Michael Vandergeest vs. Dairy Farmers of Ontario

In the matter of the Milk Act and Section 16 of the Ministry of Agriculture, Food and Rural Affairs Act.

And in the matter of:

An Appeal to the Agriculture, Food and Rural Affairs Appeal Tribunal by Michael VanderGeest, of Coldwater, Ontario, from a decision of the Dairy Farmers of Ontario to deny his request for an exemption from the November 17, 2006 Quota Policy on Transfer Assessments.

Before: Frank Handy, Vice Chair; Cor Kapteyn, Vice Chair; Ron Gelderland, Member

Appearances:
Michael VanderGeest, appellant
George MacNaughton, representative of the respondent, Dairy Farmers of Ontario
David Murray, witness on behalf of the respondent

Decision of the Tribunal

The Tribunal heard this appeal on Wednesday, July 22, 2009, in the Tribunal Boardroom, in Guelph, Ontario. Additional materials were later submitted by the DFO and circulated to Mr. VanderGeest, following which the DFO and Mr. VanderGeest made final submissions in writing. The proceedings before the Tribunal and the additional material submitted comprise the evidence and argument on which the Tribunal has made its decision.

Preliminary Matters

The Chair of the hearing informed the parties of the audio recording of the proceedings for the Tribunal panel's reference only. The parties stated no objection to the audio recording of this proceeding.

Order of Submissions

During the hearing, the Tribunal was advised of a negotiated settlement between the DFO and a former dairy producer of the producer's request for exemption from the dairy quota transfer assessment. The facts that gave rise to this settlement were not available to the Tribunal on July 22, 2009. In light of the relevance of a negotiated settlement of a transfer assessment exemption request to the VanderGeest appeal, the Tribunal made an oral order for DFO to disclose the circumstances of the negotiated settlement to the Tribunal, with information of a personal and confidential nature omitted. The Tribunal then gave the parties 7 business days to make submissions on any relevance those circumstances might have to the appeal by Mr. VanderGeest.

Background to Appeal

The events leading to this appeal are as follows:

• On November 17, 2006, DFO implemented a policy whereby producers selling the entirety of their milk quota on the monthly exchange are subject to a minimum assessment of 15 per cent of their quota, with the exception of the last 10 kgs sold, which are not subject to assessment. This assessment is subject to certain specified adjustments before calculating the final assessment amount. The policy also allows for exemption from the transfer assessment in exceptional or extraordinary circumstances, which are not defined. The assessed volume of quota is re-distributed by the DFO among all producers in accordance with specified rules.

• Mr. VanderGeest placed his entire quota, 18.23 kilograms (kgs) for sale on the September 2008 Quota Exchange, and application of the policy resulted in an assessment of 1.892 kgs. 16.34 kgs of quota were sold at a value of $33,115.00 per kg. He requested an exemption from the assessment.

• Mr. VanderGeest's request for an exemption from the policy was based on his view that it was necessary for him to sell his quota because of extraordinary circumstances. He had suffered a severe injury in a farming accident, and had come to the conclusion that he was unable to manage dairy operations and would be unable to do so again.

• On October 8, 2008, the DFO advised Mr. VanderGeest that the DFO Board had denied his request for an exemption from the transfer assessment.

• On December 18, 2008, Mr. VanderGeest requested a hearing before the DFO board, to present his request in person. He subsequently did so, but on January 30, 2009, the DFO informed Mr. VanderGeest that the board had again decided to deny his request for an exemption.

• On April 2, 2009, Mr. VanderGeest filed an appeal to this Tribunal of the DFO Board's January 30th decision.

• On April 6, 2009, Mr. VanderGeest notified the DFO of his appeal to the Tribunal, and requested a meeting with the DFO board in an attempt to arrive at an "amicable financial resolution to this matter".

• On April 16, 2009, DFO informed Mr. VanderGeest that "it is not normal practice for the Board to meet with an appellant prior to an appeal for purposes of negotiating a resolution on the matter under appeal", but informed him that his request would be brought to the attention of the Board during its meeting in late April.

• On April 21, 2009, Mr. VanderGeest provided DFO with additional submissions regarding his request and requested, among other items, a meeting between him and DFO staff to attempt to negotiate a settlement, subject to the approval of the DFO board.

• On May 5, 2009, DFO informed Mr. VanderGeest that it was "not inclined to meet to negotiate a resolution" on this matter.

• The matter then proceeded to hearing before this Tribunal.
  

