Fercan v. Attorney General 2012 ONSC 2365

SUPERIOR COURT OF JUSTICE

BETWEEN:

HER MAJESTY THE QUEEN

Respondent

• against -

FERCAN DEVELOPMENTS INC.

Applicant

R U L I N G O N A P P L I C A T I O N

BEFORE THE HONOURABLE MR. JUSTICE G.M. MULLIGAN,

On March 23, 2012,

at NEWMARKET, Ontario

APPEARANCES

J. Selvaratnam/K. Healey Counsel for the Crown

B. Greenspan/W. Friedman Counsel for the Applicant

Fercan v. Attorney General 2012 ONSC 2365

MULLIGAN, G.M.: (Orally)

[1] This is an application by Fercan for varying a restraint order of Madam Justice Ferguson, dated September 21, 2010 against lands owned by the Applicant Fercan and known as 1 Big Bay Point Road, Barrie. The restraint order was made pursuant to sections 14 and 14.1 of the Controlled Drugs and Substances Act on an ex parte basis. That order prevented the owner from disposing or dealing with the property except with the written consent of counsel for the Attorney General of Canada and the prior approval of the Seized Property Management Directorate (SPMD).

[2] The Applicant has sought the approval of the Attorney General, but has not received the consent to the terms of the sale, which it presented and brings this variation Application.

[3] The Attorney General opposes the variation on a number of grounds.

[4] By way of background, the property is now vacant land. However, it previously contained a former brewery plant, but became a substantial commercial marijuana grow-op operation while owned by the Applicant.

[5] The Applicant purchased the property in 2001 for eight million dollars and the vendor took back a mortgage for $4 million. In 2003, the applicant arranged a mortgage with FirstOntario Credit Union Ltd. for $3 million. This mortgage allowed the applicant to pay out the vendor take-back mortgage. The FirstOntario mortgage remains registered on the subject property. A Mortgage Discharge Statement was provided by FirstOntario indicating that the current balance on the mortgage, together with interest to April 30, 2012, is $2,414,443.73 together with any additional legal fees. FirstOntario is not a party to these proceedings and has not provided an affidavit.

[6] The Applicant has entered into an agreement of purchase and sale for a purchase price of $7,350,000.00. Both Applicant and Respondent acknowledge that this represents the fair market value of the property. The sale is now set to close April 30, 2012 and the Applicant has until March 30th, 2012 to obtain the consent of the Attorney General for Canada.

[7] The Applicant seeks to have a court ordered variation to enable it to complete this sale on terms that it would pay out the FirstOntario mortgage and related sale costs and then remit the balance to the Attorney General to await the outcome of the anticipated enforcement proceedings under the Controlled Drugs and Substances Act. Those proceedings are ongoing before the Ontario Court of Justice and approximately nineteen days have been set aside for these issues in September of 2012.

[8] The parties do not dispute that this court has jurisdiction to vary a restraint order on proper grounds.

[9] The Attorney General opposes the sale, or any sale that would enable FirstOntario to be paid out prior to a determination of its entitlement pursuant to the CDSA section 20.

[10] Although not a party to these proceedings, both FirstOntario and the proposed purchaser attended at the hearing, represented by counsel.

[11] It is clear, from the record before me, that although FirstOntario is prepared to provide a discharge of its mortgage upon receipt of the funds requested, it is not prepared to discharge the mortgage on the subject property on the basis that the funds are to be paid to the Attorney General to await a hearing on its entitlement.

[12] The Restraint Order makes provision for a mortgagee, such as FirstOntario, to proceed with its own remedies to enforce its security, if so inclined. The Restraint Order provides an exception, which provides in part:

1(a) Any financial institution as defined by the Bank Act, 1991 c.46 as amended, may take possession, repair and sell a property pursuant to the rights assigned to it, under any charge, mortgage or encumbrance that was registered prior to the date of this Order.

(b) Any financial institution exercising its right under this paragraph, must provide a full accounting to counsel for the Attorney General of Canada of any proceeds arising from the sale of the property and must forward any net proceeds from that sale to the Seized Property Management Directorate (SPMD) to be held until an Order is made, as set out in paragraph 5 below.

