Very Important Family Law Decision from Court of Appeal this Morning: Post Valuation Date Fluctuations in a Spouse's Net Family Property do not Justify an Unequal Division of Net Family Property

LeVan v. LeVan, 2008 ONCA 388 Executive Summary --  post valuation date fluctuations in a spouse’s net family property do not justify an unequal division of  net family property.

In family law matters there is customarily an equalization of family assets based upon their value on the date of separation.  The Court, under s. 5(6) of the Family Law Act, does have the power to award a spouse an amount that is more or less than one-half the difference between their net family properties where the Court is of the view that equalization would be unconscionable. The Court’s authority to order unequal division is severely restricted to those circumstances that are “unconscionable” and that fall within the specific circumstances set out in clauses (a) through (h) of s. 5(6).

Can an unequal division of family property be made if there is a radical decline in the value of one of the spouse’s assets following the separation date?  Today the Court of Appeal said “no”.

In Warne v. Warne (1992), 8 O.R. (3d) 571 (Gen. Div.), the Court held:

Given the carefully crafted complex property scheme propounded in Part I of the Act, dependant as it is on events prior to separation, it is difficult to conceive that the legislature, without so specifically providing, intended one subsection thereof, s. 5(6)(h) to entirely change this scheme and permit consideration of post-separation events.

This view was also adopted in Arndt v. Arndt (1992), 6 O.R. (3d) 97 (Gen. Div.), at page 5:

I am mindful and have considered s. 5(6) of the Family Law Act, 1986 as to unequal payment.  Although the market has considerably declined since the valuation date, a declining market is not one of the factors set out in s. 5(6) and I am not empowered to vary the equalization payment on that basis.  In Kelly v. Kelly v. Kelly (1986), 50 R.F.L. (2d) 360 (Ont. H.C.J.), Potts J. was of the view that s. 5(6) refers to circumstances in existence prior to, or as of the date of separation.  He seriously doubted that, even if a decrease in the value of property after separation created an unconscionable result, one could vary the equalization payment under s. 5(6).  At p. 366, he stated the following:

…even if I had decided that it was unconscionable, I seriously doubt that s. 5(6) has any application because valuation is determined as of the date of separation and “debts or other liabilities” mentioned in para. (f) and “other circumstances” mentioned in para. (h) refer to debts or other liabilities and other circumstances in existence prior to, or as of, the date of separation.  There are no transitional provisions in the Family Law Act which would apply in these circumstances.

Accordingly, there will be no adjustment for declining prices of real estate under that section.

An appeal to the Court of Appeal was dismissed: (1993) 15 O.R. (3d) 389 (C.A.).  While both the majority and the dissenting reasons offer some support for the position of the trial judge it cannot be said that the issue was decided before today.

Today’s decision in LeVan v. LeVan, 2008 ONCA 388 answers the question directly --  post-separation circumstances may be considered in limited situations, such as where the conduct of one spouse post-separation has resulted in a significant depletion of assets, but post valuation date fluctuations in a spouse’s net family property do not come within the stipulated grounds in s. 5(6).  

The Court holds:

 

[73]          More recently, in Serra v. Serra (2007), 36 R.F.L. (6th) 66 (Ont. S.C.J.), Herman J. refused to impose an unequal division under s. 5(6)(h) where the value of the husband’s business had declined significantly after separation. The trial judge noted the following at paras. 134 &135:

Turning to the language of s. 5(6)(h) itself, a market-driven decline in value does not appear to come within the “acquisition, disposition, preservation, maintenance or improvement” of a property. This is to be contrasted to a situation in which the conduct of a spouse had an impact on the value of the property.

I conclude that the circumstances in which a court may order an unequal division of net family property under s. 5(6) do not include a market-driven decline in the value of the property.

[74]          However, the courts have not fully rejected the possibility of considering post-separation circumstances under s. 5(6). On some occasions, courts have interpreted s. 5(6) as permitting the adjustment of the equalization payment in light of all circumstances existing at the time the case is decided. See the brief endorsement in Merklinger v. Merklinger (1996), 26 R.F.L. (4th) 7 (Ont. C.A. ). Such approach clearly suggests that the court may account for post-valuation date events in considering the application of s. 5(6). This approach was also adopted in the following cases: Davies v. Davies (1988), 13 R.F.L. (3d) 278 (Ont. H.C.); McCutcheon v. McCutcheon (1986), 2 R.F.L. (3d) 327 ( Ont. Dist. Ct.); Perrin v. Perrin (1988), 17 R.F.L. (3d) 87 ( Ont. Dist. Ct.); and Macedo v. Macedo (1996), 19 R.F.L. (4th) 65 (Ont. Gen. Div.). However, it is important to point out that in each of these cases, the court’s decision to order an unequal division under s. 5(6) was related to the conduct of one of the spouses post-separation, or, in the case of Perrin, related to the medical condition of the wife post-separation.

[75]          Thus, there does seem to be room within s. 5(6) to consider post-separation circumstances in limited situations, such as where the conduct of one spouse post-separation has resulted in a significant depletion of assets.  Nevertheless, the cases that have considered post valuation date fluctuations in a spouse’s net family property are uniform that this factor does not come within the stipulated grounds in s. 5(6).  However, in the context of this case, for the reasons that follow, I am of the view that it is not appropriate in this case to consider the decrease in the value of the husband’s assets subsequent to the valuation date.

[76]          First, it is as a result of the husband’s misrepresentations and his own conduct in failing to provide proper financial disclosure that has put him into the situation of having his property and the value of the shares subject to the equalization provisions of the FLA.

[77]          Second, as determined by the trial judge, the husband could have disposed of his shares to hedge against the setting aside of the contract, but he chose not to do so.  In making this determination, the trial judge considered the evidence of the legal experts, Tim Youdan and Michael Disney of Davies, Philips, Vineberg, who produced a report that provided that the husband had no ability to directly sell the Wescast shares.  At para. 243, the trial judge makes the following finding in this regard:

I accept [the evidence of Ms. Brent] that “prohibited transfer” in the Youdan report does not mean that a sale of the husband’s shares cannot occur.  Rather, it is a defined term that triggers the right of first refusal by the siblings and then a conversion of the shares into Class A shares. 

[78]          The trial judge also accepted the evidence of Ms. Brent that the husband had the right to redeem his preference shares in RyVan at any time, and that the right of first refusal by his family created a market and some liquidity.  There was also evidence that Wescast shares could be sold through secondary offerings and through “bought deal” arrangements with institutional investors.  In my view, it is not unconscionable to force the husband to bear the consequences of his choices in light of the trial judge’s finding that “[t]he husband could have protected himself by a disposition.”

[79]          Third, no one would suggest that any ordinary creditor share the burden of a debtor’s reversal of fortune.  For all other purposes, including bankruptcy, the wife is treated as an ordinary unsecured creditor.  The application of this rule is consistent with the common law in relation to publicly traded shares.  When there is a breach of contract and shares of a publicly traded company are involved, Lord Wrenbury’s decision in Jamal v. Moolla Dawood, Sons & Co., [1916] 1 A.C. 175 (Judicial Committee of the Privy Council) has been consistently applied.  Lord Wrenbury says at p. 179, if the seller retains the shares after the breach, the speculation as to the way the market will subsequently turn is the speculation of the seller, not of the buyer; the seller cannot recover from the buyer the loss below the market price at the date of the breach if the market falls, nor is he liable to the purchaser for the profit if the market rises.

 

 

James Morton

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