Denby Group v Dairy Farmers of Ontario, 2008 ONAFRAAT 19

Agriculture, Food and Rural Affairs Appeal Tribunal

1Stone Road West

Guelph, (Ontario) N1G 4Y2

Tel: (519) 826-3433, Fax: (519) 826-4232

Email: appeals.tribunal.omafra@ontario.ca

Tribunal d’appel de l’agriculture, de l’alimentation et des affaires rurales

1, chemin Stone Ouest

Guelph (Ontario) N1G 4Y2

Tél.: (519) 826-3433, Téléc.: (519) 826-4232

Email: appeals.tribunal.omafra@ontario.ca

AGRICULTURE, FOOD AND RURAL AFFAIRS APPEAL TRIBUNAL

APPEAL:

Denby Group v Dairy Farmers of Ontario

Denby Group v Dairy Farmers of Ontario 2008 ONAFRAAT 19

STATUTE:

Ministry of Agriculture, Food and Rural Affairs Act

HEARING:

February 11, 2008

DATE OF DECISION:

June 28, 2008

2008-19

NEUTRAL CITATION:

2008 ONAFRAAT 19

IN THE MATTER OF THE FARM PRODUCTS MARKETING ACT AND SECTION 16 OF THE MINISTRY OF AGRICULTURE, FOOD AND RURAL AFFAIRS ACT;

AND IN THE MATTER OF:

An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by William, John and Betty Denby, Sunderland, Ontario, Keith and Ron Jarvis, Seagrave, Ontario, and Dale McFeeters, Woodville, Ontario, from a decision of the Dairy Farmers of Ontario to deny requests for exemptions from the November 17, 2006 Quota Policy on Transfer Assessments.

Before:

• Kirk Walstedt, Vice Chair
• Mary Field, Member
• Richard Smelski, Member

Appearances:

• William (Bill) Denby, on behalf of himself, John and Betty Denby, appellants
• Keith Jarvis, on behalf of himself and his brother Ron Jarvis, appellants
• Dale McFeeters, appellant
• Sunil Mathai, counsel to the appellants
• Julian Falconer, counsel to the appellants
• George MacNaughton, Director of Production and of Regulatory Compliance, Dairy Farmers of Ontario, witness for the respondent
• Peter Gould, General Manager, Dairy Farmers of Ontario, witness for the respondent
• Bruce Saunders, Chair, Dairy Farmers of Ontario, witness for the respondent
• Geoffrey Spurr, counsel to the respondent

DECISION OF THE TRIBUNAL

This appeal was heard in Guelph, Ontario, commencing on Monday, February 11, 2008, and continuing on February 12, 13 and 14, 2008, and on April 23 and 24, 2008. William, John and Betty Denby, Keith and Ron Jarvis, and Dale McFeeters, (the Denby Group) appealed to the Agriculture, Food and Rural Affairs Appeal Tribunal (Tribunal) from the decision of the Dairy Farmers of Ontario (DFO) to deny their requests from exemptions from transfer assessments made under the DFO’s November 17, 2006 Quota Policy.

Statutory Context

Subsection 16(2) of the Ministry of Agriculture, Food and Rural Affairs Act states:

Idem

(2) Subject to subsections (4) and (5), if a person is aggrieved by an order, direction, policy, decision or regulation made under the Farm Products Marketing Act by a local board or under the Milk Act by a marketing board, that person may appeal to the Tribunal by filing with the Tribunal and sending to the local board or marketing board written notice of the appeal. R.S.O. 1990, c. M.16, s. 16 (2); 2006, c. 19, Sched. A, s. 16 (3).

FACTS

William Denby, Evidence-in-Chief

1. William Denby’s farm is located in the City of Kawartha Lakes at 11523 Simcoe St, RR 4, Sunderland. He shares a licence for the production of milk with his father, Jack Henry Denby (who died on October 13, 2007), along with his mother, Betty Denby. Prior to January, 2007, Mr. William Denby was marketing milk; after that, he exited the milk industry. Prior to exiting, he had approximately 30 cows in production.

2. Mr. William Denby originally produced milk in Maple, Ontario. The licence to produce and market milk was only in his father’s name at that time. Mr. Denby was added to his father’s licence in 1992. Mr. Denby is no longer in the dairy industry, having sold his quota and having had his licence cancelled.

3. On October 19, 2006, a memo signed by Bruce Saunders, Chair, Dairy Farmers of Ontario (DFO) was addressed to “All Milk Producers” regarding “November quota exchange cancelled pending potential policy changes”. Mr. Denby, as a producer, received a copy of this memo.

The memo stated, “Dairy Farmers of Ontario (DFO) had decided to cancel the November Quota Exchange and any other quota transfers that would have an effective date of December 1, 2006. The decision relates to speculation about potential quota policy changes and incomplete or inaccurate information that could result in unfair conditions for this month’s exchange. The Quebec board (FPLQ) has cancelled its quota exchange for the same reasons”.

“DFO and FPLQ have been in discussions about potential quota policy changes with a focus on enhancing long-term sustainability for present and future dairy farmers and mitigating the upward trend in quota prices”.

“The objectives of the potential policy changes are to: stabilize and/or reduce quota prices; minimize financial impact of quota purchases; foster the sustainability of existing farms and the future of supply management by facilitating access to quota”.

“The proposal could introduce two levels of quota transfer assessment. Quota acquired that would be effective January 1, 2007 (the December Exchange) or later would be subject to a 50 per cent assessment when it is later sold. The transfer assessment on pre-January 1, 2007 quota would gradually increase by 10 per cent in August of each year for three years. The assessments on pre-January 2007 quota under the proposal would be:

0 per cent on quota sold effective January 2007 to July 2007;

10 per cent on quota sold effective August 2007 to July 2008;

20 per cent on quota sold effective August 2008 to July 2009; and

30 per cent on quota sold effective August 200 and later”.

4. In a letter dated October 22, 2006, addressed to John Karn of the DFO, Mr.. Denby, on behalf of Dencleo Farms, responds to the DFO memo of October 19, 2006. In the memo, Mr. Denby is critical of the proposed policy changes. He states, “After reviewing the Milk Act, know (sic) where is it stated, that the Board has the power to implement policy that has the ability to influence the price that producers sell and buy quota, on the exchange…I am requesting that at the end of October board meeting, that the Board votes NO, not to implement this proposal and follow the proper procedure for developing and implementing policy changes in the province of Ontario. The board also is legally obligated to inform the producers of what driving forces, if any, drove them to take such radical actions that have the implications to undermine Supply Management”.

