COURT OF APPEAL FOR ONTARIO
Feldman, MacFarland and Strathy JJ.A.
BETWEEN
Lloyd Benedict
Respondent
and
Ohwistha Capital Corporation
Appellant
Charlene Desrochers, for the appellant
Graeme A. Hamilton and Donald R. Fiske, for the respondent
Heard: June 5, 2013
On appeal from the judgment dated January 6, 2011 by Justice Charles T. Hackland of the Superior Court of Justice, reported at 2011 ONSC 18.
1Section 89(1) of the Indian Act, R.S.C. 1985, c. I-5 prohibits an Indian (as defined in the Act) from granting security on any of his or her real or personal property on the reserve except to another Indian. Section 89(2), however, allows a person who has sold a chattel to an Indian but retained title or the right to possession, to exercise his rights against the chattel even if the chattel is on the reserve.
2In this case, the appellant, Ohwistha Capital Corporation (OCC), an Aboriginal Capital Corporation but not an Indian as defined in the Act, loaned the respondent, Mr. Benedict, an Indian on reserve, $125,000 for the purpose of his fish hatchery business. In order to provide OCC with security for the loan on some chattels that belonged to Mr. Benedict, the parties attempted to structure their arrangement in such a way as to comply with s. 89(2) of the Act in order to avoid the effect of s. 89(1).
3The issue on the appeal is whether they were successful.
4Sections 89(1) and (2) of the Act provide:
- (1) Subject to this Act, the real and personal property of an Indian or a band situated on a reserve is not subject to charge, pledge, mortgage, attachment, levy, seizure, distress or execution in favour or at the instance of any person other than an Indian.
(2) A person who sells to a band or a member of a band a chattel under an agreement whereby the right of property or right of possession thereto remains wholly or in part in the seller may exercise his rights under the agreement notwithstanding that the chattel is situate on a reserve.
The Facts
5The action proceeded based on an Agreed Statement of Facts together with the filing of the relevant documents. As did the trial judge, I reproduce below the relevant paragraphs from the agreed statement:
The Plaintiff, Lloyd Benedict (“Benedict”), who resides on Akwesasne Reserve No. 59 in Ontario, is an “Indian” in accordance with the definition set out in the Indian Act.
The Defendant, Ohwistha Capital Corporation (“Ohwistha”), was incorporated as a non-profit corporation by Federal letters patent of July, 1991. Its head office is located on the Mohawk territory of Akwesasne. Ohwistha offers access to capital and provides developmental lending to Aboriginal owned enterprises through its various services. Ohwistha is not a status Indian under the definition of the Indian Act.
The Defendant, Wally Oakes (“Oakes”), who is an Indian and member of the Mohawk Community of Akwesasne, was a member of the Board of Ohwistha. At all material times, Mr. Oakes was an employee, agent or servant of the Defendant, Ohwistha.
On or about February 19, 2002, Benedict submitted an Application for Financing to Ohwistha. The application was to obtain financing for Benedict’s business, “Ekohawk Yellow Perch Hatchery,” which was located on the Mohawk Territory of Akwesasne.
On or about May 27, 2002, Ohwistha approved the loan application submitted by Benedict.
Benedict received and accepted on June 7, 2002 an Offer to Finance delivered by Ohwistha, dated May 27, 2002, in the amount of $125,000.00. It was for a term of 5 years; it began with a 6 month interest only period. The interest rate of the financing was 10% compounded semi-annually not in advance from the date of disbursement.
Payments of the loan were to be applied first toward outstanding interest and secondly to the reduction of principal. Regular payments were to begin one month following disbursement. Late payment charges and insufficient fund charges were applicable.
The loan documents consist of: the Offer to Finance; a Bill of Sale, dated June 6, 2002; a Promissory Note, executed by Benedict on June 7, 2002; a Conditional Sales Contract, dated June 7, 2002; and a Personal Guarantee executed by Benedict, dated June 7, 2002.
