Post Separation Decline in Equalized Assets — Serra v. Serra
With the economy in a free fall, the Ontario Court of Appeal’s (OCA) decision in Serra v. Serra could not be more timely. The OCA decision reversed the trial court’s judgment and replaced it with an order requiring the husband to make a lesser payment to his wife to resolve the property claim under Ontario’s Family Law Act.
The decision allows litigants to pursue an unequal division of net family property where market driven forces cause a decrease in the post separation value of assets.
Modern family law reflects a social policy of recognizing spouses equal contributions towards marriage by dividing family property equally. Ontario’s family property law differs from many jurisdictions because it uses a fixed date valuation approach to achieve that underlying policy. For most purposes, that date is the separation date.
Ontario courts had been reluctant to look beyond the separation date by either valuing assets ‘in hindsight’ or considering a post-separation value in an application for an unequal division. They did so because of the desire for certainty in resolving cases.
In the Serra case:
- the husband’s business was worth between 9 and 11 million dollars at separation.
- At trial 7 years later his assets had declined in value so that his net worth was perhaps 2 million.
- Nonetheless, the trial judge found that she had no authority under Ontario’s Family Law Act to order a lesser equalization payment. The trial court ordered the husband to pay his wife an equalization based on the value of his business at separation — twice as much as his net worth at trial.
The OCA has clarified that a non-fault, market driven decline in the value of equalized assets is sufficient for the courts to consider making an award for an unequal division of property.
In one part of the decision, the OCA suggests that a temporary market decline of shares or securities would not meet the test of unconscionability. However, does this apply to a spouse’s RRSP savings, especially where it is not uncommon to see a loss of value exceeding 30 percent in this market? These are expensive issues for spouses that separated in 2007 or earlier, but who are only now effecting equalization payments.
The Court of Appeal relied on section 5(6)(h) of the Family Law Act, which says:
5(6) The court may award a spouse an amount that is more or less than half the difference between the net family properties if the court is of the opinion that equalizing the net family properties would be unconscionable, having regard to…
(h) any other circumstance relating to the acquisition, disposition, preservation, maintenance or improvement of property. R.S.O. 1990, c. F.3, s. 5 (6).
Up until the Serra decision, the titled spouse was largely the insurer of the other party’s equalization claim in the face of market driven reductions. Now, market driven forces are “other circumstances” relating to the acquisition, disposition, preservation, maintenance or improvement of property.
In the face of declining markets, will the propertied spouse rush to make a transfer of assets vulnerable to reduction in value? Should he or she do so? The Family Law Act does not permit trial judges to make specific transfers of property in satisfaction of equalization payments.
Before making an order for an unequal division, a trial court must be of the opinion that an equalization will be “unconscionable”. The Court of Appeal noted the standard is more than simply “unfair”, “harsh”, or “unjust” alone but must “shock the conscience of the court”.
Of interest in the Serra decision:
- The Court’s ruling that unconscionability need not be based on fault based conduct;
- Despite the Court’s discussion of the absence in fault, it seemed to penalize the wife in her conduct of the litigation, and specifically the preservation orders and support orders obtained by her and which required the husband to hold on to his failing business to meet his obligations under the court orders;
- The OCA held that in fashioning an unequal division, the trial court should exercise its “normal discretion”, and not simply make an award that was shy of unconscionable; and
- yet the OCA gave very little insight about how it exercised its discretion when it declined to saddle the wife with the entire downside of the business decline.
The OCA really did not touch upon an interesting element of the trial. The fact that the husband had admitted the wife’s claim for a one-half interest in the business, that she subsequently withdrew on the eve of trial. Had the trial court allowed the admission, the wife would have been saddled with one-half of the decline in the business value, as she would have owned half of it.
Many practitioners feel there is enough in the Serra decision to allow litigants to pursue post-separation swings in the value of assets. Whether that will be applied to upswings in value will likely not be seen for years (given the recent market trends), and the extent to which trial judges will allow such claims is yet to be seen.