Mr. Denby testified that prior to a phone call that he had received from a reporter, Mr. Ian Cumming, regarding the October 19, 2006 DFO memo describing a proposed change to quota transfer policy, he had heard nothing about a transfer assessment being contemplated. He felt that the policy proposal would erode the equity that producers have built into the quota over time. Further, he stated that the policy reduced the amount of quota that would be available to producers who would need additional quota to cover production increases.

Mr. Denby also testified that his request in his letter to the DFO to identify their powers under the Milk Act - specifically regarding quota pricing – went unanswered.

5. A letter dated January 4, 2007 was sent to John & Betty Denby and William Denby from George MacNaughton, Director of the Production Division of DFO. The letter advises that the Denby’s have “…sold 44.5 kilograms of quota subject to increases or decreases, at $29,600 per kilogram, on the January 2007 quota exchange”. Of the 44.5 kilograms, 10 kilograms were exempt from the transfer assessment; 34.5 kilograms were subject to the 15% transfer assessment leaving 29.325 kilograms of saleable quota. The total amount of saleable quota was 39.325 kilograms. Payment in the amount of $1,164,004.10 was to be sent to the FCC on approximately the 20^th of February. The letter also noted that 6 kilograms of quota had been cancelled effective February 1, 2007.

In his testimony, Mr. Denby agreed that this information described the circumstances surrounding the amount of quota that he sold. However, he indicated that the amount of quota sold should have been 50.5 kilograms. He testified that a letter was sent almost immediately to bring attention to this. Under questioning, Mr. Denby testified that there was nothing that he knew of in 2003 that would have precluded the DFO from netting out six kilograms of quota from a sale of quota by Mr. Denby.

6. In a letter dated April 10, 2003 addressed to John and Betty Denby and to William Denby from John Karn, Secretary to the Board of DFO, Mr Karn writes, “This concerns your offer to sell all kilograms of quota on the April exchange. Your offer was rejected by DFO and was not entered on the exchange. This action was taken in light of alleged violations of DFO regulations and an impending DFO Hearing to consider the matter. Until this matter is resolved, please be advised that the DFO will not permit you to sell or transfer any quota”.

Mr. Denby testified that:

• this was the first written notification of this kind that he had received from DFO;
• He wanted to exit the market;
• He believed he had been notified verbally of this matter by Peter Gould or George MacNaughton around the 1^st or 2^nd of April;
• His offer at the April, 2003 exchange had been the first time that year that he had attempted to sell his quota;
• At no time between April 2003 and January 2007 had he been notified by the DFO, or the Appeal Tribunal or the Divisional Court that all his quota had been frozen; and,
• He did not in any way create a forged document; the copy of the letter that had been reproduced in the “Book of Documents of the Applicants” had been in a drawer for some period of time.

7. In a letter dated May 5, 2003 to Betty, John and William Denby and signed by John Karn, Secretary to the Board, DFO, the Denbys are advised of the results of a Hearing held by DFO on May 2, 3003. The purpose of the Hearing was to hear evidence that the Denbys, “…sold, offered to sell or marketed milk to other than DFO, in contravention of the regulations as detailed in the Notice of Hearing dated April 10, 2003”.”Based on the evidence, the Board determined that John, Betty and William Denby #585343 contravened Sections 3(1), 3(2), 3(3) and 3(4) of DFO Milk General Regulation 08/03”. The letter also stated that the Denbys’ licence to produce or market milk would be cancelled effective June 1, 2003 and that 10 kilograms of quota fixed and allotted to the Denbys would be cancelled effective the same date.

Mr. Denby testified that subsequent to the DFO Decision, through the appeal process and the court process, the DFO’s revocation of the Denbys’ licence was reversed and the cancellation of the quota was reduced from 10 kilograms to six.

8. In a letter dated June 12, 2003 addressed to John and Betty Denby and to William Denby from Grant Kennedy, Manager Quota Administration and Field Services. Mr. Kennedy writes, “This concerns your offer to sell your total quota on the June exchange. Your offer was not accepted, as your total quota is not saleable. Note that you will be subject to the quota exchange service fee, which will be deducted from your June statement”.

In his testimony, Mr. Denby:

• Confirmed that after reading this letter he felt he was not going to be allowed to sell his quota; and,
• That prior to January 2007, no one from DFO wrote back to him to tell him that he could sell quota.

9. In a memo dated November 21, 2006 to “All Milk Producers”, Bruce Saunders, the Chair of DFO discusses Ontario quota policy changes and announces that the December exchange will be open November 27 to December 11, 2006. The memo states, “The Board of Dairy Farmers of Ontario met on November 17 to consider quota policy changes following four weeks of extensive consultations with Dairy Producer Committees and dairy farmers across the province. It considered hundreds of letters and e-mail messages from producers with a wide variety of suggestions”. The memo identified four changes regarding quota polices that were to take effect immediately. These included:

1. A 15 per cent transfer assessment for quota sold on the quota exchange at prices up to $30,000. The level of transfer assessment will be adjusted upward for prices above $30,000.

2. Exemptions from the transfer assessment will apply on same-site quota transfers and a one-time quota transfer to each child of a licence-holder. There will also be no transfer assessment applied on the last 10 kilograms of quota held by each licence.

3. Producers will pay what they bid above the Market Clearing Price.

4. All existing Letters of Direction will be terminated in 10 years. New Letters of Direction will be limited to a 10-year term with specific kilogram amounts and will only be permitted for Farm Credit Corporation (FCC) and Banks.

Regarding the four weeks of extensive consultations in the November 21, 2006 memo, Mr. Denby testified that he attended a meeting regarding the policy changes in Lindsay. Later, he attended another, similar meeting in Uxbridge; he estimated the attendance at that meeting to be a little over 100. The DFO Board was represented by Mr. Wicks.

10. A circular signed by Chair of the DFO Board, Bruce Saunders, addressed to “All Milk Producers” and dated November 1, 2006 states, “DFO seeking input on possible quota policy changes before Nov. 17”. Further, “The DFO Board has decided not to support the proposal described in the letter to all producers dated October 19…Producer input from across the province indicated that the assessment levels in this specific proposal were not an acceptable way of achieving the objectives of reducing upward pressure on quota prices and fostering increased sustainability of existing farms and the future of supply management by facilitating access to quota”.

