



COURT OF APPEAL FOR ONTARIO

CITATION: Benedict v. Ohwistha Capital Corporation, 2014 ONCA
    80

DATE: 20140129

DOCKET: C53282

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.

Feldman J.A.:

[1]

Section 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.

[2]

In 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).

[3]

The issue on the appeal is whether they were successful.

[4]

Sections 89(1) and (2) of the Act provide:

89. (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

[5]

The 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:

2. 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.

3. 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.

4. 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.

5. On or about February 19, 2002, Benedict submitted an
    Application for Financing to Ohwistha. The application was to obtain financing
    for Benedicts business, Ekohawk Yellow Perch Hatchery, which was located on
    the Mohawk Territory of Akwesasne.

6. On or about May 27, 2002, Ohwistha approved the loan
    application submitted by Benedict.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. $125,000.00 was advanced via cheque from Ohwistha to
    Benedict on or about June 7, 2002.

14. Ohwistha registered a Financing Change Statement as a
    secured creditor on July 7, 2003. A Financing Statement was never registered.

[6]

Essentially, 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.

[7]

The 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.

[8]

The 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.

[9]

In effect, OCC obtained some on-reserve chattels from Mr. Benedict
    without paying for them, then secured its business loan on those on-reserve
    chattels.

[10]

Following
    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 OCCs right to do so, relying on s. 89(1) of the
Indian
    Act
, and sued for damages.

[11]

The
    trial judge found OCC liable for conversion. He held that OCCs 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:

[22] I 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 Benedicts 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
    plaintiffs 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).

[23] In the courts 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 Benedicts
    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 Indians property on Indian lands
    in s. 89(1) of the
Indian Act
applies.

Issues

[12]

There
    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

[13]

Section
    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:

66. 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.

[14]

While 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.

[15]

In
Mitchell v. Peguis Indian Band et al,
[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]

[16]

The 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. Gods Lake first
    Nation,
2006 SCC 58, [2006] 2 S.C.R. 846.

[17]

McLachlin C.J. explained how the paternalistic attitude of
    the federal government toward aboriginals in the 19
th
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 19
th
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).

[18]

Nevertheless, 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).

[19]

In
Gods 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 Acts restrictive provisions
    were a significant deterrent to financing business activity on-reserve.

[20]

The court in
Gods Lake
referred to the Royal Commissions
    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).

[21]

One 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).

[22]

In 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).

[23]

From 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.

[24]

In 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).

[25]

The debate before this court was whether the court should
    apply the approach of the Supreme Court in
Gods 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

[26]

The
    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]

[27]

I
    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 Benedicts 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.

[28]

The
    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.

[29]

Parliament
    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

[30]

I
    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.


