NEWMARKET COURT FILE NO.: 2365

DATE: 20120822

ONTARIO
SUPERIOR COURT OF JUSTICE

BETWEEN:

FIRSTONTARIO CREDIT UNION LIMITED Applicant – and – HER MAJESTY THE QUEEN Respondent

C.P. Criminisi, for the Applicant

K. Healey and J. Selvaratnam, for the Respondent
W. Friedman for Fercan Developments Inc.
L. Dizgun for Prime Real Estate Holdings Corp.

HEARD: August 13, 2012

MULLIGAN J.

[ 1 ] This is an application by FirstOntario Credit Union Limited (FirstOntario) for an order varying the restraint order of Justice J. Ferguson, dated September 21, 2010. The subject lands are owned by Fercan Developments Inc. 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 consent of the Attorney General of Canada. However, the order made limited provisions for sale under power of sale by a mortgagee.

[ 2 ] The owner of the subject property, Fercan Developments Inc., brought a previous application for an order varying the restraint order to enable it to sell the subject property. For Reasons released as R. v. Fercan Developments Inc., [2012] O.J. No. 2784 and R. v. Fercan Developments Inc., [2012] O.J. No. 2792, the owner’s application was dismissed.

[ 3 ] FirstOntario brings this application to enable it to sell this property to the same proposed purchaser for the same purchase price with the provision that it be enabled to pay the balance on its mortgage and related costs of sale, together with a payment of tax arrears to the Municipality of the City of Barrie. The Attorney General for Canada opposes the application.

[ 4 ] The proposed purchaser, Prime Real Estate Holdings Corp., attended at this hearing and brought a companion motion which was adjourned sine die. However, it is clear from the submissions of counsel that Prime is prepared to purchase the property from the mortgagee, FirstOntario under power of sale proceedings for the same price which it agreed to in its contract with Fercan. As I indicated in my previous ruling, the proposed purchase price of $7,350,000 has been acknowledged by the Attorney General as representing the fair market value of the property.

[ 5 ] Although Prime has not entered into an agreement with FirstOntario, it is prepared to do so pending the court’s determination of the issues on this application.

THE RESTRAINT ORDER

[ 6 ] The restraint order does make provisions, on a limited basis, for the sale of the property by a financial institution. As set out in para. 1 on the order:

1. Subject to the exceptions noted below in this paragraph, no person shall dispose of or otherwise deal with the Property or any interest in the Property, in any manner whatsoever, except as provided for in this Order or by further order of this court. The recognized exceptions are:

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

(b) Any financial institution exercising its rights 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. For the purposes of this Order, net proceeds is defined as the sale proceeds less all reasonable and ordinary costs associated with the possession, repair and sale of the Property pursuant to the terms and conditions of the said charge, mortgage or encumbrance.

[ 7 ] It is acknowledged by the Attorney General that FirstOntario is a financial institution as defined by the Bank Act, 1991, c.46.

[ 8 ] The exception provided in the order would require a financial institution to remit all of the net proceeds to the Attorney General, save and except for reasonable and ordinary costs associated with the sale. However, that is not what FirstOntario was seeking in this case. They are seeking to pay out their mortgage first and then remit the remaining net proceeds to the Attorney General.

[ 9 ] The Attorney General opposes this variation on the basis that the applicant must first demonstrate a lack of complicity or collusion in the underlying drug activity conducted at the premises. As the Attorney General sets out in its Factum:

Banks and other financial institutions have an obligation to ensure that they do not become complicit in financing drug production and trafficking or other offences such as mortgage fraud or money laundering. Whether the applicant can meet its onus to demonstrate lack of complicity or collusion will be canvassed either in the full context of a hearing before the Ontario Court of Justice for restoration of the property under s.19(3), or with the benefit of a transcript of the forfeiture proceedings in an application for relief from forfeiture before the Superior Court of Justice under s.20 of the C.D.S.A.

[ 10 ] In R. v. Fercan Developments Inc., [2012] O.J. No. 2784, at para. 36 I made the following preliminary finding which informs my decision in this case:

It [the Attorney General] does not concede at this state 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 activities started approximately a year prior to the mortgage. In my view, the Attorney General has raised a prima facie case.

[ 11 ] It is not disputed that neither Fercan Developments Inc. nor its shareholder Vince DeRosa were charged with any criminal offences underlying the restraint order, or any events or relation to the property. Nor were there any charges against FirstOntario. The individuals charged and convicted were sentenced in the Ontario Court of Justice. As a result of those proceedings, forfeiture proceedings are set to commence on August 21, 2012, in the Ontario Court of Justice, and twenty-three days of court time have been set aside for the hearing of that matter.

JURISDICTION

[ 12 ] It is clear that this court has jurisdiction to deal with these issues prior to the forfeiture hearing. Section 19(1) of the Controlled Drugs and Substances Act, S.E., 1996, c.19 states:

Before making an order under subsection 16(1) or 17(2) in relation to any property, the court shall require notice in accordance with subsection 2 to be given to, and may hear, any person who, in the opinion of the court, appears to have a valid interest in the property.