“The Board decided to consult with Dairy Producer Committees on the quota policy issue over the next two weeks and review a range of alternatives.

“The alternatives will include the following possible actions:

• A transfer assessment on the sale of existing quota;
• A transfer assessment on quota that was purchased after November 1, 2006; and,
• No longer accepting direction of proceeds from quota sales.

“These actions can be considered independently or as any combination. Producer opinion on the timing and level of any assessment will be important to assist in the Board decision…

“The Board will meet on November 17, 2006, at which time it will decide what, if any, changes will be made to DFO quota policy.

“Following communication to all producers regarding the decision, the Board plans to run the December quota exchange on its regular schedule”.

Mr. Denby testified that at the time this document was released, the quota exchange was still closed. He advised that, related to the circular, he attended a third meeting for Region 5 at Port Perry on or about November 14, 2006. He recalled that about 100 people were in attendance. Two Board members, Lloyd Wicks and Sid Atkinson, were in attendance, as was one DFO staff member, George MacNaughton. Mr. Denby testified that there were a number of votes taken, but, that there was no clear result.

11. Following the Port Perry meeting, Mr. Denby wrote a letter addressed to John Karn, Secretary to the Board of DFO, dated November 10, 2006. Mr. Denby testified that the letter was a standard letter that had been faxed to various groups across the province. Groups were asked to fill in their region, sign the letter and mail it or fax it to Mr. Karn. The letter concludes by stating, “We are recommending to the Board, that at the November 17^th meeting, that the status quo remain and the board review its authority given to you by the Province of Ontario on quota transactions. If the Board has failed to do so, we recommend that you all consider handing in your resignation to the Farm Products Marketing Commission as soon as possible”. In his testimony, Mr. Denby could not recall receiving a response to his letter from DFO.

12. In a letter dated November 16, 2006, Mr. Denby again wrote to John Karn of the DFO, regarding, “DFO seeking input on possible quota changes before November 17/2006 To the DFO Board of Directors”. The letter raises concerns regarding a fraud investigation. Mr. Denby testified that as of the date of writing, the quota exchange was still not open and that the DFO Board did meet on November 17^th. Further, he testified that as a result of the November 17, 2006 meeting, the circular of November 21, 2006 was done, which created the transfer assessment without notice.

13. A letter on the letterhead of “The Office of the Director of Regulatory Compliance” from George MacNaughton, Director, Production Division, DFO and dated February 1, 2007 was addressed to John & Betty Denby and William Denby. Mr. MacNaughton indicates that the letter is in “response to your letters and attachments of January 8, 2007 and your letter and attachments of January 14, 2007”. The letter addresses the issues of exemption from the application of the transfer assessment with respect to quota sold on the January 2007 exchange. In addition, the letter notes that “a Board decision as amended by the Agriculture, Food and Rural Affairs Appeal Tribunal, as further amended by the Ontario Divisional Court, cancels the six kilograms of quota held by DFO licence 585343”.

Mr. Denby testified that:

• in this letter, there was reference to the notion that his quota wasn’t able to be sold because of its pricing;
• on the last chart of page 2 of the letter, there are details of his effort to offer his quota for sale;
• several of the offers recorded on the chart were “protest votes”; and,
• they successfully sold all their quota on February 1^st, 2007.

14. In a letter dated January 8, 2007 to John Karn, Secretary to the Board, DFO, William Denby writes on behalf of John, Betty and Gwen Denby and himself, regarding the “New Quota transfer assessment policy November 17^th, 2006”. In the letter, he states that:

• Under a partnership agreement between the four Denbys, the quota holding is divided equally among all parties;
• Under advice from legal council (sic) the 15% transfer assessment does not apply;
• Regarding licence # 585343, “the new quota policy does not apply to us because our issue between DFO and ourselves is still in the courts”; and,
• “There is disagreement with the volume sold in a letter received January 4^th, 2007 by Mr. MacNaughton stating 50.5 kgs of quota. We feel this should be 51.20 kgs of quota with no transfer assessment applied, withholding the proceeds from the 6 kgs of quota”.

15. Mr. Denby testified receiving a letter from George MacNaughton of the DFO dated February 15, 2007. The letter is addressed to John & Betty Denby and William Denby. It states:

“Your January 2007 milk statement and cheque and a copy of the statement and cheque sent to the Farm Credit Corporation, for all of the quota proceeds due to you and directed by you to the Farm Credit Corporation, are enclosed for your information”.

“The matter of the cancellation of six kg of quota will not be reviewed unless DFO receives a court order or direction”.

“The matter of your request for an exemption from the application of the transfer assessment in the amount of 5.175 kg of quota will be considered by the Board”.

“You will be advised of the Board’s decision after their consideration of your request”.

16. Mr. Denby acknowledged receiving a letter from George MacNaughton of the DFO to John & Betty Denby and to William Denby dated October 4, 2006, The letter, in part, states:

“This is to advise you that your offer to sell 44.5 (50.5 kg minus the reduction of 6.0 kg) kilograms of quota, subject to increases or decreases, at $32,000 per kilogram on the October quota exchange was not successful”.

“The market-clearing price on that exchange was $30,995.00 per kilogram”.

Mr. Denby testified that he had made such an offer but that it too, was a “protest vote”, even though it was very close to Exchange Clearing Prices.

William Denby, Cross Examination

17. With regard to the DFO letter dated October 4, 2006, Mr. Denby testified that he would have made this offer between September 20^th and October 1^st of 2006. He acknowledged that:

• he was experiencing some somatic cell counts that were abnormally high at that time and that this was an issue that he had appealed to the Tribunal;and,
• the Tribunal heard this case and that it upheld the imposition of penalties and fines.

18. On January 1, 2007 @ 11:41 pm the DFO received a Quota Exchange Bid from John & Betty Denby and William Denby to sell all their kilograms of quota for $27,999/kg.

Mr. Denby testified that:

• This was one of four bids he had made on the January exchange;
• He had spoken to George MacNaughton, who had asked Mr. Denby to pick on of the four bids that he had submitted;
• The four bids were not protest bids
• There was no discussion with Mr. MacNaughton regarding the application of the transfer assessment or the decision of the Divisional Court regarding the cancellation of the six kilograms of quota.