The loan transaction was structured in the following manner. A Bill of Sale was executed by Oakes as purchaser and Benedict as seller that notionally transferred title to certain equipment from Benedict to Oakes. In exchange Benedict received a notional payment of $125,000.00. As both the purchaser and seller were status Indians, sales tax was not payable. If Ohwistha was identified as the purchaser, sales tax would have been payable.
A conditional sales contract (the “Benedict CSC”) was executed by Benedict as purchaser and Oakes as seller, in which Benedict notionally bought back the same equipment. The equipment was identified as collateral in an attached Schedule ‘A’.
The Benedict CSC contemplated a future assignment to Ohwistha of the rights accruing to Oakes thereunder but neither Oakes nor Ohwistha has produced a document evidencing the assignment, and Benedict was never given notice of an assignment. It has been acknowledged that an assignment never occurred.
$125,000.00 was advanced via cheque from Ohwistha to Benedict on or about June 7, 2002.
Ohwistha registered a Financing Change Statement as a secured creditor on July 7, 2003. A Financing Statement was never registered.
6Essentially, Mr. Benedict sought a business loan of $125,000 from OCC. OCC is an Aboriginal Capital Corporation (ACC) established with the support of the federal government in order to make loans to aboriginal-owned businesses. It is “an aboriginal owned company…. It lends to aboriginal owned enterprises by way of small business loans and other financial vehicles.” (Reasons para. 5). In this case, Wallace Oakes, an on-reserve Indian, was initially the president of OCC and later, its general manager.
7The loan was structured as a conditional sale of chattels. The chattels belonged to Mr. Benedict. He sold them to OCC (through Wally Oakes as agent to avoid sales tax), then Mr. Oakes on behalf of OCC sold them back to Mr. Benedict by conditional sale. Under the fiction of paying for those chattels, OCC loaned Mr. Benedict the $125,000 he was seeking to borrow for his fish hatchery business.
8The chattels are listed in schedule “A” to the Bill of Sale and the Conditional Sale Contract and consist of old, used farm equipment. While there is no indication of the value of the used equipment, the Bill of Sale states that the sale price is $125,000. The Conditional Sale Contract between Mr. Benedict as buyer and Mr. Oakes as seller provides that Mr. Oakes is selling the schedule “A” chattels to Mr. Benedict for $125,000, financed by the seller at 10% per annum. Although the contract is titled “Conditional Sale Contract”, there is no specific reservation of title in the conditions. However, the conditions include the right on default of payment to take possession of the property, although the contract does not refer to the fact that the chattels are situated on a reserve.
9In effect, OCC obtained some on-reserve chattels from Mr. Benedict without paying for them, then secured its business loan on those on-reserve chattels.
10Following the transaction, Mr. Benedict made four interest installments on the loan then stopped making payments. He subsequently went bankrupt. Following his discharge from bankruptcy, OCC seized the schedule “A” chattels from Mr. Benedict on the reserve. Mr. Benedict denied OCC’s right to do so, relying on s. 89(1) of the Indian Act, and sued for damages.
11The trial judge found OCC liable for conversion. He held that OCC’s seizure of the chattels on the reserve contravened s. 89(1) and was not allowed under s. 89(2). His key findings at paras. 22 and 23 are:
22I am of the opinion that this transaction does not fall within the wording or the intent of s. 89(2) of the Indian Act. Ohwistha is not a seller of goods or chattels wherein a right of property or right of possession “remains” in the seller. This transaction was a cash loan by a commercial lender. As Benedict’s counsel points out, Ohwistha is in the same legal position as a bank, finance company or other commercial lender with the result that if this transaction falls within s. 89(2), any of these non-Indian lenders can seize chattels on Indian lands pledged as security for loans by structuring their transactions in this manner. Such a practice would defeat the purposes of s. 89(1) of the Act which is designed to protect Indians on reserves from seizure of their chattels by non-Indians. I agree with the plaintiff’s submission that enforcement of this agreement would serve to avoid s. 89(1) of the Indian Act insofar as it pertains to security agreements and would open the door to any financier, conducting business on a reserve or with individuals residing on a reserve, to use a two step avoidance transaction: whereby the debtor “sells” collateral to the lender and then “buys” it back in order to avoid the protections afforded to Indians in s. 89(1).