Issues

The issue before the Tribunal is:

• Should Mr. VanderGeest receive an exemption from the DFO's assessment on quota transfer?
  

Evidence

Michael VanderGeest

Mr. VanderGeest has produced and shipped milk since 1979, after acquiring quota as part of his purchase of an operating dairy farm. In his 28 years as a dairy farmer, he did not incur any penalties, and always maintained a Grade A quality of product.

On July 2, 2008, Mr. VanderGeest fell through a rotten board on a wagon, which pinned his leg and resulted in a lateral sheer of his tibia and significant damage to his knee. While he was obtaining medical attention and dealing with the immediate repair of this injury, Mr. VanderGeest's son took care of the dairy operation for several days. However, both of his children are grown and neither of them farm for a living or intend to succeed Mr. VanderGeest as dairy farmers. Mr. VanderGeest required surgery and the installation of screws and a plate. He has undergone extensive physiotherapy and treatment, but has not yet regained and is unlikely to ever regain full use of the knee.

Mr. VanderGeest was informed at the time of his injury that it was very serious, that he would be unable to work at all for many weeks, and that his recovery would be ongoing for at least a year, with an uncertain long-term prognosis. He was advised that the full range of motion in his knee would likely never be regained. Knowing the nature of Mr. VanderGeest's work, Mr. VanderGeest's doctor suggested that Mr. VanderGeest consider exiting the dairy industry.

Mr. VanderGeest found this news devastating, as it had been his expectation to continue his farm for several more years; with a complete dairy operation to manage, he felt he needed to make quick decisions about the future of this operation.

Mr. VanderGeest contacted Mr. George MacNaughton of the DFO, who suggested he write a letter to the DFO board regarding the catastrophe clause in the DFO Policy Book. Following this advice, Mr. VanderGeest requested and received temporary approval to move his dairy cows to a shared facility where another producer could manage milk production. Mr. VanderGeest told the Tribunal that after his surgery on August 2, 2008, it became clear to him that exiting the dairy industry was realistic and practical.

Mr. VanderGeest's knee, even after more than a year of treatment, stiffens easily, so that he is not able to sit on a tractor for any significant period of time, and it is hard for him to manage foot-operated controls and to climb up and down from the vehicle. More significantly, it is difficult at best and rapidly becomes impossible for him to bend, squat down, and stand up again repeatedly, as he would have to do in order to manage milking operations efficiently and effectively.

Mr. VanderGeest had disability insurance that helped maintain his farm during the first stages of recovery, but his insurance payments have now ended as the insurer has deemed that he is able to perform one of five major activities relating to a dairy operation. Mr. VanderGeest is not able to fulfill all the major activities of dairy farming, however.
Mr. VanderGeest noted that the above circumstances were the reason for exiting the industry. He referred the Tribunal to the Cayer decision dated March 31, 2009, and requested the exemption from the transfer assessment on the ground of compassionate circumstances. Mr. VanderGeest also quoted other excerpts from the Cayer Decision, and other decisions dealing with analogous circumstances.

In response to questions from Mr. MacNaughton, who represented the DFO, Mr. VanderGeest confirmed that he was aware of the transfer assessment policy and of DFO policies in general. He acknowledged that as a milk producer under the quota system he had enjoyed a good living and a comfortable lifestyle. He also confirmed that he had maintained a disability insurance policy for many years before making the claim for disability for the injury he sustained.

He also confirmed that he had purchased his farm in May of 1979 with quota, and on the sale of his quota had an appreciation in value of approximately $724,000. He had previously sold some quota in January 2005 in order to reduce his workload, after having fallen from a silo.

He indicated he was appealing to the Tribunal based on undue hardship, including physical suffering, and feels that he should not be subject to the penalty of an assessment in the circumstances.

In response to questions from the Tribunal, Mr. VanderGeest stated that he now farms 168 acres of land, and plants 40 acres of soybeans, sells square bales of hay for horse feed, and has some property for pasture. He indicated he had consulted with an accountant when considering his decision to exit the industry.

Dairy Farmers of Ontario

David Murray

Mr. Murray is a milk producer who serves on the DFO board. He noted that the DFO develops policy to benefit the entire industry to ensure its sustainability. He added that he held quota for 20 years, and the purpose of quota is to represent the producer's share of the market, with which they are able to generate income through the sale of milk. He further added that his farm generates $18 per kg per day, and this allows him to have a very good lifestyle.