19. A letter dated October 2, 2003, and addressed to John & Betty Denby and to William Denby was signed by Grant Kennedy, Manager, Quota Administration and Field Services, DFO. The letter concerned: 1) a Request to Bid on Quota Exchange; and, 2) a Request Concerning Licensing.

Mr. Denby testified that:

• Based on the letter and on his recollection, he was at least contemplating purchasing more quota; and,
• He did not proceed with a bid after the letter.

Dale McFeeters, Evidence-in-Chief

20. The farm of Dale McFeeters is located at 1301 White Rock Road, City of Kawartha Lakes. Prior to January, 2007, he was producing milk at the farm on White Rock Road. He started marketing milk in 1982 with approximately 30 cows. He obtained a licence to market milk in 1982; his name was the only one on the licence at that time. His former wife, Ruth McFeeters was, for a period also named on the licence. He did not market milk after January, 2007, as he had sold all his quota and had quit the dairy industry. He had sold 43.87 kilograms of quota

21. A letter dated January 4, 2007 from George MacNaughton is addressed to Darmar Farms Inc. of Woodville, Ontario. The letter states: “This is to advise you that you sold 41.37 kilograms of quota, subject to increases or decreases, at $29,600 per kilogram, on the January 2007 quota exchange.

Mr. McFeeters testified that:

• He is Darmar Farms and that Darmar Farms incorporated in 1997;
• He had received the letter;
• 31.37 kilograms of his quota was subject to the transfer assessment;
• The transfer assessment cost him $139,268;
• The 2.5 kilogram loss was the result of an export program; the 2.5 kilograms represented a penalty;
• He had originally been subject to a 5 kilogram penalty, his licence had been revoked, and he had been advised that no production credits would be accumulated;
• He had appealed the DFO decision to the Appeal Tribunal, who had reduced the penalty to 2.5 kilograms of quota; however, the Tribunal had maintained the cancellation of his licence; and,
• He had appealed the Tribunal’s decision to the Divisional Court, as Mr. Denby had. The Divisional Court restored Mr. McFeeters’s licence, but, the 2.5 kilogram quota penalty remained in effect.

22. On October 22, 2006 , Mr. McFeeters wrote to John Karn, Secretary to the Board, DFO. In his testimony, Mr. McFeeters acknowledged that he had written the letter. In the letter,

• He asked that his concerns be brought immediately to the DFO Board members;
• He stated that he was vehemently opposed to the changes outlined in the October 19, 2006 DFO letter to all milk producers;
• He expressed concern about the decrease in the value of quota as a result of the proposed changes; and,
• He stated, “To this end, I am expecting that this Board without question turn down this policy change at the October meeting and that they act diligently in repairing the damaging effect that they have caused in this industry”.

23. On November 12, 2006 Mr. McFeeters again wrote to John Karn, Secretary to the Board, DFO. In the letter he requested that the it be directed to the DFO Board prior to their November 17, 2006 meeting. Further, he expresses his “…concerns over the producer’s wishes not being relayed to the Board by the milk committee”. “The Board must vote no to any quota policy changes at this time”. In a letter dated November 16, 2006 , Mr. McFeeters expresses his concerns about the proposed policy changes following an information meeting for producers in Port Perry. He raises concerns about conflict of interest for Board members in general and about a specific board member in attendance at the Port Perry meeting in particular.

24. On December 20, 2002, the World Trade Organization (WTO) released the Report of the Appellate Body, entitled, “Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products: Second Recourse to Article 21.5 of the DSU by New Zealand and the United States”. Paragraph 152 of the document reads:

“Before concluding, we wish to comment on Canada’s arguments concerning the approximately 100 producers out of the 8,000 who sell CEM, and out of the total of 19,000 producers that do not participate in the domestic market at all and sell solely CEM. Canada argues that the Panel erred in finding that, for these producers, sales of CEM involve payments “financed by virtue of governmental action”. We do not believe that it is necessary for us to make any findings regarding these 100 producers. The complaint made by New Zealand and the United States is that Canada has acted inconsistently with its export subsidy commitments under the Agreement on Agriculture. Canada may act inconsistently with these commitments, as we have found, even if some producers never make payments financed by virtue of governmental action”.

Mr. McFeeters testified that:

• he concluded from this paragraph that milk producers were not able to export milk, if they held quota;
• no ruling had been made regarding producers that held no quota and that they were eligible to export milk;
• he felt that if he sold his quota, that he could export milk, and that others, including Mr. Hope and Mr. Denby held a similar view at the time;
• as a result of this decision by the WTO, the DFO re-regulated all milk under their authority on April 1^st, 2003; and,
• he tried to sell milk into the United States in April of 2003 and that as a result, the DFO revoked his license.

25. Mr. McFeeters testified that he had seen a letter dated April 10, 2003 from John Karn, Secretary to the Board of DFO and addressed to Isobel and Wayne Hope. The letter states, “This concerns your offer to sell 1.2 kilograms of quota on the April exchange. Your offer was rejected by DFO and was not entered on the exchange. This action was taken in light of alleged violations of DFO regulations and an impending DFO Hearing to consider the matter”. “Until this matter is resolved, please be advised that DFO will not permit you to sell or transfer any quota”.

Mr. McFeeters testified that,

• from this letter he understood that his group was not able to sell quota at that time;
• he had wanted to sell quota; and,
• the first time he attempted to sell the quota was on the June, 2003 exchange – which ran from May 20, 2003 until June 1, 2003 - and that this was done as a protest.

26. Mr. McFeeters received a letter addressed to Darmar Farms, of Woodville, Ontario, dated February 6, 2007 from George MacNaughton, Director, Production Division of DFO. The letter addresses: Mr. McFeeters’s request for a transfer assessment exemption; his saleable quota; and, the cancellation of quota held by Mr. McFeeters as a result of a Board Decision.

The third page of the letter shows a table of quota offered for sale by Mr. McFeeters for the Exchange Months of June, 2003; July, 2003; October, 2006; and, January, 2007. Mr. McFeeters testified that the June, July and October offers were “protests”.

Dale McFeeters, Cross Examination

27. In cross examination by Mr. Geoff Spurr, Mr. McFeeters testified that:

• He had been a cream producer for five years and had held quota as a cream producer;
• He sold his cream quota when he became a milk producer; there was no transfer assessment on the cream quota when it was sold;
• He had participated in various export programs that DFO had administered when there was an export program in place; at one point approximately 50% of his production was for the domestic market and 50% was for export purposes;
• With regards to the November 21, 2006 DFO circular to “All Milk Producers” on Ontario quota policy changes, it was fair to say that he was advocating for the status quo, which meant no transfer assessment, no pay-what-you-bid and no limit on the letters of direction; and,
• The November, 2006 policy changes had a very negative effect on his business, and, in part, his position to maintain the status quo.

