Would the Canadian government ever try to seize investment property, mortgage investment security or any other valuable assets, even from law-abiding taxpayers? The surprising answer is "yes." There is a little-known provision of federal drug enforcement legislation which the government has been using that supports these actions. Even to its non-drinking, non-smoking, non-drug-using and environmentally friendly citizens. Even to those of society's best-behaved and productive contributors.
Controlled Drugs and Substances Act
How could a landlord or lender find their property tied up? First a little background on Canadian criminal drug enforcement. The Controlled Drugs and Substances Act ("CDSA") is an important device in the federal government's law enforcement arsenal. At the government's request, it permits a court to order the seizure and restraint of any offence-related property pending the outcome of the offender's criminal trial and, on conviction, complete forfeiture of the property to the government.
"Offence-related property" under the CDSA includes any property, within or outside Canada, that is used in any manner in connection with the commission of a designated substance offence. An obvious example is a home used as a grow-op for the production of marijuana. If the Crown establishes reasonable grounds to believe that a house has been used as a grow-op, then a judge may make a restraint order under section 14(3) of the CDSA "prohibiting any person from disposing of, or otherwise dealing with any interest in, the offence-related property specified in the order other than in such manner as may be specified in the order." This section serves to prevent the disposition of offence-related property pending a criminal trial, so that if the accused is convicted, the Crown may seek as part of the sentencing package the property's forfeiture to the government.
These restraint and forfeiture provisions of the CDSA are intended by Parliament to serve as a general deterrent, make offence-related property unavailable for further criminal use, and impose a very high cost to committing a criminal act.
So far, this appears to be quite reasonable. The government must arm itself with powerful tools to fight crime. Other than the criminals themselves and their lawyers, no one would complain about the government's seizure of a convict's property.
The Reach of the CDSA
The trouble is that the government does not believe that the CDSA should be limited only to participants in the alleged crime. On the contrary, the Crown says the statute empowers the government to tie up for interminable periods and ultimately confiscate property even from those not charged with any offence.
In two recent cases (Scotia Mortgage Corporation v. Leung; Maple Trust Company v. Walton) involving foreclosures of alleged grow-op homes in B.C., the Crown argued that a CDSA restraint prevents mortgage lenders from foreclosing on their security before the criminal proceedings are concluded – potentially for many years. The Crown said that it is necessary to stop the lenders' foreclosures, pending the outcome of the borrowers' criminal trials, because the mortgages themselves are liable to future CDSA forfeiture. After a borrower's conviction, the onus is on the lender to prove that they were innocent of collusion or complicity in the crimes and that they "exercised all reasonable care to be satisfied that the property was not likely to have been used in connection with the commission of an unlawful act."
The Crown could presumably make the same argument in respect of a realization of a landlord exercising remedies against a tenant. How does a mortgage lender or a landlord prove that? How would the average person? Parliament doesn't say. And that is not the Crown's problem. Of course, the Crown never suggested that either Scotia Mortgage Corporation or Maple Trust Company participated in any way in the alleged drug cultivation. These are large Canadian lending institutions interested only in the residential mortgage business, not drug cultivation, and it is absurd to even suggest that these lenders were complicit or participated in any alleged criminal activity. Both the B.C. Supreme Court and Court of Appeal ruled that clearly innocent lenders should not be dragged into the middle of their borrowers' criminal disputes with the Crown and should not be delayed in their mortgage realization. The Crown's application for leave to appeal the B.C. Court of Appeal decision was dismissed by the Supreme Court of Canada: Attorney General of Canada v. Maple Trust Company, 2007 CanLII 50099 (S.C.C.). Thus, the BCCA decision in Maple Trust Company v. Walton decided once and for all that a restraint order made under section 14 of the CDSA is not a necessary impediment to an innocent lender's realization on its mortgage security. Having lost that battle, the federal Crown has taken another approach in its apparently ongoing effort to frustrate the proprietary rights of innocent parties dragged into an alleged offender's criminal proceedings. The Crown asserts that a CDSA restraint order may not be varied to permit a lender's mortgage realization unless the lender first makes full disclosure of all confidential and other information and documentation in its possession supporting the lender's decision to grant the loan in the first place. The Crown's argument is that in too many cases involving grow-ops, lenders are recklessly approving loans to borrowers who clearly lack the ability to service them and that a restraint order must not be varied to permit foreclosure sale unless the lender is able to prove, in hindsight, that it "a exercised all reasonable care to be satisfied that the property was not likely to have been used in connection with the commission of an unlawful act" (CDSA, subsection 20(4)). The Crown says that careless lenders who give loans to unworthy borrowers fail in their obligation to ensure that their security would not be used for illegal purposes. In the result, lenders who fail to make full disclosure, in particular by revealing their underwriting and loan application files, cannot meet the subsection 20(4) onus and must not be permitted to exercise their enforcement rights until after the criminal charges and forfeiture proceedings are concluded.
In a case I recently argued for the bank (Royal Bank of Canada v. Xu Yu Huang, B.C.S.C., Dec. 13, 2007), my client sought leave to vary a CDSA restraint order to permit foreclosure sale, but refused to hand over any of the confidential information it learned from the borrower or elsewhere as part of its underwriting process. The bank instead described in very general terms some aspects of its usual underwriting procedure, but nothing more, arguing that compelling specific disclosure puts lenders and their customers at risk of potential self-incrimination.
The court rejected the Crown's position and agreed with the bank that in the absence of any evidence of lender complicity or collusion it is not the court's job in such applications to second-guess the bank's acceptance of a borrower's creditworthiness. The court also agreed that subsection 20(4) of the CDSA, which Parliament intended to apply only post-forfeiture, imposes too onerous an obligation on innocent lenders seeking only to realize on their security.
If a lender takes mortgage security on a B.C. home that, through no fault of its own, was used as a grow-op, is it fair that its attempts to foreclose are delayed until after the criminal trial (and appeals) and it is forced to incur the legal expense of proving its innocence to protect its mortgage investment from the government?
Fortunately, the highest court in the land doesn't think so.