Equal division of net family property shocks the conscience of the court in Serra v. Serra Ont. C.A. 2009

This case is fresh from the Ontario Court of Appeal and has caught the attention of legal professionals and the public alike. The main issue is whether a market-driven post-valuation date change in the value of a spouse’s assets may be taken into account in determining whether an equalization of family property is unconscionable under s.5(6) of the Family Law Act.

The parties in this case were married in 1976. They separated 24 years later, in November 2000, and were divorced in 2003. The husband carried on what had been a very profitable textile business in Ajax, Ontario. At the time of separation the husband’s shareholdings in the business were valued at $9.5 million and $11.25 million. 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. It is important to note that this dramatic drop was not the fault of the husband who had done everything in his power to keep business afloat. Rather the change was entirely the result of market forces that negatively affected the Canadian textile industry generally.

The husband argued at trial 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 FLA. It would require him to make an equalization payment of $4,129,832.50 – an amount that that exceeded his total net worth. However, the trial judge ruled 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 Court of Appeal held that the trial judge erred in her approach and allowed an appeal based on the following analysis. The judge considered section 5(6) of the FLA, specifically s. 5(6)(h) which reads: “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 circumstances relating to the acquisition, disposition, preservation, maintenance, or improvement of property.”

The judge concluded that it would be “unconscionable” to order an equalization of net family properties based upon a separation-date valuation of his interest in the business; to do so would be to require the husband to make an equalization payment that exceeds his total net worth, perhaps significantly. However, the judge stated that an order for an unequal division of net family properties is exceptional and may only be made on such a basis:

  1. 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
  2. where equalizing the net family property would be unconscionable, having regard to those circumstances.

In the judge’s opinion, the case of Serra fit the criteria. However, he warned that it is not an easy test to meet since the threshold of “unconscionability” under s. 5(6) is exceptionally high. Circumstances which are “unfair,” “harsh” or “unjust” alone do not meet the test. Rather the equal division of net family properties would have to “shock the conscience of the court.” Due to the fact that the value of the husband’s business plummeted after separation through no fault of his own and the overall circumstances of the case, the court decided that the equal division of net family property would be unconscionable. The court held that the appropriate remedy was to exercise its discretion and do what was just, fair, and equitable in the circumstances. As such, the husband was ordered to make an equalization payment to the wife that was much lower than that which he would have made if the net family properties had been divided equally.

This Post Has 2 Comments
  1. Sign of the Time or Slippery Slope?

    Generally the value of a party’s assets crystallizes as of the valuation date and a post valuations-date decrease in value of assets would not be taken into consideration by the court when determining equalization of net family property. The Court of Appeal’s ruling in the Serra Decision marks a departure from the state of the law heretofore.

    The value of Mr. Serra’s business drastically decreased after the valuation date through no fault of his own but rather because of the downward turn in the sector of the economy affecting his particular business. This downward turn in the global textile market pre-dated and was not in and of itself a result of the now well recognized global recession (depression?). The Court of Appeal held that an equal division of net family property would be unconscionable in the circumstance.

    Too bad the courts did not see fit to take this view in the early 2000’s when Nortel stock drastically dropped and many parties (especially those employees of Nortel whose net worth was comprised by Nortel Stock) suffered significant post valuation date losses. The courts generally offered these parties no relief and ordered them to pay the full amount of Equalization.

    Unconscionability is generally one of the most difficult tests to meet in Family Law. With this decision, the floodgates are open and the downward turn in the economy may well result in an unequal equalization payment. Certainly where a payor through no fault of action of his own suffers a severe reduction in net worth post separation it is reasonable to reduce the equalization payment. Would this also apply if the payor’s net worth skyrockets post separation? It could go both ways.

  2. There is no doubt that this decision of the Ontario Court of Appeal is significant, a must-read for any family lawyer and recommended to parties in a case where their financial picture has changed dramatically since the date of separation.

    Generally in family law cases, the equal division of property between married spouses is determined by calculating each party’s net family property at the date of separation, also called the valuation date. If one spouse’s financial circumstances changes and that spouse wants an unequal division of family property, they have to meet the difficult test under section 5(6) of the Family Law Act. However, judges have tended to limit the test to situations where there is misconduct by a spouse and the general view seemed to be that post-valuation date changes in the value of an asset were not considered as factors under the test.

    However, in this case the Court of Appeal concluded that the market-driven decline in the Appellant’s business – his major and only significant income-producing asset – and the circumstances surrounding it, were factors to be considered under s. 5(6)(h) of the Family Law Act because, on the facts of this case, they relate to the disposition, preservation and maintenance of that asset. Once the post-separation decline in his asset were ruled to be factors to be considered under s. 5(6)(h), the Court of Appeal had to decide whether they amounted to “unconscionability” before they could order an unequal division of family property.

    “Unconscionability” is an extremely high test to meet. The circumstances of a case must “shock the conscience of the court”. Mere unjust, harsh and unfair situations are not enough. In this case the Appellant’s share holdings in the business were valued between $9.5 and $11.25 million at the time of separation. At trial they were worth between $1.875 million and $2.6 million. Not withstanding this drop, the court makes it clear that it is not just the market-driven downturn in the asset that lead the Court conclude that the Appellant met the test of unconscionability but the combination of other factors that included that:

    • Although there was a remote possibility that the business could turn around, the market-driven downturn was not a result of a recession that lead to a temporary decrease in the asset’s value;
    • There were no other factors under section 5(6) of the Family Law Act to weigh against the decrease;
    • The Appellant could not dispose of his business or part thereof to hedge it against the downward trend as there were no buyers given the market and he had to keep it running to satisfy the existing interim court orders;
    • The Appellant’s equalization payment would mean that he would have to pay more than his total current net worth to his spouse, perhaps as high as twice as much of his net worth;
    • The Appellant had no control over the decline in his asset and used his best efforts to maintain it, including incurring significant further debt;
    • The Appellant’s spouse came into the marriage with little but had a net family property of her own of approximately one-million dollars plus an interest in a property in Florida;

    Most cases involving a post-separation decline in assets will not involve facts as compelling as this case, but some of those cases may nevertheless succeed in obtaining an unequal division of property. Undoubtedly the cases that follow this ruling will help clarify when the unconscionability will be met. However, the Court of Appeal may have suggested a circumstance where unconscionability will not be met, although they did not close the door on it either. In their decision the Court repeatedly stated that this case was not simply a decrease in the value of an asset due to the current global economic crisis:

    [3] The change in value of the asset “ […] pre-dates the economic downturn that is currently bedevilling the Canadian and world economies and is therefore not the produce of a temporary recession inevitably followed by an economic rebound.”

    [61] “Nor, I emphasize, is it a case of a temporary decrease in the value of an asset resulting from a temporary economic recession; the difficulties in the domestic textile industry were well embedded before the onset of the current economic downturn.”

    [65] “[…] 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. Such an occurrence may well be a factor for consideration under s. 5(6)(h), but whether it would be sufficient by itself to constitute “unconscionability” is quite another matter. Each case must be determined on its own facts.”

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