Keith Jarvis, Evidence-in-Chief

28. The home farm of Keith Jarvis is located at 1660 Scugog Line 12 in Durham Region. Mr. Jarvis’s father, Leonard, had purchased the farm in the late 1950’s with the intent of operating it as a dairy farm. In 1977, Mr. Jarvis and his brother Ron both took 1/3 shares in the farm. Since 1989, the farm has been split on the basis of 40% for Keith Jarvis; 40% for Ron Jarvis and the remaining 20% for their parents. Leonard Jarvis received a milk license in 1965; the two sons were added to the license in 2005.

29. The family sold 123 kilograms of quota in February, 2007 and no longer runs a dairy operation. Mr. Jarvis testified that:

• the quota was sold as a result of the quota policy changes announced by DFO in November, 2006;
• he’d had no notification that the transfer assessment changes were going to take effect immediately;
• he feared that the transfer assessment might further increase to 25% within a few months after the implementation of the November 21, 2006 policy changes;
• the transfer assessment had eroded his equity by $511,305.52;
• he was not supportive of the proposed quota policy changes outlined in the October 19, 2006 circular addressed to All Milk Producers; and,
• After the February, 2007 sale of quota, he had not tried to repurchase quota; his son had made enquiries regarding financing of quota purchases, but, had not proceeded with a purchase.

30. In a letter dated January 26, 2007 and addressed to John Karn, Secretary to the Board of DFO, Mr. Keith Jarvis writes on behalf of his father Len, mother Margaret, brother Ron and himself regarding the sale of their quota. Mr. Jarvis advises that the family members have decided to sell all their quota on the February Quota Exchange, “…due to the quota policy that came into effect on November 17 ^th, ‘06”. The letter continues by requesting an exemption from the 15% transfer assessment and that this matter be brought before the DFO Board at their January meeting.

31. In a letter to Keith and Ronald Jarvis as Reachvale Farms dated March 15, 2007, George MacNaughton, Director, Production Division of the DFO writes, “The Board considered your request to be exempt from the application of the transfer assessment for the quota that you sold on the February 2007 quota exchange, at the March 13, 2007 Board meeting. The Board did not agree with your argument that the policy was inequitable to producers as all producers have a 10-kilogram exemption, and denied your request. Your request for an exemption from the Pay-What-You-Bid Policy was not considered as you have not purchased quota since this policy came into effect”.

Keith Jarvis, Cross Examination

32. In questioning from Mr. Spurr, Mr. Jarvis testified that:

• two farms had been purchased by family members subsequent to the quota policy changes of November, 2006 and subsequent to the sale of their quota;
• Reachvale Farms did not direct DFO to pay quota sales proceeds to others; the cheque came directly to Reachvale; and,
• Of the proceeds from the sale of the quota, approximately $400,000 was used to pay off outstanding debt resulting in the farm being debt-free at that particular time.

George MacNaughton, Evidence-In-Chief

33. George MacNaughton was raised on a dairy farm in Stormont County that is still operated by his brother. He was hired by the DFO on June 7, 1981 as a Fieldman in southwestern Ontario. He worked as an account manager for the Bank of Nova Scotia in 1990 and in 1991 returned to DFO as Field Service Supervisor. In 1995, he was appointed Manager of Farm Policies and Programs; in 1998, he took on responsibility for the management of the Raw Milk Quality Program in Ontario. Today, he has two positions within DFO; 1) Director of the Production Division; and, 2) Director of Regulatory Compliance.

34. Under questioning by Mr. Spurr, Mr. MacNaughton testified that:

• In 2006, Mr. Denby appealed a somatic cell count penalty that was imposed by the DFO under Regulation 761 of the Milk Act; Mr. Denby asked that the penalty be reconsidered, but, Mr. MacNaughton denied the request; Mr. Denby subsequently appealed to the Tribunal; the Tribunal upheld Mr. MacNaughton’s decision;
• In 2006, Dale McFeeters asked Mr. MacNaughton to review a penalty imposed by virtue of an elevated somatic cell count level; upon recalculating the weighted average somatic cell count for the month of October 2006 the review turned out in Mr. McFeeters’s favour. The penalty against Mr. McFeeters was refunded. These sorts of circumstances occur infrequently - some 20 to 30 times per year.
• DFO policies, including quota policy can be revised on an on-going basis; a number of factors are monitored, e.g. the effectiveness of policies, and then revise them accordingly;
• The DFO tries to revise policies once annually, so that there is consistency in policy;
• The August 1, 2007 version of the policy manual covers the new quota transfer policy; there is a more up-to-date version of the manual on the web that includes two minor revisions;
• Page 1 of the August 1, 2007 version of the policy manual states, “(a) Quota is the property of the Dairy Farmers of Ontario (DFO). It is fixed and allocated to producers on such basis as DFO considers proper and is subject to the terms and conditions of DFO’s quota policies”;
• This clause has been consistent during Mr. MacNaughton’s tenure with the DFO;
• Regarding Section “C” on page 4 of the policy manual, a “same-site quota transfer” means that “if you have an operating farm of what we refer to in a lot of cases as an ongoing operation, then you can move that entire operation to another entity. The majority of them are inter-generational transfers or transferred within family but it’s not restricted to that. Any producer could actually sell their entire farm operation including the quota to another party. So, for example, if you owned a farm, I could purchase it from you and obtain all of the quota”; the transfer assessment would not be applicable in that circumstance;
• Additional quota acquired through the Quota Exchange increases the quota allotment on the acquiring farm – is allocated to one single licence;
• The Quota Exchange has far more transactions each month than there would be in terms of same-site transfers; in terms of volume approximately 40% of the quota transferred would be an inter-generational transfer versus 60% being transferred on the Quota Exchange;
• DFO has operated a Quota Exchange since 1980; prior to 1980, “there were a number of mechanisms used to transfer quota…Producers buying between themselves; there were rental agreements at one point in time; you could purchase…cows on quota; same-site transfers; within family transfers…various methods…”; in each instance, the Board had to approve the transfer from one producer to another; currently, the Board approves all quota transfers on a monthly basis;
• The purpose of the Quota Exchange is to provide all producers with equitable access to both selling and buying quota;
• He oversees the operation of the Quota Exchange and assumed that responsibility in March, 2005; and,
• The Board has granted two exemptions to the transfer assessment and three to letters of direction; “…the two that were actually granted with respect to the application of the transfer assessment were actually for compassionate reasons that had to do with the death of the principal operator of the farm”; regarding the three exemptions for letters of direction, “…the primary reason for all three decisions…the producers were actually dealing with matters and trying to get their affairs in order prior to the change in…policy”.

