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.

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