The strange tale of a local council gouging its near-bankrupt major employer

I find this an amazing story: Local politicians want to remain popular with their rapidly growing population of increasingly wealthier voters and so rather than ding them for all the new municipal services these voters want and need, the local council ratchets up the tax bill on the municipalities single biggest employer the local paper mill. Meanwhile, the paper mill’s owner is scrambling to avoid bankruptcy. It asks the municipality for relief. It gets just that. A little relief. But not nearly enough.

Frantic to cut costs — and preserve jobs in the area — the mill owner takes the local council to court arguing the council is being unreasonable. Local court agrees. Council appeals to the B.C. Supreme Court. B.C. Supreme Court sides with the council. Mill appeals to the Supreme Court.

And on Friday, the Supreme Court, in a unanimous 7-0 decision, sided with the municipality.

The municipality in this case is the District of North Cowichan, on Vancouver Island. If you’ve heard of Saltspring Island — then you’ve got North Cowichan. It’s a beautiful part of the world.

The mill owner is struggling Catalyst Papers. Catalyst has four mills on Vancouver Island, including one in the District of North Cowichan, in the town of Crofton. The Crofton mill, has three paper machines, two pulp machines and employees more than 500 people. The town of Crofton has a population of 2,500. [Here’s a map]

Here in essence is Catalyst’s beef: In 2009, the local council set a
property tax rate for most residential ratepayers of $2.143 for every
$1,000 of assessed value. Meanwhile, the “Major Industry” ratepayer —
and Catalyst is the only “Major Industry” in this class — would be
required to pay more than $43 for every $1,000 in assessed value. That’s
a ratio of one dollar in residential taxes to more than $20 for
Catalyst. Residential properties account for almost 90 per cent of the
total value of all property in the District but they account for only 40
per cent of the tax revenue.

Catalyst, not surprisingly, was unhappy with this state of
affairs.  Not only is it required to foot a grossly disproportionate part of
the District’s property tax levy, it obtains little in exchange in terms of
services.  It has its own sewer and water systems, and its own deep-sea port.
Exacerbating the situation is the fact that in recent years, Catalyst’s
operation has been losing money.  Catalyst cannot pick up its operation and
move elsewhere.  Its choices are to stay and pay, or to close the mill.

That’s Supreme Court Justice Beverly McLachlin writing for the court. She
frames it quite nicely. Now, I spent a few years working for the paper
in Thunder Bay in Northwestern Ontario, a region where there are plenty
of towns that depend on the local paper mill for everyone’s livelihood. I’m
certain it would be unheard for any municipal council there to call a
company’s bluff by raising their property taxes and then daring them to
close the mill or pay up.

It seems to me to be an even more dangerous game of chicken for the
council to be playing given the fact that Catalyst, right now, is in
some deep financial trouble. Last month, it missed a $21 million
interest payment on its bonds. Missing bond payments is usually a
prelude to filing for bankruptcy protection. Indeed, it filed for what’s
called “Chapter 15” protection of its U.S. assets last week.
Chapter 15 is part of U.S. bankruptcy laws that allow a foreign company
to protect its assets in that country from creditor. It has not filed
for bankruptcy protection in Canada. In fact, it looks like the company
might avoid that fate, announcing, also last week, that it had reached a deal with its bondholders to reduce an $840 million debt load. It will be in court in Vancouver on Feb. 3 to certify this “recapitalization transaction.”

And yet, despite the precariousness of the Crofton Mill’s financial position, the Supreme Court found the District council was acting in a “reasonable” manner. Here’s what the Court had to say (Chief Justice McLachlin wrote the judgement):

The standard of review applicable is reasonableness.  The power of
the courts to set aside municipal bylaws is a narrow one, and cannot be
exercised simply because a bylaw imposes a greater share of the tax burden on
some ratepayers than on others.  The critical question is what factors
the court should consider in determining what lies within the range of possible
reasonable outcomes.  Courts reviewing bylaws for reasonableness must approach
the task against the backdrop of the wide variety of factors that elected
municipal councillors may legitimately consider in enacting bylaws, including
broad social, economic and political issues.  Only if the bylaw is one no
reasonable body informed by these factors could have taken will the bylaw be
set aside.

Meanwhile, back in the District of North Cowichan, the mayor tells the Victoria Times-Colonist that council has been trying to reduce the tax burden for the the Crofton mill and says Catalyst now pays about 30 per cent of all municipal property tax revenue. (The average assessed value of residential property, the Supreme Court notes, is $300,000.  If you lived in a community where the average house price was $300,000, I’d say you and your neighbours are fairly affluent) The Mayor, Jon Lefebure, said his council plans to look at ways to keep the Crofton mill running.

Good luck.