George MacNaughton, Cross Examination

35. In questioning from Mr. Falconer, George MacNaughton testified that:

• At the time the DFO took over the Raw Milk Quality Program, legal counsel to DFO, Geoff Spurr, described the legal obligation of fairness, as well as errors of omission and commission.

36. The Section 7(1) of the Milk Act R.S.O. 1990, c. M.12 states:

Regulations with respect to regulated products

7. (1) The Commission may make regulations with respect to regulated products generally or to any regulated product, and, without limiting the generality of the foregoing, may make regulations,…

8. authorizing a marketing board,

i. to require that a regulated product be marketed on a quota basis,

ii. to prohibit any person to whom a quota has not been fixed and allotted for the marketing of a regulated product or whose quota has been cancelled from marketing any of the regulated product, and

iii. to prohibit any person to whom a quota has been fixed and allotted for the marketing of a regulated product from marketing any of the regulated product in excess of such quota;

15. authorizing a marketing board,

i. to fix and allot to persons quotas for the marketing of a regulated product on such basis as the marketing board considers proper,

ii. to refuse to fix and allot to any person a quota for the marketing of a regulated product for any reason that the marketing board considers proper,

iii. to cancel or reduce, or refuse to increase, a quota fixed and allotted to any person for the marketing of a regulated product for any reason that the marketing board considers proper, and

iv. to permit any person to whom a quota has been fixed and allotted for the marketing of a regulated product to market any of the regulated product in excess of such quota on such terms and conditions as the marketing board considers proper

37. Section 7(10) of the Milk Act R.S.O. 1990, c. M.12 states:

Acts of marketing board deemed administrative

(10) Everything that is done by a marketing board under the authority of paragraph 15 of subsection (1) shall be deemed to be of an administrative and not of a legislative nature. R.S.O. 1990, c. M.12, s. 7 (10).

38. Mr MacNaughton further testified that:

• He was aware of the provision under section 7(10) of the Milk Act;
• He was aware that in exercising administrative power that he had a duty of procedural fairness to those affected by his actions;

39. Section 6 of the Milk Act – O. Reg. 354-95 states:

Authority of Marketing Board

6. The Commission authorizes the marketing board,…

(j) to require that milk or cream be marketed on a quota basis;…

(m) to fix and allot to persons quotas for the marketing of milk or cream on such basis as the marketing board considers proper;…

(p) to permit a person to whom a quota has been fixed and allotted for the marketing of milk or cream to market milk or cream in excess of the quota on such terms as the marketing board considers proper;

40. Mr. MacNaughton testified that:

• The DFO Board considers subsections 6(j), 6(m) and 6(p) as key in establishing policy concerning quota;
• “Transfer assessment” is one of the matters that the Board considers proper for the purposes of the regulation; and,
• There is no specific reference to “transfer assessment” in Section 6 of the regulation; but that “transfer assessment” is considered to be policy;

George MacNaughton, Re-examination

41. Mr. MacNaughton testified that, regarding the November 17, 2006 Board meeting that resulted in the new policy provisions, it is a normal approach for the principles of a policy to be established by the Board with elaborations or particulars being added subsequent to the exercise; this has happened throughout the history of DFO.

Peter Gould, Evidence-In-Chief

42. Peter Gould is the General Manager of the Dairy Farmers of Ontario. He has worked with the DFO for many years in a variety of positions; starting as an economist, then senior economist, Director of Marketing Division, additional duties related to the Production Division; Director of Regulatory Compliance and now as the General Manager. George MacNaughton replaced him as the Director of Regulatory Compliance.

43. In response to questioning from Geoff Spurr, Mr.Gould testified that:

• Since its inception, the DFO has had the authority to set prices for milk;
• The DFO Board has consciously and aggressively done everything in its ability to ensure that there is no cost of the quota in the cost of milk;
• He believed William Denby was involved in an export scheme that allowed producers to contract with companies to export; DFO would have been involved in Mr. Denby’s acquisition of a FDA import permit by providing assurance that he was qualified to produce;
• Mr. Denby was allowed to begin exporting, but that this was brought to a close due to the change in DFO regulations resulting from the 2002 WTO decision;
• There was concern within the DFO Board regarding the possible outcome of the Doha Round of WTO negotiations which began in 2001; emphasis on this round has been placed on agriculture; high quota values were unsustainable in light of the Doha negotiations;
• The global milk market has changed since November, 2006 – the Canadian dollar has risen in value; international milk prices have also risen, but, that can change quickly;
• In addition to higher quota prices, the DFO Board was also concerned that amortization periods were getting longer and that risks related to interest rates were increasing;
• The DFO had commissioned a study entitled “A Study of Milk Quota Prices in Ontario” that was released in January, 1988 by S. H. Lane and by G. H. Brinkman; as a result of the report, the DFO made no changes regarding quota transfer assessments, nor were any changes made to the operation of the quota exchange;
• The DFO did not commission a similar study for the 2006 quota transfer changes;
• There are two concerns regarding the use of quota as collateral for financing: 1) quota is the property of the DFO, not the producer; 2) treating quota as collateral could increase the security of the asset and could/would result in greater lending and higher quota prices;
• Amortization periods for quota had increased from 3 – 5 years in the 1980’s and through the 1990’s; by 2006, loans were made with amortization periods of 20 years;
• Quota was taking on the characteristics of a financial instrument; there was no question that letters of direction were a factor in the escalating prices of quota; and,
• At least two meetings were held with financial institutions, i.e. Farm Credit Corporation and with the Canadian Bankers’ Association regarding the implications of the proposed quota transfer policy changes;

