Loan as Crestmark’s Interest under s. 10.7(c)(vi) of the LPA had the effect of subordinating Crestmark’s entitlement to repayment of the Loan to the claims of third party creditors. [ 79 ] On its face, s. 60 of the Partnership Act , which is found within

Part 3 titled “Limited Partnerships”, provides that a limited partner who lends money to the partnership may receive a proportionate share of the assets along with third party creditors: Business dealings by partner with partnership 60

(1) A limited partner may lend money to, borrow money from and transact business with the limited partnership.

(2) Unless the limited partner is also a general partner, a limited partner having, with respect to anything done under subsection (1), a claim against the assets of the limited partnership may receive a proportionate share of the assets along with other creditors .

(3) For the purposes of this section, a claim described in subsection (2) does not include a claim for a return of capital contributions. [Emphasis added.] [ 80 ] As noted above, there is a distinct lack of authority interpreting the effect of this provision, or the other provisions of the Partnership Act at issue, on contractual rights. [ 81 ] In my opinion, a consideration of the Partnership Act is essential to determine whether the Arbitrator’s decision is defensible in law. Crestmark and the Greata partners have robust opposing views of the proper

interpretation of the Partnership Act as it relates to contractual rights, and these should be explored fully and properly on appeal. [ 82 ] The amount in dispute is substantial. The parties have fervently pursued the dispute as a whole and it would amount to a miscarriage of justice to allow the arbitral decision to stand absent a consideration of the relevant statute. [ 83 ] Finally, and as previously referenced, Crestmark is attempting to raise new issues on appeal.

This engages the court’s residual discretion under s. 31(2) and generally militates against granting leave: VIH Aviation Group at para. 45. [ 84 ] In the circumstances however, I am of the view that Crestmark has provided valid reasons for why the Partnership Act provisions were not raised in the first instance and has met the test for raising new issues on appeal. [ 85 ] At the arbitration, Crestmark claimed for repayment of the Loan on the basis that it was a demand loan and repayment had not been made following the initial demand in February 2015.

This claim did not contemplate that Crestmark would be entitled to repayment concurrently with dissolution of the Partnership. [ 86 ] At the companion arbitration, Crestmark sought a declaration from the Arbitrator that the general partners be required to apply for a receiver to distribute the proceeds of the Partnership’s assets in the event dissolution was granted, seeking specifically: a declaration that the General Partners are required to apply to the British Columbia Supreme Court to appoint a member in good standing of the Canadian Institute of Chartered Accountants and a partner in one of the major national Canadian accounting firms which

is not the auditor of the Limited Partnership or to any Partner as receiver of the Limited Partnership , pursuant to

section 10.6 of the LPA … [Emphasis added.] [ 87 ] Alternatively, Crestmark sought a declaration at the companion arbitration that “the circumstances are such that it is just and equitable that the [Partnership] be dissolved”, to be relied on as “the basis for a future application to the court for a decree of dissolution”. [ 88 ] In either case, Crestmark asserts that the dissolution provisions of the Partnership Act would have been considered after the Arbitrator rendered his decisions in both arbitrations.

As a result, there was no reasonable anticipation of the Arbitrator’s positive determinations regarding post-dissolution asset distribution, and the dissolution provisions of the Partnership Act were not raised. [ 89 ] Based on these circumstances, I am satisfied that Crestmark did not fail to address provisions of the Partnership Act that were in issue at the arbitration. [ 90 ] Further, I am of the view Crestmark has met the test for advancing a new issue on appeal set out in On Call Internet Services and Laursen v.

