Can a post-separation market-driven decrease to the value of family property be considered in determining whether an equalization of net family property is unconscionable?
Maybe. In some limited circumstances. But don’t bank on an unequal division of property just because of an economic recession.
Property Sharing Regime
The Family Law Act in Ontario provides for a property sharing regime on marriage breakdown whereby separated spouses add the value of the property each owns at the date of separation, less liabilities, less certain deductions and exclusions, to determine his or her “net family property.” The spouse with the higher net family property must pay a sum to the other spouse worth half the difference of the two net family properties, called an “equalization payment.”
The amount of that payment can be varied, resulting in an un-equal division of net family property, if it would be unconscionable to do otherwise. There is a long line of cases in which courts discuss the distinction between what is “unfair” and what is “unconscionable.” It is not sufficient that an equalization payment would have a merely “unfair” result. The threshold for unconscionability is very high.
The process of negotiating, mediating, or (especially) litigating to resolve issues that arise on separation can take a long time. During that time, market factors can contribute to a significant decrease in the value of a spouse’s assets. When this happens a spouse who has to make an equalization payment often asks whether there is any relief.
The Ontario Court of Appeal considered this issue in the case of Levan v. Levan and, more recently, in Serra v. Serra.
Levan v. Levan
Serra v. Serra
The case law
In Levan v Levan (2009),, 51 R.F.L. (6th) 237 (C.A.) the husband owed an equalization payment to his wife in the amount of $5.3 million. The husband argued that it would be unconscionable for him to have to pay this amount because the value of his assets had decreased so significantly that an equalization payment would result in his entire net worth being given to his wife. The wife argued that the equalization payment had to be made based on the value of the husband’s assets on the date of separation. The Court of Appeal agreed with the wife, although it was noted that there may be some cases where post-separation circumstances, would permit an unequal division of net family property, taking into account all of the circumstances in a particular case.
Then on February 4, 2009 the Ontario Court of Appeal provided reasons in the case of Serra v Serra (2009), ONCA 105 in which the Court determined that it would be unconscionable for the husband to have to make an equalization payment to his wife where his assets had decreased in value post separation. In that case the husband’s principal asset – shareholdings in his business – were valued between $9.5 million and $11.25 million at the date of separation. By the time of trial the value had decreased to between $1.875 and $2.6 million. Again, market conditions were to blame. The Court of Appeal considered the following:
The decrease in value was attributed to market conditions out of the husband’s control, specifically, shifting market forced that adversely affected the Canadian textile industry in general
The adverse affect on the husband’s industry predated the “economic downturn that is currently bedeviling the Canadian and world economies” and was therefore “not the product of a temporary recession inevitably followed by an economic rebound.”
Also, the wife in this case made a trust claim against her husband’s shares in his company and obtained a preservation order that precluded him from dealing with any of his assets without her permission prior to the trial.
Based on those circumstances, the Court of Appeal held that it was “unconscionable” for the husband to have to make an equalization payment to the wife based on the value of his assets on the date of separation.
So, the Ontario Court of Appeal has confirmed that a court may take into account a post-separation date change in the value of a spouse’s assets and the circumstances surrounding such a change for the purposes of determining whether equalizing net family properties would be unconscionable.
What does this mean?
This means that there are some situations in which a post-separation decrease in the value of a spouse’s assets can result in an unequal division of net family property. The decision in Serra does not mean that every separating spouse who has suffered a post-separation decrease in asset value as a result of an economic recession will be successful in claiming a reduction in the equalization payment he or she has to make to the other spouse.
The Court of Appeal stressed that the threshold of “unconscionability” is “exceptionally high.” It is not sufficient that a situation is simply “unfair.” The Honourable Justice Blair, writing for the Court, stated,
“Although a purely market-driven decline in the value of Mr. Serra’s principal asset is at the heart of these proceedings, this case is not about whether a significant post-separation drop in the value of an individual’s stock portfolio, precipitated by a deep but temporary recession, will amount to unconscionability.”
Each case must be determined on its own facts. It will be important for people to consult with their lawyers to determine whether this is an issue worth pursuing in each case.
Dated: March 2009