June 27, 2004

RE:   CITY OF QUESNEL, (MUNICIPAL FINANCE AUTHORITY, and ON-LINE FINANCE & LEASING CORPORATION

The Issue

The issue on which an opinion has been requested is as follows:

Do the Letters of Understanding dated December 17, 1999, August 28, 2001, and October 10, 2002, along with the various lease agreements which the Letters of Understanding modify, trigger the provisions of the Local Government Act (“LGA”)?

Do they give rise to a counter-petition opportunity [section 334.1(2)(b)]? 

If the answer is “yes”, what remedy is available to tax payers?

I have not been asked to comment on the role of any organization or individual.  Similarly, we have not been asked to initiate any court action.

I have attached to my opinion a chronological list of documents that I have reviewed in the preparation of my opinion.  I would be grateful if the list of documents could be reviewed to ensure that it is accurate and completed.  If there is a document of any importance that has been omitted from the list, would you please provide it to me for review as soon as possible?

I also make reference to several key case references. These can be accessed from the Courts of British Columbia website:

http://www.courts.gov.bc.ca/sc

Reasonable Chance of Success

It is my opinion that there is a reasonable chance of the Letters of Understanding and the leases being successfully challenged in court.  The key appears to be that the Letters of Understanding purport to convert the leases into obligations that do in fact trigger the provisions of the LGA. A counter-petition opportunity should have been provided.  The effect of the Letters of Understanding is to impose a financial obligation on the City that extended beyond the five year period.

The authority for this conclusion is Robson v. The Corporation of the District of Maple Ridge et al 2002 BCCA 422  We have also relied on a decision of our Supreme Court issued last month:  Canada Safeway Ltd. v. Surrey (City) 2004 BCSC 567.  It is worth noting that the agreement in issue in the Safeway case was 30 years old – it had been executed on July 30, 1974.

It is immaterial whether the form of the financial obligations that extended beyond the five years consisted of a binding commitment to renew the lease, or a binding commitment to purchase the property.  The Letters of Understanding and leases would only bind the City if a proper counter-petition opportunity had been provided.

Section 334.1(2) of the LGA applied at the time the Letters of Understanding and the leases were signed.  The Community Charter (the “CC”) came into effect on January 1, 2004.

Letters of Understanding

The language of the Letters of Understanding is unusual.  I say this with particular reference to the October 10, 2002 Letter of Understanding. It appears that what I have is only a draft.  I do not have a final copy.  The first line on my copy indicates that the content is to be typed on the City of Quesnel letterhead.  I have no document that indicates that was done. There is no signature on the line requiring the signature of the Executive Director of the MFA.  There are the following problems with that document.

(i)            The text of the document suggests that it may fail for uncertainty, and or because it does not represent a final agreement. For example, the last paragraph simply indicates what the City’s intention is, without confirming a binding commitment.

(ii)          There may also be problems of ‘privity’ and ‘consideration’ that you may wish to argue.

(iii)        It is also odd that no lease is specifically referred to.  Rather, the phrase ‘ …any Lease Agreement…’ is the phrase used.

(iv)         It also may be significant that at the time of the signing of the first Letter of Understanding on December 17, 1999 there was apparently no lease whatsoever in existence.  The equipment lease, so called, is dated December 21, 1999.  The land/structures lease was dated December 28, 1999

While it is unnecessary to prove it, given the composition of the membership and executive of the MFA, and its experience in these matters, it must have had actual knowledge that the Letter of Understanding would trigger the above-mentioned counter-petition opportunity under the LGA.  The same is true of Online, given its experience in the field of municipal finance.

Two Regulations

You and I have also spoken about my concerns over the language in Regulations 106/2001 and 126/2002, both of which may make counter-petitions unnecessary in certain circumstances.  I still have not satisfactorily resolved my concerns over these Regulations.  I note, however, that neither Mr. C. Murdy, counsel for the City, in his argument in Campbell and Morton v. Quesnel nor Mr. C. Hamilton, City Manager, in his Discussion Paper of August 2003, referred to these Regulations.  Neither appeared to rely on them in any way.

That is also consistent with the reference to these Regulations by W.A. Buholzer in his text The Community Charter: B.C. Local Government in Transition (Continuing Legal Education, April 2004).  He seems to imply that they were meant to deal only with certain statutory right of way situations.

Retroactive Regulations

I again should draw your attention to the distinct possibility of retroactive regulations being passed by the government at any time, including ongoing litigation in this matter.  The government has passed two retroactive statutes applying to the class action against it in BC Hydro.  It has also passed retroactive regulation with respect to the BCTF and HEU.

Finally, the City Manager referred to the possibility of exempting regulations in his Discussion Paper of August 2003, at page 9, footnote 1.

Other Matters

I should also refer to Tab Z of the Ron Campbell and Pat Morton Affidavit of May 14, 2001, which consists of  the February 19, 2002 Place St. Laurent Inquiry Report of Kroll and Company, Forensic Accountants.  At page 13 of that Report, we find the following language:

In our view, the November 8, 1999 resolution regarding the purchase of Place St. Laurent effectively removes the subject to conditions on the interim agreement the City had with Mrs. Ernst. That is, in our opinion at November 8, 1999, the City had a final agreement with Mrs. Ernst, notwithstanding that a number of Councillors told us they were under the impression that Council would be able to revisit the decision after the November 19, 1999 election.

I have not been able to determine whether this statement is accurate.

On a final matter, I should also draw your attention to a letter dated September 30, 2003 from Murdy & McAllister to the City Treasurer in which we find the following language:

Given the nature of the leasing programme and financing arrangement, in our view, the City is entitled to rely on the representations and directions received from the Municipal Finance Authority to govern its actions and to look to the Municipal Finance Authority to ensure that in its dealings with Online – the City is fully protected.”

This opinion does not of course render the City immune from any taxpayer’s action as to the legality of the Letters of Understanding and leases. I’m sure it was not intended to.

Thank you for referring this very important matter to me.  Please call if you have any questions arising out of my opinion.

Yours truly,

McGRADY, BAUGH & WHYTE

PER:

LEO McGRADY Q.C.

LM/cma

Enclosure