[13] The record indicates that the FirstOntario mortgage is in arrears by four months and that it will consider taking its own enforcement proceedings if the sale as requested by the applicant is not proceeded with.

[14] In addition to the mortgage payout issue, the Attorney General raised several other issues surrounding the transaction including whether or not the purchaser was in fact an arm's-length purchaser and whether or not the contract that was between the Applicant and the proposed purchaser, was a binding and legal contract.

[15] In my view, the issue of the contract is an issue between the parties to the contract and does not assist the Attorney General in these proceedings. Simply put, if the Order is granted and the transaction is completed, the Attorney General will have the proceeds and those contractual issues will be moot. In addition, there is no evidence before me to raise any inference that this is a non-arm's-length transaction. The property was listed commercially and sold after being exposed to the market. The proposed purchaser is separately represented. There is nothing to raise suspicion about the sale, given that the Attorney General acknowledges that the sale price is fair market value.

[16] The issue of the payment of the mortgage to FirstOntario gives me more concern. This is not a case where FirstOntario brings the application seeking to sell the property under power of sale or by way of other enforcement proceedings. FirstOntario is not a party to these proceedings and therefore, has not brought an application to be paid from a sale in advance of the legislative scheme contemplated in section 20 of the CDSA. FirstOntario has provided a Mortgage Discharge Statement, which it is no doubt required to do under the provisions of its charge. FirstOntario has not agreed to allow the sale to proceed if the mortgage proceeds are to be paid to the Attorney General to await the outcome of a further hearing.

[17] The record before me indicates that the Attorney General has opposed the pay-out of this mortgage as evidenced by its letter of December 1, 2011, which provided in part:

All of the proceeds of the sale, including a third party interest, brokerage and legal fees, disbursements and mortgage interests that would otherwise be discharged, are to be forwarded by a cheque made payable to the Receiver General of Canada. This includes the interests of the following: (a) FirstOntario Credit Union Ltd.

[18] The record also indicates that by a letter dated March 1, 2012 the Attorney General further elaborated on this position by stating in part:

"The Attorney General has also consistently maintained, in accordance with the terms of the Restraint Order, that we will not concede the interest of any mortgagees or third party interest holders in this matter. Those interests are to be determined in a separate hearing in accordance with section 20 on of the Controlled Drugs and Substances Act, should those parties wish to bring an application post-forfeiture. The Attorney General has serious concerns about the circumstances under which the mortgage was extended and maintained, and anticipates a full hearing on this issue."

[19] The Attorney General further provided in its factum at paragraph 24-25:

24. The property was acquired by Fercan on October 5th, 2001. Growth schedules found at the property date from March of 2002. In January of 2004, the execution of search warrant resulted in the well publicized discovery of the then largest marijuana grow operation in Canadian history. In 2010, employees of Fercan were charged and subsequently convicted of CDSA offences in relation to this matter.

25. In this case, FirstOntario advanced a $3 million mortgage at 6.7 % per annum on the property and another property on September 25th, 2003 at a time when the relevant offences were well underway.

[20] The Attorney General raised an issue about other mortgages registered by FirstOntario on the property. However, I am satisfied on the material before me and the submissions made by counsel, that those mortgages are paid in full and that discharges are available for registration, provided that both parties advise the Land Registry Office that such discharges would not offend the No Dealings Order registered by the Attorney General.

[21] The Attorney General further states at paragraph 27:

"No documentation has been provided to indicate how or why such over encumbrances occurred, how much money was advanced by FirstOntario to Fercan, how much has been repaid, and how much FirstOntario has made from what the Crown intends to establish was offence-related property."

ANALYSIS

[22] The Applicant relied on several decisions for authority that there should be a Variation Order enabling the applicant to pay out the mortgage. In Balemba v. R. 2009 Carswell Ont. 953, Gilmore J. at paragraph 59, spoke of the legislative scheme and the important purpose of ensuring that property used in the commission of a drug offence is no longer available for continued use in criminal activity.