Director of Crime Victim Assistance , 2017 BCCA 8 at para. 85 ; specifically, that the issue is one of pure law that can be resolved with reference to the parties’ pleadings and submissions, and that allowing the new issue will not result in prejudice to the responding party. [ 91 ] On this point, the Greata partners submit, in essence, that the issues cannot properly be determined on the current state of the record and consequently it would be inappropriate to allow this issue to be resolved by the court. [ 92 ] In particular, they assert that: (

i) a factual determination is required as to whether the Loan is a loan or a capital contribution within the meaning of s. 73 of the Partnership Act ; and (ii) the Partnership certificate was not in evidence before the Arbitrator, which is specifically mentioned in s. 73. [ 93 ] The Greata partners say these issues preclude a determination on the point of law Crestmark has advanced. [ 94 ] In response, Crestmark submits it is apparent throughout the Award that the Arbitrator made the relevant factual determination and treated the Loan as a loan, not a capital contribution. [ 95 ] The Arbitrator found that the Loan fell within the definition of Interest under the LPA, which contemplates both loans and capital contributions.

Despite both possibilities, he referred to the Loan as a loan throughout the Award, and specifically noted that it was a loan as defined by s. 4.4. [ 96 ] Definitively, the Award states “the parties are agreed that [the Loan] was a loan within the terms of s. 4.4 for “the purposes of the Limited Partnership” to the extent that it prevented a potential dissolution and allowed the Partnership to continue in business.” [ 97 ] I agree that the Arbitrator made a finding of fact to this effect and determined that the Loan was a loan, not a capital contribution.

Further, the Award indicates that this was admitted at the arbitration. [ 98 ] With respect to the certificate, s. 73 provides in full: Settling accounts on dissolution 73 If accounts are settled after the dissolution of a limited partnership, the liabilities of the partnership to creditors , excepting (

a) to limited partners on account of their contributions, and (

b) to general partners must be paid first and then, subject to a statement in the certificate or to subsequent agreement , the other liabilities of the partnership must be paid in the following order: (

c) to limited partners in respect of the capital of their contributions; (

d) to limited partners in respect of their share of the profits and other compensation by way of income on their contributions; (

e) to general partners other than for capital and profits; (

f) to general partners in respect of capital; (

g) to general partners in respect of profits. [Emphasis added.] [ 99 ] The legal question Crestmark has proposed is whether the Partnership Act mandates that Crestmark is entitled to proportionate repayment of the Loan, which is not a capital contribution, at the same time as third party creditors. The essential consideration is whether the statute confers the entitlement that Crestmark asserts and overrides the terms of the LPA. If it does not, the provisions of the LPA will be engaged.

I do not find that it is necessary to examine the certificate in order to assess this legal question. [ 100 ] I conclude this dispute raises a question of law that can be resolved on the record before the court. [ 101 ] For these reasons, leave to appeal is granted on the following question of law: did the Arbitrator err by failing to consider relevant provisions of the Partnership Act when determining the distribution priority of the Loan under the LPA?

The Third Proposed Ground [ 102 ] This ground relates to the Arbitrator’s

interpretation of the LPA and his characterization of the Loan based on that

interpretation.

I have concluded this ground raises a question of mixed fact and law. [ 103 ] The Arbitrator did not accept Crestmark’s argument that the Loan became due and owing following the demand for payment in February 2015. [ 104 ] In reaching this conclusion, he noted that implying the terms proposed by Crestmark would be inconsistent with the provisions of the LPA that define the Loan to be part of Crestmark’s Interest. [ 105 ] He also noted that if the Loan was properly characterized as a demand loan, it would have given Crestmark the ability to unilaterally dissolve the Partnership, at least prior to a successful pre-sale, because the Partnership would have no funds to pay the Loan. [ 106 ] The Arbitrator determined that a unilateral power to dissolve the Partnership conflicted with the general tenor of the LPA as a partnership of equals. [ 107 ] Based on this reasoning, the Arbitrator concluded that the failure of the Project to meet the pre-sale benchmark necessarily meant that the Loan was never repayable prior to dissolution of the Partnership. [ 108 ] Crestmark argues that the Arbitrator erred in law by attributing implied terms to the Loan without applying the proper test; namely, that the implied terms are necessary and consistent with what has clearly been agreed upon: Pine Valley Mining Corporation (Re) , 2008 BCSC 297 at para. 44 . [ 109 ] Specifically, Crestmark contends that the Arbitrator implied a term to the effect that repayment was to be governed by the LPA’s dissolution provisions, which was neither necessary nor agreed upon. [ 110 ] In my respectful view, this submission misconstrues the Arbitrator’s reasoning in the Award. [ 111 ] The Arbitrator rejected Crestmark’s argument that the Loan was a demand loan on the basis that it would be inconsistent with the definition of Interest provided in the LPA. [ 112 ] He then considered whether, under the circumstances of a failed pre-sale, it would be appropriate to imply a term that the Loan was due and owing at any point prior to dissolution.