[ 13 ] Section 19(3) provides:

Order of restoration of property

(3) Where a court is satisfied that any person, other than

(a) a person who is charged with a designated substance offence, or

(b) a person who acquired title to or a right of possession of the property from a person referred to in paragraph (a) under circumstances that give rise to a reasonable inference that the title or right was transferred for the purpose of avoiding the forfeiture of the property,

is the lawful owner or is lawfully entitled to possession of any property or any part of any property that would otherwise be forfeited pursuant to an order made under subsection 16(1) or 17(2) and that the person appears innocent of any complicity in an offence referred to in paragraph (a) or of any collusion in relation to such an offence, the court may order that the property or part be returned to that person. [Emphasis added.]

[ 14 ] FirstOntario submits as an alternative remedy, that I should conduct such a hearing on the material before me and make a determination as to the innocence or otherwise of FirstOntario. The Attorney General opposes such a determination on the basis that such a hearing can only be conducted on a full evidentiary record with viva voce evidence and the opportunity for cross-examination. Further, the Attorney General points out that this would lead to a multiplicity of proceedings because many of the same issues will be subject to judicial determination in the Ontario Court of Justice proceedings scheduled to begin August 21, 2012.

ANALYSIS

[ 15 ] FirstOntario points to a number of judicial decisions wherein the mortgagee obtained an order authorizing the sale of the property under a power of sale with the right of the mortgagee to retain the proceeds of its mortgage. See for example, North Shore Credit Union v. Pham, [2005] B.C.J. No. 3020, Scotia Mortgage Corp. v. Leung, 2006 BCSC 846, [2006] B.C.J. No. 1223. However, the Attorney General points out that in those cases, it was acknowledged that the mortgagee was an innocent third party. There was no issue raised about collusion or complicity on the part of the mortgagee.

THE FORFEITURE ORDER

[ 16 ] FirstOntario submits that it has the right to sell the property and pay itself under the further wording in para. 4 of the restraint order. That paragraph states as follows:

Nothing in this Order detracts from the interest that a bona fide secured creditor has in relation to the Property, if that creditor’s interest was registered against the Property before the registration of this order, and the creditor meets its burden under s.19 of the Controlled Drugs and Substances Act on a pre-forfeiture restoration application or its burden under s.20 of the Controlled Drugs and Substances Act on a post-forfeiture restoration application.

[ 17 ] FirstOntario submits that this paragraph overrides para. 1, previously referred to, which requires a mortgagee to remit all of the net proceeds to the Attorney General, subject to ordinary sale costs.

[ 18 ] I do not agree with FirstOntario’s interpretation of para. 4. In my view, para. 4 enables creditors such as the first mortgagee to pursue ancillary rights such as commencing a claim for possession or judgment, or perhaps dealing with tenancy or other property related issues. If the court in making the restraint order had meant to eviscerate the plain meaning of para. 1, it could have done so in clear and unambiguous language.

CONCLUSION

[ 19 ] Under the existing restraint order, FirstOntario has the right to sell the property under power of sale if it pays all of the net proceeds to the Attorney General subject to sale costs. The Attorney General has made out a prima facie case that FirstOntario may not be an innocent third party. FirstOntario has remedies available to it, it could seek to participate in the forfeiture hearings scheduled to commence August 21, 2012. Alternatively, it has the right to bring a post-forfeiture application under the terms of the Act.

TAX ARREARS

[ 20 ] In the event that FirstOntario does sell the property pursuant to the provisions of the existing restraint order, the parties have asked the court to address the issue of tax arrears. As appears from the record, there are substantial tax arrears owing to the City of Barrie. These arrears have been triggered because Fercan has not paid the taxes and interest on the property. In order to give clear title on sale to a purchaser, FirstOntario will be required to pay tax arrears and penalties so that same are removed as a lien on the property sale. In my view, FirstOntario is entitled to pay these arrears as an ordinary cost of sale pursuant to the provisions of its mortgage and the standard charge terms in relation thereto.

[ 21 ] However, the Attorney General points out that such a payment if made, would reduce the amount available to it, should it be successful on forfeiture, and therefore provide a benefit to Fercan and a deprivation to the Attorney General. As the Attorney General noted in its Factum at para. 32:

It should be noted that even if the respondent is successful in its application for forfeiture and the property is not returned to either the applicant or Fercan, the applicant may still seek a civil remedy against Fercan for the debt owing to it, including the outstanding balance on the mortgage and other costs.

[ 22 ] In my view, the Attorney General has available to it a civil remedy against Fercan for the taxes and penalties if they are paid by FirstOntario. If the Attorney General is successful in its forfeiture application, that remedy will remain available.

MULLIGAN J.

Released: August 22, 2012