However, with respect to the mortgagee before her, she stated at paragraph 61:

"The interests of 136 [a mortgagee], an innocent third party, should thus be considered. Paying out the mortgage amount owed to 136 is consistent with 136's legitimate property rights."

At paragraph 58, Gilmore J. stated:

"136 takes the position that the Crown may not interfere with an innocent third party's interest, such as a bone fide secured creditor, unless that creditor has colluded or was complicit with Mr. Balemba." I agree.

There being no dispute as to the innocence of the third party, Justice Gilmore's order enabled the pay-out of the mortgage.

[23] Northshore Credit Union v. Pham 2005 BCSC 1862, 2005 B.C.S.C. 1862, related to a foreclosure action in the face of Restraint Order pursuant to the CDSA, the court allowed the sale by the mortgagee determining that the property did not need to be held in specie. However, the order was on terms that the Credit Union pay the funds into court to stand in the place of the property. As the court stated at paragraph 22:

"Further, the net proceeds are restrained to the same extent as the property and subject to forfeiture pursuant to the Controlled Drugs and Substances Act, as amended as if the net proceeds are offence related properties."

[24] Scotia Mortgage Corp. v. Leung 2006 BCSC 846, 2006 B.C.S.C. 846 involved an application by a lender to sell real property by way of a variance to an existing Restraint Order under the CDSA in order to allow the mortgage company to complete its foreclosure proceedings and pay the monies into court to stand in place of the real property under restraint. In making the order, the court stated at paragraph 41:

"If Attorney General were able raise even a prima facie case that the mortgage lender were complicit with or in collusion with acts on drug related property, I would not grant such an order at this stage of the proceedings. However, in the case of an innocent third party mortgage lender, such an order should be granted."

[25] The court granted the order, but still required the proceeds to be paid into court to stand in place of the property on terms similar to the Northshore Credit Union case supra. An appeal of that Order to the Court of the Appeal was unsuccessful see: 2007 BCCA 304, 2007 B.C.C.A. 304. As the court noted in paragraph 6:

"Maple Trust is a commercial lending institution. There is no suggestion by the Attorney General that it was complicit in any of the drug offences alleged as connected with the Walton property."

[26] In the face of clear finding that Maple Trust was an innocent party, by both the application judge and the Court of Appeal, the sale was allowed to be completed, but the court confirmed that the proceeds of the sale by the mortgagee had to paid into court.

[27] R. v. Wisniewska 2007 Carswell Ont., 3244 is a brief decision of McCombs J., the court found in the facts before it was a bone fide agreement of purchase and sale and it allowed the sale to proceed. The issue of the mortgagee's right was not explored in the decision. However, the court noted at paragraph 10:

"In the circumstances, I see no basis to refuse to permit the transaction to close. However, the net proceeds are to be protected pending a determination of the issue of entitlement."

[28] There is nothing in that decision, which indicates whether or not a mortgagee was involved, whether or not the mortgagee was an innocent party, and whether or not the mortgagee, if any, was entitled to be paid out of the gross proceeds.

[29] The respondent, the Attorney General, provided a number of judicial authorities, which provide guidance on application such as these and more significantly on the legislative regime that third parties may avail themselves of pursuant to the Controlled Drug and Substances Act.

[30] In Canada (Attorney General) v. 311165 B.C. Ltd., MacKenzie, J., dealt with an application to vary a restraint order. As she set out in paragraph 2:

"The Attorney General is correct that the restraint procedure is not intended to determine whether in fact the property is offence related property, nor whether in fact the owner of the property is innocent of complicity or collusion of the drug crime alleged; those issues are to be determined at the forfeiture hearing itself."

As the court noted at paragraph 43:

"The CDSA does not include a statutory right for interested parties to challenge or set aside the Restraint Order. The statute contemplates that the rights and entitlements of owners and others who may have interests in the restrained property will be adjudicated upon the course of the forfeiture hearings, following a conviction for a designated substance offence." [citations omitted]

[31] As the court concluded at paragraph 86:

"The application for leave to apply to set aside the Order is refused because such a hearing would only amount to a premature adjudication of the very issues that fall to be determined at the forfeiture hearing itself should there be a conviction on the predicate offences."

