In its recent decision in Benedict v. Ohwistha Capital Corp., 1 the Ontario Court of Appeal rejected a financing technique that had been intended to circumvent the prohibition in the Indian Act (the “Act”) against any person, other than an Indian or a band, taking certain types of security on property situated on an Indian reserve. In a unanimous decision written by Justice Feldman, the court found that a conditional sales contract between the parties was actually a sham meant to allow the appellant to take security on some equipment in the context of a normal loan transaction – which could not be allowed. This prohibition is found in section 89(1) of the Act, and reads as follows:
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 or a band.
However, there is an exception to this prohibition. Section 89(2) of the Act provides that the seller under a conditional sales contract may enforce its security notwithstanding the general prohibition in section 89(1):
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 situated on a reserve.
The appellant in this case was an Aboriginal Capital Corporation (“ACC”) that was created by the federal government for the purpose of facilitating financing for Aboriginal businesses. The appellant did not, however, fall within the definition of Indian for the purposes of the Act, and so section 89(1) applied to it.
The appellant approved a loan of $125,000 for the respondent, Lloyd Benedict, for his fish hatchery business. However, it wished to take security on certain equipment belonging to Benedict. In order to avoid the prohibition in section 89(1), the transaction was structured such that Benedict sold the equipment to an employee of the appellant for $125,000, then the equipment was sold back to Benedict under a conditional sales contract for the same amount plus interest. As the court noted in its judgment, although the contract was titled “Conditional Sales Contract,” there was no specific reservation of title in its conditions – though it provided the right upon default of payment to take possession of the equipment.
Benedict defaulted on payment, went bankrupt and was later discharged from bankruptcy. After this discharge, the appellant seized the equipment. Benedict challenged the seizure based on section 89(1), and was successful both at trial and on appeal. This type of financing structure was found to be an unacceptable circumvention of the section 89(1) prohibition.
The court made note of recent Supreme Court of Canada jurisprudence relating to sections 89 and 90 of the Indian Act, both of which place restrictions on the freedom of alienation of certain property situated on a reserve. In the cases of Mitchell v. Sandy Bay Indian Band2 and McDiarmid Lumber Ltd. v. God’s Lake First Nation, 3 the court noted that the provisions contain an element of paternalism resulting from the Crown’s fiduciary obligation to protect Aboriginal property. It further acknowledged that the provisions have the adverse effect of impeding Aboriginal business activity on reserve by making it more difficult to obtain financing. In her decision in God’s Lake, Chief Justice McLachlin noted that the 1996 report of the Royal Commission on Aboriginal Peoples found that these sections are a “significant deterrent to financing business activity on reserve”4 and recommended that they be eliminated. Although the Supreme Court was unable to modify the statutory wording, the Chief Justice suggested that a narrow reading of these provisions is appropriate in order to counter this discriminatory effect.
However, although Justice Feldman did find that section 89(1) has a “significant discriminatory effect,”5 she did not give it a narrow reading. Instead, she found that the transaction was such an obvious fiction that it undermined the provision’s purpose. In so finding, she focused on the repeated use of the word “notional” throughout the agreed statement of facts – title was “notionally transferred,” Benedict received a “notional payment” of $125,000, and Benedict “notionally bought back” the same equipment.6 Justice Feldman summarized by calling the transaction a “pure fiction,” and concluded that this was not an appropriate case to give section 89(1) a narrow reading.
While the discriminatory effect of section 89(1) continues to be worrisome, Justice Feldman explicitly left it to Parliament to decide whether changes should be made to the statute to allow ACCs – which were set up by the federal government for the specific purpose of facilitating financing for Aboriginal businesses – to employ these types of lending practices.7 It is possible that this could be done either by exempting ACCs from the rule in section 89(1), or by repealing the provision entirely (as the 1996 report of the Royal Commission on Aboriginal Peoples recommends).
Given the acknowledged need to give section 89(1) a narrow reading to counter its discriminatory effects, it may be possible to distinguish Benedict on the grounds that the transaction was simply improperly structured. The “Conditional Sales Contract” neglected to actually expressly reserve title in the equipment, and the use of the word “notional” throughout the agreed statement of facts in the case made it clear that the parties were merely trying to circumvent the statutory provision. It remains possible that a properly structured transaction involving a purchase of some of the debtor’s property and a subsequent conditional sale back to the debtor could fall within the section 89(2) exception, if all steps of the transaction are properly followed. While Benedict casts some doubt in cases where title to the property originally belonged to the debtor, Benedict was a situation where the facts made it patently clear that the transaction was a sham.
Stephen Crawford is an articling student at Aird & Berlis LLP.