Case Comment: Benedict v. Ohwistha Capital Corp.

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...