Lending To Limited Partnerships: Lessons From The Cerieco Decision

The Ontario Superior Court of Justice decision in Ontario Securities Commission v. Bridging Finance Inc. et al. (for the purposes of this article, the “Cerieco decision”) arose out of a claims process in the receivership related to the collapse of Bridging Finance Inc. While the broader litigation and regulatory context was complex, the portion of the claims decision addressing Cerieco Canada Corp.’s (“Cerieco”) guarantee claim is significant for lenders dealing with limited partnerships. In this decision, failure to make sure the guarantee was properly authorized has resulted in the lender losing its only available source of repayment for a loan, and the lender’s lawyers being sued for the amount outstanding on the loan.

The Cerieco decision concerns lending to limited partnerships, the necessity of confirming authority at each level of a transaction, and the limits of reliance on legal opinions that assume, rather than establish, authority. It demonstrates how a substantial guarantee can fail where foundational due diligence is not performed, even in a sophisticated financing supported by formal opinion letters.

The application arose from a large real estate financing. Cerieco, a Chinese-based lender, advanced $200 million to the Mizrahi Organization in connection with the development of The One project at Yonge and Bloor in Toronto (the “Project”). The loan was supported by several guarantees. When Cerieco determined that the initially proposed guarantors did not have sufficient assets to support the guarantee, a Bridging income fund (“BFLP”) structured as a limited partnership was added as an additional guarantor.

BFLP had no direct economic interest in the Project. Its involvement was linked to another guarantor who may have benefited if the Project succeeded. When the Mizrahi entities entered receivership, and the guarantees were called, the exposure attributed to BFLP exceeded half the value of its assets. BFLP was placed into receivership, and it was in that process that the defects underlying the guarantee were uncovered.

A limited partnership acts through its general partner, and the scope of that authority is defined by statute, the limited partnership agreement, and the general partner’s own governance. Where a limited partnership is asked to provide a guarantee – particularly one disconnected from its business – each of those sources of authority must be examined.

In the Cerieco transaction, the guarantee was purportedly authorized by the board of directors of BFLP’s general partner. The guarantee was accompanied by a legal opinion stating that it had been duly authorized and was valid and binding. However, the opinion was not based on and expressly excluded a review of the minute book of the general partner, the amended and restated limited partnership agreement, and other relevant documents pertaining to BFLP. For the general partner, they relied solely on the Certificate of Status, and for the Partnership, solely on the Declaration.

The opinion referred to a board resolution authorizing the guarantee, but no such resolution was attached. In fact, no such resolution existed. The individual who executed the guarantee on behalf of the BFLP was not a director of the general partner. The board of the general partner had never approved the guarantee and was unaware of it until it was called.

Section 8 of the Limited Partnerships Act (“LPA”) provides that a general partner has all the rights of a partner in a partnership without limited partners, except for a number of items enumerated, including acts in contravention of the limited partnership agreement, or that make it impossible to carry out the limited partnership’s business, as if so, the written consent of the limited partners would be required. The guarantee was inconsistent with the stated business of the limited partnership and contrary to provisions in the limited partnership agreement, and thus in contravention of Section 8.

Despite these deficiencies, the lender and its counsel relied on the opinion without independently confirming that the assumptions on which it rested were correct.

The receiver disallowed Cerieco’s proof of claim under the guarantee, and the Court upheld that disallowance. The Court’s analysis turned on two issues: whether the guarantee had been properly authorized, and if not, whether Cerieco could rely on apparent authority or the indoor management rule.

The Court found there was no actual authority. The general partner’s board had never approved the guarantee. The signatory lacked authority to bind BFLP.

The Court also found that Cerieco could not rely on the indoor management rule. Where a transaction depends on a specific person’s ability to bind an entity, particularly a limited partnership acting through a general partner, it is not sufficient to rely on titles, representations, or assumed roles. The lender was required to confirm that the individual in question possessed the authority they purported to exercise, as conferred by the general partner’s governance and evidenced by duly passed resolutions. That confirmation could only be achieved by reviewing the relevant corporate and partnership records. Reliance on asserted authority, without verifying its source and scope, was itself a due diligence failure and undermined any subsequent attempt to invoke apparent authority or the indoor management rule. In the Cerieco transaction, there was no evidence of the authority of the signatory to the guarantee from anyone or anywhere other than the signatory.

The existence of a legal opinion did not alter the analysis. The Court treated the opinion as evidence of what had been assumed, not proof of what had occurred. An opinion cannot create authority where none exists, and it cannot be a substitute for ensuring the signatories have at least apparent authority from other than the signatory themselves.

The Cerieco decision provides guidance on what should have been done differently. Proper due diligence should have included reviewing the limited partnership agreement to identify restrictions on guarantees and extraordinary transactions, verifying that the general partner’s board had approved the guarantee through properly passed resolutions, and reviewing offering materials and other documents describing the actual and intended business of the limited partnership, to ensure the guarantee was consistent with the partnership’s disclosed business and risk profile.

The decision also illustrates the importance of grounding opinion practice in reviewed documents. An enforceability opinion concerning a limited partnership guarantee must be based on the documents that confer authority. If the opinion depends on board approval, the resolutions must be examined. The limited partnership agreement must be reviewed.

Finally, the case underscores the need for careful opinion qualifications and reliance language. Opinion practice permits, and often requires, carve-outs and assumptions, but the Cerieco decision illustrates the boundary between acceptable qualifications and impermissible gaps.

The Cerieco decision also highlights the importance of aligning assumptions with transaction risk. The more extraordinary or disconnected a transaction is from the limited partnership’s stated business, the less defensible it becomes to rely on high-level assumptions or broad carve-outs in opinions. In such circumstances, reliance in language and qualifications must be sufficiently robust to signal clearly to the recipient what has not been verified and what risks remain with the lender.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.