Focus: First Nations take feds to court over third-party managers

An ongoing $30-million lawsuit against the federal government has the potential to provide more details about the inner workings of what happens when it appoints a third-party manager to administer the finances of a First Nation.

The Algonquins of Barriere Lake First Nation filed the action in the Ontario Superior Court earlier this year against the federal government, Atmacinta Hartel Financial Management Corp., and BDO Canada LLP. The case is reportedly the first instance of an action against the federal government for alleged breach of fiduciary duty and negligent misrepresentation under its third-party management powers.

Barriere Lake is a remote reserve in Quebec, more than 200 kilometres north of Ottawa, with housing shortages and high rates of unemployment.

The controversial practice of third-party managers, who are under the direct control of the government and not the First Nation, is at the centre of the Barriere Lake lawsuit. There are 12 other First Nations in Canada where a third-party manager administers funding, according to the federal government.

The best-known instance of an appointment of a third-party manager involved the Attawapiskat First Nation in 2011, a decision later found by a Federal Court of Canada judge to have been unreasonable.

In the lawsuit filed by Barriere Lake, the First Nation alleges that since 2006, the companies appointed as third-party managers have collected approximately $6 million in fees paid out of the funds allocated for the reserve by the federal government.

The existing framework “creates a disincentive for third-party managers to get out” even though it’s supposed to be a temporary measure, says Toronto lawyer Katherine Hensel, counsel for Barriere Lake.

The federal government initially appointed a third-party manager nearly nine years ago because it found Barriere Lake was in default of its funding agreement with a cumulative deficit of at least eight per cent.

The current court case is challenging events since 2010. That year, the federal government entered into an agreement with BDO Canada that paid two of its officials rates of $1,800 and $1,000 per day, respectively, the statement of claim alleges. It named Hartel the third-party manager in 2013.

Both companies have “refused to co-operate or work with chief and council of Barriere Lake,” according to the statement of claim.

The First Nation was “not a party” to these agreements, says Hensel, and the lawsuit alleges that BDO Canada and Hartel wouldn’t take steps to assist the community in taking the necessary steps to control its own finances.

None of the allegations has been proven in court. The federal government and the private sector defendants haven’t yet filed statements of defence. Instead, the Superior Court heard a motion brought by the federal government on April 29 to determine whether Ontario is the proper jurisdiction for the case. The court reserved a decision on the motion.

Lawyers for BDO Canada and Hartel declined to comment. The federal government says “the application has been brought in the wrong province” in written arguments to support its motion to change the venue of the litigation.

Barriere Lake is in northwestern Quebec. BDO Canada is a limited liability partnership “carrying on business throughout Canada,” although the Barriere Lake contract was with an office in Winnipeg, notes federal government lawyer Michael Beggs in the court documents. Hartel has an office address in Ottawa.

The dispute over the appropriate forum for the dispute will pre-empt a decision on the merits of the Barriere Lake claim, but the debate over the use of third-party managers is ongoing.

Jane Dickson-Gilmore, a professor in the undergraduate law program at Carleton University in Ottawa who specializes in aboriginal issues, is critical of the policy. “It appears in many cases it is used like a blunt object so that decisions are made that are more in line with the goals of the federal government than the benefit of First Nations,” she says.

The professor agrees that accountability by First Nations for how they spend federal funds is essential. But she suggests there’s a popular misconception in the media that there’s widespread misuse of funds.

“As a general rule, First Nations are underfunded and at the same time, the level of accountability is incredibly onerous,” says Dickson-Gilmore.

In the case of the Attawapiskat First Nation, the government appointed a third-party manager in 2011 on the same day Prime Minister Stephen Harper told the House of Commons it had invested $90 million there and the results were unacceptable.

There was a housing crisis within the northern Ontario community that attracted national attention. Justice Michael Phelan later ruled that the $90-million figure cited couldn’t have related to funding for housing and there was no evidence of mismanagement or incorrect spending.

Instead, the problems were “operational” and not financial, the Federal Court judge said in finding that the decision to appoint the third-party manager was unreasonable.

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