In response to questions from Mr. MacNaughton, Mr. Murray told the Tribunal that he believes most producers will develop some sort of medical condition in the course of their careers, and he doesn't feel that any medical reason would warrant an exemption from the policy. The DFO would not be able to make an effective transfer assessment policy if people could be exempted for medical reasons, and a general exemption for medical reasons would hinder the DFO from addressing rising quota prices, which the transfer assessment is intended to do.

Mr. Murray indicated that he and his wife each hold life insurance, peril insurance, disability insurance, and business interruption insurance, and he has RRSPs, in which he has invested profits from his dairy operation to fund his retirement. Quota should not be considered an investment, as it is there solely to generate income for a farmer's business; and therefore, while he feels empathy for Mr. VanderGeest's situation, Mr. Murray and the DFO Board felt that an exemption was not warranted.

In response to questions from Mr. VanderGeest, Mr. Murray told the Tribunal that he began working as a DFO board member in 2006, and was present at the first hearing of John and Susanna Cayer before the DFO board; and also that he is aware of what is involved in accident insurance, and it includes everything he needs to operate his business. He did not think his disability insurance would be more comprehensive than Mr. VanderGeest's, but he has never had occasion to make a claim under the policy.

In response to questions from the Tribunal, Mr. Murray stated that: dairy farmers are required to have coverage under WSIB, at a minimum of $100. He also stated that he and the DFO make no distinction between a degenerative condition such as arthritis and a catastrophic accident when it considers the transfer assessment policy; he added that he would not want to participate in making distinctions between such situations because he thinks it would be difficult for the Board to do.

George MacNaughton

Mr. MacNaughton represented the DFO and also gave testimony. He is the Director of the Production Division, serves as the Secretary to the Quota Committee, and administers all quota transactions. He told the Tribunal that the DFO board and the Tribunal have both granted exemptions to the assessment to former dairy producers, in other circumstances. With respect to the various decisions on transfer assessments referenced by Mr. VanderGeest, Mr. MacNaughton stated that the DFO has expressed its concern to the Tribunal on one decision; the DFO has appealed the other decision, and a hearing has been held but the Board is still awaiting a decision.

Mr. MacNaughton noted that after the release of the first Decision of the Tribunal dated March 25, 2008, from the appeal by John and Susanna Cayer, DFO developed a policy within 2 months after that decision was released. This policy stated that medical conditions would not be grounds for a transfer assessment exemption.

In response to questions from the Tribunal, Mr. MacNaughton stated that the DFO board has granted 3 exemptions to the November 2006 policy, out of 87 requests received. He indicated that the Board also provides relief by approving shared facilities, which allows temporarily disabled producers to maintain their quotas by having others handle production.

In response to questions from Mr. VanderGeest, Mr. MacNaughton told the Tribunal that the DFO has not acted on the recommendations of the Tribunal in its March 31, 2009, decision to develop a more comprehensive exemption policy.
He noted that in two of the three exemptions previously granted by the DFO board prior planning to sell quota under the old policy was clearly demonstrated. The other exemption involved the untimely death of the primary operator in an accident, at a time where DFO had not advised producers of the risks associated with not having insurance.

In addition, in response to questions from Mr. VanderGeest, Mr. MacNaughton also acknowledged that there had been one partial exemption, which occurred by way of a negotiated settlement pending hearing of an appeal to this Tribunal. However, the circumstances and amounts relating to this partial exemption were not within his purview at the DFO, and the result was confidential. He also conceded that the DFO board made a decision to deny the request for negotiation made by Mr. VanderGeest.

Subsequent Submission of Additional information

As a result of this information, the Tribunal ordered that the circumstances of this partial exemption be sent to the Tribunal, subject to removing personal identifying information, following which further submissions and final argument could be made in writing so as to avoid the need to reconvene the hearing in person. The Tribunal received this information via Mr. Spurr, counsel to the DFO, and circulated his cover letter summary of the circumstances to Mr. VanderGeest. Both parties then made their final submissions in writing.

The Findings

The Tribunal has serious concerns with the exemption policy and also with the manner in which the DFO has recently exercised its discretion in relation to this policy. Although the transfer assessment has an extraordinary circumstances exception, it is completely lacking in criteria that would guide applicants' expectations, and the problems with the policy raised by other panels of this Tribunal remain uncorrected. The first two exemptions are justifiable because the applicants were caught by the timing of the introduction of the policy; however, the subsequent exemption and the partial exemption do not display the procedural fairness or consistency required of regulatory bodies, and the lack of transparency in the partial exemption settlement undermines the credibility of the DFO in dealing with these requests. The inconsistency of treatment and lack of clarity in the policy also creates challenges for this Tribunal in attempting to make decisions on appeals.