Peter Gould, Cross Examination

44. In response to questions from Mr. Falconer, Mr. Gould testified that:

• He did not entirely agree with Mr. MacNaughton’s answers to Mr. Falconer’s questions regarding “fairness”;
• He did not recall having any training on “procedural fairness” when he assumed the role of Director of Regulatory Compliance, though he did recall covering the implications of errors and omissions and related liability;
• He did not believe that Mr. MacNaughton had received any training on procedural fairness when Mr. MacNaughton had taken on the role of Director of Regulatory Compliance;
• He agreed that in the context of being the Director of Regulatory Compliance, that the appearance of fairness was very important;
• He is Mr. MacNaughton’s superior at the DFO;
• He was aware of the March 25^th, 2008 Agriculture, Food and Rural Affairs Appeal Tribunal Decision of the appeal of John and Susanna Cayer v. Dairy Farmers of Ontario;
• The DFO had submitted a request to the Tribunal to review that decision;
• No steps had been taken as a result of the Tribunal’s decision on the Cayers v. DFO appeal;
• No specific study or expert report had been undertaken by DFO that advised that the 15% quota transfer assessment had to be implemented without notice, or without providing an opportunity to producers to exit the industry;
• There was a desire by the DFO to move forward on the matter of quota;
• In November 2006, there was no urgency from the point of view of something having necessitated it, but, once information had been distributed to the Ontario and Quebec Boards and then disclosed in an unorganized way to producers, the DFO Board felt that it needed to act;
• DFO membership is divided up into 48 committees, which comprise 12 regions; the committees are based roughly on geographical regions – close to counties; some of the committees decided they would hold information meetings concerning the October 2006 proposed quota policy changes;
• The consultation process was not optimal; but questioned whether the decision would have been any different;
• The DFO Board looks at each case on its own merits when dealing with requests for exemptions to the quota transfer assessment; and,
• The discussions with financial institutions were held more to get feedback from the banks on what they consider to be appropriate regarding any quota policy changes.

45. A letter to George MacNaughton, DFO dated October 4, 2006 from Susan Rivett, Manager Finance Programs and from Rob Mabe, Vice President, Sales of Maxium Financial Services Inc., states, in part:

“During our meeting you made the following comments and observations, recognizing that some of these comments may be your personal observations versus the official position of the DFO:

“…5. DFO expects there is a three to eight year window before the WTO will implement tariffs; consequently DFO will need to lower the price of industrial milk”.

In response to a comment from Mr. Falconer that this statement doesn’t suggest urgency on the part of the DFO to implement changes to quota policy, Mr. Gould indicated that there were other factors that influence the price and markets for milk.

Peter Gould, Re-examination

46. Requests for Special Consideration of DFO quota policy decisions are addressed in Section H, Page 21 of, DFO Policies: Quota, Raw Milk Quality, Milk Transportation, Dairy Farmers of Ontario, August 1, 2007. Part 2 of Section H states:

“If a producer requires special consideration for reasons of not being able to comply with a particular policy(s) in Part 1, DFO’S Quota Committee should be advised of the problem, in writing, providing all of the pertinent details as to why special consideration has been requested.

“The Quota Committee will consider a request and make a recommendation to DFO. DFO, in turn, will reach a decision on the matter and the producer will be so advised.

“If the producer is not satisfied with a DFO decision, the right is granted, under provincial legislation, to request a Hearing and appear before DFO to present their case in person. In this instance, the producer should advise DFO’s Board Secretary, in writing, of their wish to “appeal” DFO’s decision. Beyond DFO decisions, a producer still has the right to appeal DFO’s decisions to the Agriculture, Food and Rural Affairs Appeal Tribunal.

“The producer must appeal a decision of DFO within 90 days of being advised of DFO’s original decision”.

Bruce Saunders, Evidence-In-Chief

47. Bruce Saunders has been the Chair of DFO for 3 years into a 4 year term; he has been on the Board of DFO for 22 years and has been a dairy producer for 38 years.

48. Mr. Saunders testified that:

• He was out of the country when the decision to cancel the November Quota Exchange had been made by the Board.
• In 2005, he detected that a change within the membership that there was an interest in addressing the issue of values; at the DFO annual meeting in 2006, the Board decided that they would take up the interest the delegate body had regarding quota policy; the Board had also heard that the Quebec Board had a similar interest; DFO staff were asked to meet with their Quebec counterparts to see if they could develop a joint proposal that both boards could review.
• Why the November 21, 2006 DFO circular to “All Milk Producers” indicated that the DFO Board had adopted the policy changes “effective immediately”; “stability” was a major reason; concerns that if the Board discussed a policy change and then take no action, then there would be the risk of someone with that knowledge putting the integrity of the organization at risk;
• At the time the Board reached a decision on the changes to quota policy, it felt that the risk related to a possible adverse WTO decision was continuing;
• The level of interest among producers made the Board’s decision regarding quota policy very difficult;
• For a number of Directors, the decision may have been one of the most difficult as a board member, given the relatively new board membership;
• The rationale for cancelling the November, 2006 quota exchange was to allow time to communicate the policy changes to all producers; the Board felt that there was not enough time for all producers to get the information before the November quota exchange; and,
• In terms of conflict of interest, Board members declare them all the time; relative to the November 17, 2006 decision, no member declared a conflict of interest, as all members are dairy producers.

Bruce Saunders, Cross Examination

49. Bruce Saunders is quoted in an article entitled “Caution urged for policies on quota value” in the November 2005 edition of MilkPRODUCER. The final paragraph in the article states: “Interest in the board doing something is greater than in the past,” said board chair Bruce Saunders. He added, however, that delegates appeared to want more of a fine-tuning approach than anything too radical, and plenty of notice before new polices are implemented”.

Under questioning by Mr. Falconer, Bruce Saunders testified that:

• He did not write the article in MilkPRODUCER;
• MilkPRODUCER had quoted him in the past;
• He had not contacted MilkPRODUCER to advise them that they had their facts wrong;
• He could not recall saying that delegates wanted, “plenty of notice” in the interview for the article;
• He did not agree that the 15% quota transfer assessment was more than “fine tuning”; this was the same approach as in 1996, the difference being in the value of quota at the time;
• The Board of Directors did not commission a study to examine the implications of the quota policy changes that were eventually implemented; and,
• The Board’s decision was based, in part, on “gut feeling”.

THE ISSUES

Did DFO have the legal authority in November 2006 to levy a quota transfer assessment? If DFO did have the legal authority to levy a transfer assessment, was the manner in which the transfer assessment was levied in keeping with the basic principles of fairness?