23In the court’s opinion, it does not assist Ohwistha that it, through its agent Oakes, purported to purchase the equipment and hold it then sell it back but retain title as security for their loan. This aspect of the transaction was a pure fiction. The equipment never left Benedict’s possession on the reserve. A transaction structured in this fashion does not constitute Ohwistha as a seller of chattels within the intent of s. 89[(2)] and for that reason the general bar to seizing an Indian’s property on Indian lands in s. 89(1) of the Indian Act applies.
Issues
12There are two issues on the appeal: 1) Is it a contravention of s. 89(1) of the Indian Act to structure a transaction which effectively grants security over existing chattels that are on the reserve, so that the transaction complies with s. 89(2)? If not, does this transaction comply with s. 89(2)?
Discussion
13Section 89 of the Act was enacted in the 1951 revision of the original Indian Act. The original Act contained a similar provision, s. 66, which read as follows:
- No person shall take any security or otherwise obtain any lien or charge, whether by mortgage, judgment or otherwise, upon real or personal property of any Indian or non-treaty Indian within Canada, except on real or personal property subject to taxation under section sixty-four of this Act: Provided always, that any person selling any article to an Indian or non-treaty Indian may, notwithstanding this section, take security on such article for any price thereof which may be unpaid.
14While the purpose of s. 89(1) was to protect all real and personal property on reserve from being used as collateral or security for a loan made by anyone other than an Indian, s. 89(2) allows aboriginals on reserve to purchase goods from sellers off the reserve and to do so on credit. This provision gives the seller the ability to repossess any goods sold to an Indian on reserve on default of payment.
15In Mitchell v. Peguis Indian Band et al, 1990 117 (SCC), [1990] 2 S.C.R. 85, at paras. 87-88 La Forest J. explained that the purpose of ss. 87-89 of the Act was to protect Indians from losing their land or their chattels on the reserve to non-Indians:
“…the Crown has always acknowledged that it is honour-bound to shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold qua Indians, i.e., their land base and the chattels on that land base….An examination of the decisions bearing on these sections confirms that Indians who acquire and deal in property outside lands reserved for their use deal with it on the same basis as all other Canadians.” [paras. 87-88]
16The Supreme Court again discussed the protective purpose of a number of provisions of the Indian Act as well as some of the consequences of those provisions in McDiarmid Lumber v. God’s Lake first Nation, 2006 SCC 58, [2006] 2 S.C.R. 846.
17McLachlin C.J. explained how the paternalistic attitude of the federal government toward aboriginals in the 19th century was reflected in the protective policy of the Act, which placed restrictions on aboriginal economic activity with non-aboriginals that affected aboriginal lands and property. She stated at para. 50: “The 19th century exemption provisions were born of a fear that Indians and their lands and property were subject to exploitation by others.” However, by the 1930s and 1940s, “self-determination and self-government had emerged as an aspiration, if not a reality, and bands were beginning to embark on projects to improve their economic situation” (para. 51).
18Nevertheless, as McLachlin C.J. stated at para. 55, the tension between the old and the new approaches continued to exist. This tension was reflected in the new Indian Act enacted in 1951, which continued to include provisions for the protection of aboriginals from exploitation by others. One such provision is s. 89(1).
19In God’s Lake, the focus was not on s. 89 but on s. 90 of the Act, another protective section. In deciding that s. 90 should be given a narrow meaning, the court referred to the finding of the Royal Commission on Aboriginal Peoples in its 1996 report (“RCAP report”), which stated that s. 90 (as well as other sections including s. 89(1)) limits the ability of aboriginal peoples to access credit because it restricts the ability of lenders to secure loans using reserve lands or chattels located on reserve lands. The Royal Commission concluded that the Act’s restrictive provisions were “a significant deterrent to financing business activity on-reserve.”