Based on the Partnership’s financial situation and the nature of the parties’ relationship, he concluded it was necessarily the case that the Loan was not repayable during the life of the Project, and therefore was to be dealt with upon dissolution. [ 113 ] He also considered the parties’ failed negotiations regarding repayment terms and found that the negotiations were inconclusive. Nothing had clearly been agreed upon and none of the positions advanced during those negotiations could bind the parties. [ 114 ] In my view, the Arbitrator’s characterization of the Loan was an exercise in contractual

interpretation. [ 115 ] He examined the provisions of the LPA, the parties conduct, and the financial realities of the contractual relationship. He then, accordingly, drew conclusions about the Loan. Reading his reasons as a whole, there is no indication that he applied an incorrect legal test. Rather, it appears he applied the exact framework cited in Pine Valley Mining by determining which terms were necessary and fit within the parameters of the agreement. [ 116 ] As Crestmark’s third proposed ground does not raise a question of law, I decline to grant leave to appeal. The Fourth Proposed Ground [ 117 ] This ground relates to the Arbitrator’s

interpretation of s. 4.4 of the LPA. I am also of the opinion this ground raises a question of mixed fact and law. [ 118 ] The Arbitrator declined to find that the Loan attracted interest at the Interest Rate on the basis that the Partnership’s management committee had not ruled on the terms of the Loan. The management committee authorized the Partnership to pay out the Loan to the Greata Ranch Development Corporation in February 2008, but made no other determinations. [ 119 ]

Section 4.4 of the LPA provides “Crestmark may make . . . loans to the [Partnership] at the Interest Rate and on other terms acceptable to the General Partners”. Within the structure of the Partnership, the general partners acted through the management committee. [ 120 ] The Arbitrator interpreted this provision to require a determination by the management committee about whether or not interest could be claimed in addition to any other applicable terms. [ 121 ] Crestmark submits that this

interpretation is untenable and that the Arbitrator erred in law by failing to take into account and enforce an express provision of the LPA. [ 122 ] This submission rests on Crestmark’s position that there is only one possible

interpretation of s. 4.4; namely, that interest at the Interest Rate automatically attaches to loans made pursuant to s. 4.4 and the management committee may agree on other terms they consider acceptable. [ 123 ] In response, Greata contends that the Arbitrator simply interpreted s. 4.4 in the context of the LPA and came to a different

conclusion than Crestmark. Greata submits that this was an exercise in contractual

interpretation and not a failure to enforce provisions of the LPA. [ 124 ] I have concluded, properly construed, this is a question of contractual

interpretation and Crestmark has not identified a question of law arising from this determination. [ 125 ] The Arbitrator interpreted s. 4.4 of the LPA in a particular way, and a conclusion that the Loan did not attract interest flowed from that

interpretation. He quoted s. 4.4 in full at the beginning of his analysis, discussed it, and applied it to the facts before him. I do not agree that he failed to consider or enforce the provision as Crestmark contends. [ 126 ] As Crestmark’s fourth proposed ground does not raise a question of law, I decline to grant leave to appeal. VI. Conclusion [ 127 ] The petition is allowed in part.

Crestmark is granted leave to appeal under s. 31 of the Arbitration Act on the following question of law arising from the Award: did the Arbitrator err by failing to consider relevant provisions of the Partnership Act when determining the distribution priority of the Loan under the LPA? [ 128 ] Given the divided success, the parties shall bear their own costs of this proceeding. “Crossin J.”