HLA Magazine Feature: Market-Driven Decline in Post-Separation Value and Unconscionability Claims Under The Family Law Act
A key principle in family law legislation in Ontario regarding division of property is a fixed valuation date approach, such that the crystallized date for the valuation of assets is the date of separation.
Section 5(6) (h) of the Family Law Act provides discretion for the Court “to 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 any other circumstance relating to the acquisition, disposition, preservation, maintenance or improvement of property.”
In the 2009 case Serra v Serra, the Ontario Court of Appeal considered section 5(6)(h) of the Family Law Act. Serra involved a decline in the value of shares post-separation due to shifting market forces impacting the Canadian textile industry. In Serra, the Court of Appeal held that it would be unconscionable to equalize the date of separation value of shares of approximately $10.5 million, due to the post-separation decline in the values of shares as of the date of trial to approximately $2.0 million.
As set out by Justice Blair at paragraph 46, “An order for an unequal division of net family properties is exceptional. It will only be made in circumstances where the change in value relates directly or indirectly to the acquisition, disposition, preservation, maintenance or improvement of property (s. 5(6)(h)), and 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)).”
Justice Blair further stated at paragraph 47, “In this regard, the threshold of “unconscionability” under s. 5(6) is exceptionally high. The jurisprudence is clear that 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”.”
The high threshold outlined in the Serra case has yielded limited success in arguments of unconscionability in 2008 recession and post 2020 Covid cases in Ontario wherein there was a drastic decline in property value post-separation as result of market-driven forces.
For example, the 2010 case Kean v Clausi addressed a general decline in the value of stocks due to the 2008 recession wherein an unconscionability claim was successfully made. However, there were distinguishing factors in Kean which have limited its applicability to subsequent cases.
In Kean, the wife claimed an unequal division of the parties’ net family property on the basis of a significant plummet in the value of the Toronto-Dominion investment account in the wife’s name alone from the date of separation ($228,168.00) to the date of the application ($145,158.00) and as of the date of trial ($157,000.00). The TD account was created at the suggestion of the husband to refinance the matrimonial home and use the equity from the home to invest in high-risk stocks and utilize the dividends to cover the carrying costs of the matrimonial home. The TD account was solely managed by the husband but placed in the wife’s name. Due to the nature of the account, Justice Mossip determined that it was an asset for the benefit of the family, and as such, it would be an unconscionable result for the wife to have to bear the entire burden of a decrease in the value of an asset created by the conduct of the husband (Para 17.).
Justice Mossip ordered that it would be just and equitable in the circumstances for the value of the Toronto-Dominion investment account in the wife’s net family property statement to be the value as of the date of trial, being $157,000.00 (instead of the $228,168.00 as of date of separation) or the value 15 days prior to the payment, whichever is greater. Justice Mossip further added, that if the value of the investment account is lower at 15 days before payment, the value shall be included as $157,000.00 (Para 20).The net result was that the husband would share in ½ the value of the TD account as of date of trial rather than as of date of separation.
Another post-2008 recession case, Earle Barron v Barron 2012 ONSC 2837 dealt with a section 5(6) unconscionability argument relating to the devaluation of the Applicant’s business post-separation. The Applicant argued that the value of the business for equalization purposes should be reduced to NIL. The Applicant relied on the Kean v Clausi case noted above to support her position. However, Justice Goodman distinguished Kean on the basis that the unconscionability finding in that case arose not just from market-driven forces, but also from the specific set of circumstances regarding the husband’s conduct and the nature of the asset.
Justice Goodman held that “the evidence fell short of establishing the proposition that the fluctuations in currency exchange rates directly or indirectly impacted the value of the business to the extent required to satisfy a finding of unconscionability”, stating: “In my opinion, in a situation of pure market-driven forces, the result of a drop of value must fall more towards the spectrum of extreme, rather than trending as found in this case.” (Paras 255-256)
A more recent case which raised a claim for unconscionability as a result of market-driven declines in property in the context of Covid, was quickly dismissed in Jayawickrema v Jayawickrema 2020 ONSC 4444. Justice Jarvis reviewed all the evidence and concluded:
“While I have every reason to suspect that the current pandemic is having, and may for the foreseeable future have, an impact on the wife’s business and possibly the value of her realty, I am not persuaded that she has met the exceptionally high evidentiary onus for unconscionability required by s. 5(6)(h) of the Act.” (para 18)
BOTTOM LINE:
The Ontario Court of Appeal has set a very high threshold in Serra which makes the unconscionability argument exceptionally difficult to meet in the context of uncontrollable market-driven declines in the value of property. There is a challenging balance between the objective of the legislation to provide finality and certainty in equalization calculations using a fixed-date approach, with empowering the Courts to divide property based on discretionary fairness. Hopefully there will be some clarity from the Courts in balancing these competing objectives as further cases emerge addressing market-driven devaluations of property.
Originally published to the HLA.