[32] The legislative scheme was reviewed by the Supreme Court of Canada in R. v. Craig 2009 SCC 23, 2009 S.C.C. 23. As the court noted when referring to the CDSA:

"Separate sections deal with protecting the interests of innocent third parties in the property to be forfeited."

[33] In R. v. 1431633 Ontario Inc. 2010 ONSC 266, 2010 ON SC 266 Malloy J., dealt with a claim of a construction lien claimant at an opposed forfeiture hearing. The court noted Parliament's intention at paragraph 30:

"Although Parliament intended to deprive criminals of the fruits of their crimes, it clearly did not intend to do so at the expense of innocent third parties who may have a legitimate interest in the same property. That is the purpose of the provisions permitting relief from forfeiture (such as s. 462.42), and that purpose must be kept in mind when considering whether a particular Applicant is entitled to the relief sought."

[34] In the post-forfeiture hearing, the court made the following comments about onus at paragraph 23:

"There is an onus on the claimant to prove that there has been no complicity or collusion with respect to the offence that resulted in the forfeiture and to show that any interest obtained by the claimant was not obtained in circumstances leading to the reasonable inference that title or right was transferred in order to avoid forfeiture."

[35] In R. v. Vu 2011 BCSC 1398, 2011 B.C.S.C. 1398, Justice Silverman, once again, reviewed the onus on the claimant within the context of a Ruling under section 20 of the CDSA. When comparing sections 16, 19 and 20 of the Act the court stated at paragraph 28:

"Some of the similarities between the two sections are as follows:

1. Both sections use almost identical wording in requiring that, before any relief can be granted, the judge must be satisfied that the applicant appears innocent of any complicity...or of any collusion in relation to [the offence].

2. Both sections place the onus of proof with respect to the question of complicity and collusion on the applicant."

As the court went onto say at paragraph 30:

"It would be unwise to attempt to set out what types of third parties might be successful in making claims under section 20. I do note that section 20(4) explicitly refers to 'Where the applicant is a mortgagee or lien holder,...'"

CONCLUSION

[36] The Applicant seeks approval for a sale of property enabling the Applicant to pay out the first mortgage in favour of FirstOntario. It is clear that the court has power to vary an ex parte restraint order, but the position of the Attorney General has to be considered. It does not concede at this stage of the proceedings, that the mortgagee is an innocent third party, given the timing of the mortgage registration and the submissions that the grow-op activity started approximately a year prior to the mortgage. In my view, the Attorney General has raised a prima facie case.

[37] In looking at the application, it is important to look at it in context of the very large dollars that are involved here. This perhaps distinguishes this case from others that counsel referred to. The proposed sale price is $7,350,000.00. It is acknowledged that this is the fair market value of the property. If that amount was paid to the Attorney General from a sale, then there would a further and better opportunity to review any issues surrounding the placement of the first mortgage by FirstOntario. Given that the Attorney General does not, at this point, concede that FirstOntario is an innocent third party, it would be premature to enable FirstOntario to be paid out, prior to a full hearing, under section 20 of the CSDA with FirstOntario being a party.

[38] I remind myself that this is not an application by the Credit Union pursuant to the exceptions in the restraint order. Although it is offered a Discharge Statement, it has made it clear it will start its own proceedings if the sale is not completed. Under the provisions of the restraint order, if it sells the property it will be required to pay the funds to the Attorney General subject to the ultimate determination under section 20 of the CSDA. In my view, FirstOntario should not be put in better position under Fercan's application than it would be if it brought its own application.

[39] Under the circumstances, the application by Fercan Developments Inc. is dismissed. However, this is without prejudice to Fercan bringing a further and better application.

[40] This relief does not prevent the Applicant from continuing to seek the consent of the Attorney General to this sale on such amended terms as the parties may agree.

CERTIFICATE OF TRANSCRIPT (SUBSECTION 5(2))

EVIDENCE ACT

I, Donna Dobson, Certify that this document is a true and accurate transcript of the recording of R. v. Fercan Developments Inc. in the Superior Court of Justice held at 50 Eagle Street West, Newmarket taken from Recording No. 401-20120323-134707, which has been certified in Form 1.