The Tribunal finds that the failure to at least discuss with Mr. VanderGeest a negotiated settlement in the face of a hearing was unfair in light of the DFO Board's decision to negotiate a partial exemption in another application. Mr. Spurr attempts to distinguish the latter case because the appellant's counsel commenced negotiation by making a settlement offer, while Mr. VanderGeest merely asked to meet to see if a settlement could be reached. Therefore, Mr. Spurr argues, the DFO did not initiate negotiations. The Tribunal does not accept this distinction. Mr. VanderGeest should be in no worse position for having asked to meet to negotiate than if he had started negotiations by making an offer, nor should he be worse off for trying to negotiate with the DFO directly rather than by negotiating through counsel. Although in both situations the DFO Board had refused the exemption request and an appeal was launched, and while in both situations the negotiation request was made, in one case negotiations took place and in the other they did not.

In the Tribunal's view, the DFO, having opened the door for negotiation as a manner of settling appeals about this policy, has created for itself the need to conduct negotiations with other appellants. It would certainly be possible for the DFO, having heard the exemption request and having made a decision, to refuse to negotiate, or to conduct all its negotiations before making the final decision that triggers the right to an appeal, but treating negotiation requests inconsistently and allowing negotiations in some appeals but not others creates unfairness for applicants and undermines the exemption application and appeal processes.

The Tribunal is also concerned that the DFO would make its policy decisions on whether to grant exemptions from transfer assessments in such a way that the information on how matters were settled is not available for subsequent applicants or for the Tribunal. The DFO's decisions on policy matters should be consistent. Confidence in the DFO's decisions is not enhanced, nor in the Tribunal's view does the DFO display best practices, considering that it is a decision making body elected by its members, by keeping its decisions on such applications confidential. First, the Tribunal is left inadequately informed, and in this case but for the specific questions by Mr. VanderGeest would not have received information relevant to the appeal. Second, the rationale for making policy decisions is undermined if settlements are entered into that are contrary to the DFO's stated position on how it handles its policies.

The difficulty the DFO creates with an inconsistent and sometimes confidential approach was unfortunately visited on Mr. MacNaughton. The Tribunal asked him what exemptions had been granted by the DFO. The Tribunal, having no knowledge of a partial exemption, did not ask Mr. MacNaughton if there had been any partial exemptions or settlements. Since the DFO had made the partial exemption settlement confidential. Mr. MacNaughton had a duty of confidentiality. However, he also had the obligation to answer truthfully, so that when Mr. VanderGeest put additional specific questions to him about the partial exemption case, he gave additional information in order to be accurate and truthful. Although this situation led Mr. VanderGeest to ask the Tribunal to be suspicious of Mr. MacNaughton's credibility, in our view he was accurate and honest in his answers; however, he was left by the DFO with an obligation to answer questions while managing confidential information in a situation where comprehensive transparency would have been preferable.

The exemptions that have been granted depend on criteria that are not written or exhaustive or even defined. Also, there does not appear to be any objective rationale or criteria for a partial exemption versus a full exemption in the two situations cited by the DFO. If the criteria of unexpected death, significant debt and inability to operate a dairy farm are grounds for an exemption, the Tribunal does not see why a partial exemption was granted to one and a full exemption to the other. Again, inconsistency of approach undermines the expectations of producers, the credibility of the DFO and the efficacy of the appeal process.

Although the Tribunal has respected the DFO's request for confidentiality, in our view undertaking confidential settlement negotiations and settling one appeal with a partial exemption, then denying the request for negotiation in another, undermines both the policy and the expectation and confidence of producers who are subject to the DFO's decisions. We are also of the view that the vagueness and lack of criteria as well as the blanket refusal to distinguish between a medical claim arising from a long term degenerative condition such as arthritis and an injury resulting from a catastrophic accident lend themselves to exactly the kind of inconsistency and problems that the DFO faces in these appeals.

The Tribunal understands the concern of the DFO with the prospect of facing a number of exemption requests. However, if there are to be exceptions to the general policy, defining a catastrophic accident resulting in a permanent injury as a medical claim and prohibiting all medical claims is overly broad and excessively rigid; it is specious to think that producers would use a catastrophic accident to generate additional exemption requests. The difficulty of doing so does not obviate the need for the DFO to set up a more effective, clear policy with consistent defensible criteria to guide both the DFO and producers making applications for exemptions, and then to make decisions consistent with it.

