When a limited partnership sells partnership property, individual limited partners cannot claim a proprietary interest in any sale proceeds of the partnership property, and individual limited partners do not have a personal cause of action in respect of claims to the partnership property. Partnership property is owned by the partnership, and accordingly any claims relating to the partnership property may only be brought by way of common law derivative action on behalf of the limited partnership.
These principles were recently confirmed by the B.C. Supreme Court in Lam v. WS Scott Station Development Limited Partnership, 2025 BCSC 149, where McMillan's team successfully applied to cancel two certificates of pending litigation ("CPLs"). The court's decision also underscores the recent trend of B.C. courts taking a stricter approach in determining whether a plaintiff has properly claimed an "interest in land" sufficient to justify the registration of a CPL.
Background
In two related actions, the plaintiffs were all limited partners of a limited partnership created for the purpose of pursuing a multi-unit residential property development in Surrey (the "Project"). The general partner was controlled by an individual who also controlled a series of other corporate entities, including two other limited partnerships developing other projects in Surrey and New Westminster. The plaintiffs alleged the general partner and individual defendant improperly diverted the Project's sale proceeds to other related entities. The plaintiffs further alleged the diverted funds might have been used to acquire, develop and/or improve the projects in Surrey and/or New Westminster.
Based on these allegations, the plaintiffs claimed a substantive constructive trust, or a remedial constructive trust arising from unjust enrichment, sufficient to constitute a claim for an "interest in land" and corresponding CPLs on unrelated project lands in New Westminster. In response, the defendants brought an application seeking to strike the CPLs on the basis the plaintiffs had not advanced a valid claim for an "interest in land". The court agreed with the defendants and ordered the immediate cancellation of the CPLs.
The court's decision highlights the following principles:
- Individual limited partners do not have a proprietary interest in property owned by the limited partnership, including any sale proceeds from such property.
- Limited partners do not have a personal cause of action for wrongs allegedly done to the limited partnership (such as the alleged diversion of sale proceeds from sale of partnership property). Such claims must be brought as a common law derivative action on behalf of the limited partnership.
- A bare allegation of funds being misappropriated and being used to acquire, maintain or develop the defendant's property is not a sufficiently close "causal nexus" to support a CPL.
No Proprietary Interest in Partnership Property for Limited Partners
The court agreed that limited partners do not have a proprietary interest in property owned by the limited partnership, including any sale proceeds from such property. As such, there is no basis for the individual limited partners to bring personal causes of action against the limited partnership in which they are partners.
In this instance, the plaintiffs advanced funds to subscribe for limited partnership units. Once they did, their interest was limited to a personal property interest in their respective units of the limited partnership. They no longer had any proprietary right to the funds they invested. Limited partners do not have a direct proprietary interest in the assets of the partnership.1
Limited partners also do not have a claim to an interest in real property that forms a part of the partnership property, or the sale proceeds of such real property.2 Accordingly, the plaintiffs here had no personal proprietary claim to the proceeds from the sale of the Project.
Limited Partners Can Only Bring Common Law Derivative Actions
The court further confirmed that individual limited partners have no personal cause of action when a wrong is done to the limited partnership. Rather, limited partners have the right to bring a common law derivative action on behalf of the limited partnership, which had not occurred in this case.
The general rule is that any alleged wrongs done to a partnership must be advanced in a claim by the general partner on behalf of the limited partnership.3 On the other hand, a common law derivative action (in this context) is a claim commenced by the limited partner(s) on behalf the limited partnership usually in cases where the general partner is alleged to be part of the impugned conduct or has improperly refused to take steps to protect the partnership interests. Unlike corporate law, the BC Court of Appeal has determined that leave of the court is not required to start or continue a common law derivative action.4
In this case, the court accepted the argument that any claims brought by the limited partners alleging partnership assets were wrongfully diverted by its general partner, must be brought by way of a common law derivative action, in the name of and on behalf of the limited partnership.5
The "Causal Nexus" to Support a Claim for an Interest in Land
The court also found that the plaintiffs had failed to sufficiently particularize the requisite causal link between the allegedly misappropriated sale proceeds and the lands on which the CPLs were registered.
The court confirmed that a bare allegation of misappropriating funds to acquire property is insufficient to establish a "casual nexus" to support a claim for an interest in land.6 A CPL is an extraordinary pre-trial tool that "must be grounded on more than mere conjecture".7 It is not intended as a way to freeze assets, as a form of pre-judgement security, or as a shortcut to a Mareva injunction.8
This means that plaintiffs must provide sufficient particulars to establish a "causal nexus" between the misappropriated funds and the lands to which a CPL is registered. Practically, plaintiffs may have to wait to register any CPL until after the discovery process occur to determine if a "causal nexus" exists in a given case.9 Bare allegations or suggestions that an event "may" have occurred is not sufficient to warrant the registration of a CPL.
Takeaways
The court's decision in Lam is the latest of a recent trend of decisions indicating that B.C. courts are strictly and carefully analyzing the registration of CPLs. Long labelled an "extraordinary tool" the BC courts have clearly signaled that this tool will remain so. Furthermore, individual limited partners are reminded that they do not hold a proprietary interest in the partnership's property (including sale proceeds) and claims in respect of partnership property may only be brought in the form of common law derivative actions.
Footnotes
1. Lam v. WS Scott Station Development Limited Partnership, 2025 BCSC 149 ("Lam") at para 21, 25.
2. Lam at para 25.
3. Lam at para 34 – 35.
4. 1115830 B.C. Ltd. v. Treasure Bay HK Limited, 2022 BCCA 380; see related bulletin here.
5. Lam at para 36.
6. Lam at para 51.
7. Lam at para. 51.
8. Lam at para 59.
9. Lam at para. 54.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