20The court in God’s Lake referred to the Royal Commission’s recommendations regarding overcoming the restrictions created by the Act, which included abolishing them. McLachlin C.J. observed that although the court could not abolish any provisions of the Act, it could give some provisions a narrow reading in order to help meet the concern about limited access to credit by aboriginals on reserve resulting from these restrictions (para. 42).
21One of the steps that the federal government took to make funds available for aboriginal enterprise was the establishment of ACCs across the country in 1989. The ACCs were funded by the federal government, but were expected to become self-sufficient in terms of administration and operating costs from interest earned on loans; this, however, proved to be very difficult (RCAP report, vol. 2 at p.916-917). The Royal Commission made a number of recommendations to improve the financial viability of the ACCs, such as having the federal government provide a continuing operating subsidy (RCAP report, vol. 2 at p.917).
22In its discussion of possible amendments to the Indian Act, the Royal Commission also raised the possibility of allowing Aboriginal financial institutions to seize Aboriginal lands or property but without the right to sell them outside the community (RCAP report, vol. 2 at p.927).
23From this history emerges the backdrop to the issues that have arisen for decision in this case. To date, the Indian Act has not been repealed or amended to remove the restriction on using on-reserve chattels to secure new loans that is created by s. 89(1). This provision, intended to protect aboriginals from being exploited by non-aboriginals and losing their on-reserve property, is viewed on the one hand as paternalistic, but on the other hand as still possibly beneficial as a protective measure.
24In the present case, the respondent, Ohwistha, an ACC with the mandate to lend funds to aboriginals for their business ventures, wanted to lend money to Mr. Benedict and sought to take some security in the event of default. In order to try to avoid the restriction in s. 89(1), Ohwistha attempted to structure the loan as a conditional sale of chattels that belonged to Mr. Benedict but which he first transferred to Ohwistha (through Mr. Oakes), in order to comply with and come within s. 89(2).
25The debate before this court was whether the court should apply the approach of the Supreme Court in God’s Lake to ease restrictions on the ability of aboriginals to obtain credit by interpreting s. 89(2) in a way that allows loans to be made using on-reserve chattels as security, by the device of a two-step conditional sale transaction. Or, whether the court should ensure that the purpose of s. 89(1) is not undermined by transactions that are structured so as to circumvent it.
Disposition
26The agreed facts state in para. 10 that Mr. Benedict as seller “notionally transferred title to certain equipment from Benedict to Oakes,” and that in exchange, Mr. Benedict received a notional payment of $125,000. And in paragraph 11, the agreed facts state that “Benedict notionally bought back the same equipment.” [Emphasis added]
27I agree with the parties that the transaction they purported to enter into was merely notional because the payment was notional. The transaction purported to be a sale and repurchase of Benedict’s equipment as well as a loan to him using the same $125,000. Because the two sales were merely notional, they were accurately described by the trial judge as a “pure fiction”.
28The Royal Commission identified the significant discriminatory effect of s. 89(1) on the ability of aboriginal peoples to access credit. Were it possible to interpret s. 89(2) so as to mitigate this effect, and to facilitate access to credit, it might be appropriate to do so. It cannot, however, be done where the transaction under scrutiny cannot come within s. 89(2) because it is effectively a sham. That could give rise to the very abuses the legislation is designed to prevent. It would also conflict with the purpose of s. 89(1) – to protect from seizure personal property on reserve.
29Parliament may decide that it is desirable to give ACCs the flexibility to employ lending practices that would facilitate access to credit by aboriginals on reserve, such as by adding ACCs to the exemption in s. 89(1). That decision, however, and the manner in which to implement it, is for Parliament.
Conclusion
30I would dismiss the appeal with costs fixed at $20,000 inclusive of disbursements and HST.
Released:
“JAN 29 2014” “K. Feldman J.A.”
“KF” “I agree J. MacFarland J.A.”
“I agree G.R. Strathy J.A.”