Was DFO’s decision to deny the appellants’ requests for exemptions from the November 17, 2006 quota policy on transfer assessments fair and reasonable?

FINDINGS

The findings of the Tribunal are:

1. The legal authority by which the DFO operates is derived from the Milk Act R.S.O. 1990, c.M.12 and Ontario Regulation 354/95.

2. Section 7 of the Milk Act sets out the criteria by which the Commission may make regulations with respect to regulated products.

3. The authority given in these regulations includes the delegation of authority to a marketing board (the DFO) to market the product, Section 7(1)15.

4. Everything that is undertaken by the DFO under the authority of paragraph 15 of Section 7(1)15 of the Milk Act is deemed of an administrative nature.

5. The authority delegated to the DFO is further detailed in Ontario Regulation 354/95 and provides for the “control and regulation in any and all aspects of the producing or marketing within Ontario of milk and farm separated cream, including the prohibition of that producing or marketing in whole or in part.” (Section 2)

6. The DFO did have the legal authority to in November 2006 to levy a transfer assessment.

7. The DFO determined that there was an issue with respect to the rising cost of quota; DFO determined the cost of quota to have been an issue of concern since 2002 (MacNaughton).

8. In 2006, DFO officials met with their Quebec counterparts to discuss the issue of the high cost of quota.

9. In October 2006, notices were forwarded to all producers to inform them that changes were being contemplated to quota policy, part of which was the implementation of a phased-in quota transfer assessment from January 2007 to August 2009.

10. Despite the fact that the issue of transfer assessments was continuing to be discussed as outlined in the November 1, 2006 memo to all Producers, there was no indication that its implementation would be immediate and with no phase-in period to allow producers time to effectively manage their financial affairs.

11. Other than a joint meeting with the Quebec Board (Federation des producteurs de lait du Quebec) in the Spring of 2006 and a 1988 study commissioned by the DFO, there were no detailed or expert impact analyses conducted to determine the effect such a policy change would have on producers’ business strategies;

12. There was a 16 day period to canvass producers for input into a new policy based on the DFO memo dated November 1, 2006 to all Producers and that this amount of time was not adequate.

13. Despite the fact that there were a number of producer meetings held to discuss quota policy options, there was no reference at the meetings to the immediate implementation of a 15% transfer assessment nor the cancellation of the December 2006 Quota Exchange; which did not permit producers to buy or sell quota during that period.

14. Many of the board members were relatively new to the Board and inexperienced in making such difficult decisions.

15. Based on DFO testimony, there was no sense of urgency and no need for drastic changes to the quota policy and that only fine tuning was needed.

16. The DFO Chair indicated that the decision to implement quota policy changes was based on “gut feeling”.

17. As a result of the DFO’s implementation of the November 21, 2006 quota policy changes, the appellants lost trust in DFO’s management of the industry and accordingly felt they were compelled to exit the dairy industry.

18. As determined by the Supreme Court of Canada in Cardinal v. Kent Institution 1985 CanLII 23 (SCC), [1985] 2 S.C.R. 643 there is a duty to uphold the general common law principle of procedural fairness which lies on every public authority making administrative decisions which is not of a legislative nature and which affects the rights, privileges or interests of an individual. We find that the DFO did not adhere to this principle as its actions deprived the appellants of their right to a fair and open process with respect to the management of their business affairs and subsequently, their future livelihood.

With respect to the individual appellants, he Tribunal finds:

William, John and Betty Denby

19. William Denby and his family have been actively involved in the dairy industry for many years.

20. Mr. Denby vigorously opposed proposals by the DFO to establish policies that he believed would adversely affect his ability to manage his business affairs and those of other producers.

21. Mr. Denby exhausted the limited avenues available to him to contest the transfer assessment policy with no success.

22. Mr. Denby lost trust in the DFO and was left with no other alternative but to leave the industry after his family had made a lifetime commitment to dairy farming.

23. Mr. Denby was given no warning that the 15% transfer assessment would be implemented immediately with no opportunity to sell his quota prior to it taking effect as the Quota Exchange had been closed by the DFO with no prior notice to the dairy producers.

24. The DFO denied Mr. Denby’s formal request to be exempted from the 15% transfer assessment.

25. The implementation of the 15% transfer assessment resulted in a financial loss to Mr. Denby of $153,180.00.

Dale McFeeters

26. Mr. McFeeters had been a full-time dairy farmer since 1982.

27. Mr. McFeeters had vehemently opposed the initial suggested quota policy changes outlined in the DFO’s October 19, 2006 memorandum to producers and had formally informed the DFO of his objections.

28. Mr. McFeeters continued to oppose any changes to the existing policy that would affect the equity he had in his dairy business.

29. Mr. McFeeters was given no warning that the 15% transfer assessment would be implemented in November 2006 and that the Quota Exchange would be closed thus providing him with no opportunity to sell his quota without being subjected to transfer assessment.

30. Mr. McFeeters formally requested to be exempted from the transfer assessment which the DFO denied.

31. The implementation of the 15% transfer assessment resulted in a $139,268.00 financial loss to Mr. McFeeters.

Keith and Ron Jarvis

32. Keith and Ron Jarvis (the Jarvis’) and their family have been full-time dairy farmers since 1965.

33. The Jarvis’ opposed the proposed changes to the quota policy as detailed in DFO’s October 19, 2006 memorandum to producers and formally informed the DFO of their objections.

34. The Jarvis’ had no notification that the Quota Policy changes announced by the DFO in November 2006 would afford him no opportunity to sell his quota and leave the industry without being subjected to a 15% transfer assessment.

35. The Jarvis’s formally requested an exemption from the transfer assessment in January 2007 which was denied by the DFO.

36. In February 2007, having lost trust in the DFO, the Jarvis’ sold their entire quota from which the DFO deducted the 15% transfer assessment.

37. The 15% transfer assessment resulted in a $511,305.02 financial loss to the Jarvis.

ORDER

After careful consideration of the evidence filed and the submissions made the Tribunal orders:

1. The exemptions sought by the appellants are hereby granted.

2. Within thirty (30) days of the date of this Decision, the DFO shall refund:

a)$153,180, without interest, to William and Betty Denby and the estate of John Denby;

b) $139,268, without interest, to Dale McFeeters; and,

c)$511,305.52, without interest, to Keith Jarvis and Ron Jarvis.