Fresh air breathed into post-separation declines on assets

Well the Ontario Court of Appeal has finally taken a serious look at the question with respect to what happens to individuals whose assets take a bath post-separation. The traditional approach has been that the parties to a separation must equalize their assets on valuation date or more commonly known as the date of separation. But the question, especially during these economic times is what happens if the asset or assets decline in value? Is it really fair for a person to have to equalize an asset by the time a trial has occurred that has severely declined in value? One would think that the easy answer is "no of course that is not fair"; well, in most cases, the person equalizing is out of luck.

That being said, the Ontario Court of Appeal in Serra v. Serra, has come to the rescue. It is possibly the most important case since Levan, that deals with post-separation declines in asset values. The case can be found at:

http://www.ontariocourts.on.ca/decisions/2009/february/2009ONCA0105.htm

Counsel would be advised to look at this case very seriously because it may be of significant use in negotiations when coming to a resolution on asset values.

The basics of the case involve a business that was valued at 9.5 million and $11.25 million on separation but by the time of trial, however, the value had decreased to somewhere between $1.875 million and $2.6 million – a drop of approximately $8 to $9 million. At trial, Mr. Serra argued that equalizing his and his wife’s net family properties on the basis of the separation-date value of his assets would be “unconscionable” as contemplated by s. 5(6) of the Family Law Act. It required him to make an equalization payment of $4,129,832.50 – an amount that exceeds his total net worth. The trial judge ruled, however, that she could not take a market-driven post-separation date decline in the value of a spouse’s assets into account under s. 5(6) and ordered the large equalization payment.

The Ontario Court of Appeal thought the trial judge erred and set the record more clear on how to use section 5(6) of the Family Law Act.

The steps to be taken when s. 5(6) is engaged are well-established. The court must first ascertain the net family property of each spouse, by determining and valuing the property each owned on the valuation date (subject to the deductions and exemptions set out in s. 4). Next, the court applies s. 5(1) and determines the equalization payment. Finally – and before making an order under s. 5(1) – the court must decide whether the equalization of net family properties would be unconscionable under s. 5(6), having regard to the factors listed in paragraphs 5(6)(a) through (h).

The Court opined that it 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 purposes of determining under s. 5(6) of the Family Law Act whether equalizing net family properties would be unconscionable. An order for an unequal division of net family properties is exceptional, however, and may only be made on such a basis (i) where the circumstances giving rise to the change in value relate (directly or indirectly) to the acquisition, disposition, preservation, maintenance or improvement of property (s. 5(6)(h)), and (ii) where equalizing the net family property would be unconscionable, having regard to those circumstances (taken alone or in conjunction with other factors mentioned in s. 5(6)).

The Court clearly stated that the threshold of “unconscionability” under s. 5(6) is exceptionally high. and that the circumstances which are “unfair”, “harsh” or “unjust” alone do not meet the test. To cross the threshold, an equal division of net family properties in the circumstances must “shock the conscience of the court”.

It is worth emphasizing that the legal issue in Serra is whether a market-driven decline in value of a spouse’s assets post-separation may be considered as a factor in determining whether an equalization of net family property is unconscionable under s. 5(6). Concluding that it may be considered as a factor does not lead necessarily to a finding on the facts that an equalization order would be unconscionable.

The remedy once the unconscionable threshold has been met is that the Court may award a spouse “an amount that is more or less than half the difference between the net family properties” if “equalizing the net family properties would be unconscionable”. In short, the threshold that an applicant must cross in order to open the door to an unequal division is exceptionally high. That is because of the policy underlying the Act encouraging finality, predictability and certainty and minimizing the exercise of judicial discretion to the extent possible, also referred to earlier. Once the threshold has been crossed, however, and the rare resort to judicial discretion under the Act is in play, the court should exercise its discretion as it normally does: by doing what is just, fair and equitable in the circumstances.

In the end, the Court found that it was just, fair and equitable in these circumstances to reduce the equalization award downward.

This is a definite must for ALL FAMILY LAW LAWYERS.