In looking at the situation, we see the following stated policy goals of the DFO that were presented in evidence as reasons for having the transfer assessment as appropriate and important:

• to ensure quota is reasonably priced and therefore reasonably accessible for new entrants and for existing producers who wish to expand their operations;

• to discourage excessive price volatility in quota;

• to maintain recognition among producers that quota is not a property right owned by the producer that appreciates over time in the manner of other investments, but a right held by the DFO that guarantees producers a share of the current market, a reasonable income, and the opportunity for a stable business climate in which to generate a return on their own additional investment in their operation;

• to discourage quota being treated as a pension or retirement investment;

• to encourage proper business management by producers in matters such as insurance for disability, and proper ongoing investment in retirement and pension funds;

• through the exemption clause, to recognize unusual and extraordinary situations where it may be inappropriate to charge the assessment.
  

In light of these goals, Mr. VanderGeest's situation is as follows:

• the market for quota at the time of his sale was over $33,000/kg; there was no evidence on whether this price was excessively high or problematic for new entrants or those wishing to expand operations, but failing to charge the assessment would presumably support this price rather than limit or reduce it;

• not charging the transfer assessment would presumably encourage more price volatility;

• Mr. VanderGeest indicated that his understanding was that quota was intended to manage the supply of milk; he recognized that he would need to fit into the extraordinary circumstances category for an exemption, and did not argue there was any property right in quota;

• Mr. VanderGeest planned to continue to work as a dairy farmer until normal retirement age, at which time he planned to be able to manage his retirement income. What he has lost as a result of the accident is the opportunity to have the stable income to continue to build his retirement funds until his planned retirement date. He did not indicate that his plan was to continue to build the value of his quota until that time. He does have the challenge of replacing future years of lost income, regardless of the value of his quota. Mr. VanderGeest has had the benefit of 28 years of stable income and has achieved a very significant increase in the value of the quota he obtained. It is not clear that an additional few years of holding quota would have any material impact on the value of his quota, but it is very clear that losing several years of income will have an impact on his ability to fund his retirement years.

• Mr. VanderGeest had disability insurance in place, and has used and exhausted his benefits under that policy. There is no indication the policy was inadequate or inappropriate, and no indication that the transfer assessment had any impact on his decision to hold insurance, since he held the insurance for many years but the transfer assessment policy has been in place for only three years;

• The policy does not set out what constitutes extraordinary situations. The Tribunal does not find the previous decisions of the DFO to grant exemptions to be inappropriate; however, the policy is vague and uncertain and it is circular reasoning to say that the exemptions as granted create the criteria for granting exemptions. There is no guidance in the policy on how discretion should be exercised.
  

The Tribunal finds that Mr. VanderGeest's situation is worthy of consideration under the policy. His decision to leave dairy farming may have seemed hasty at the time he made it, but his physical condition today shows that he would not have been able to take up farming again within a reasonable time frame such as contemplated by the shared facility policy arrangement. The DFO has in the Tribunal's view not given proper consideration to situations such as Mr. VanderGeest's--a catastrophic injury that ended his career as a dairy farmer prematurely--as a basis for reducing or eliminating the transfer assessment. Because of the many years that Mr. VanderGeest held quota and was able to generate income, however, and in light of the long term in which there was a significant appreciation in the value of his investment in quota, there is a rationale for imposing some level of assessment on the sale of quota, even in extraordinary circumstances.

Finally, the Tribunal finds that DFO's handling of this request for exemption to be flawed; all future decisions with regard to transfer assessment exemptions should be made openly and with full disclosure of the outcome in order to enhance the credibility of the DFO and the effectiveness of the policy itself.

Order of the Tribunal

The Tribunal hereby Orders that Mr. VanderGeest's exemption request be partially granted, and that he receive payment from the DFO equivalent to one-half of the amount withheld by the DFO on the transfer of quota, of $31,326.79, within 30 days of the date of this decision. This result is based on extraordinary circumstances being proved in Mr. VanderGeest's situation, but recognizing the significant benefit and appreciation in the value of the quota over many years and the policy goal of seeking to maintain a reasonably accessible quota value by way of an assessment on complete transfers of quota.

Dated at Guelph, Ontario this 11th day of September, 2009.