Wednesday, February 11, 2009

Serra v Serra: Post V Day Decline: Recession
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"...[1] The important issue raised on this appeal is whether, and if so, in what circumstances, 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.[1] This legal question has not previously been decided by this Court. A second issue is whether – if the decline in value of the appellant’s principal asset may be taken into account – the equalization of family property would be unconscionable in the circumstances of this case.

[37] The steps to be taken when s. 5(6) is engaged are well-established. The court must first ascertain the net family property of each spouse, by determining and valuing the property each owned on the valuation date (subject to the deductions and exemptions set out in s. 4). Next, the court applies s. 5(1) and determines the equalization payment. Finally – and before making an order under s. 5(1) – the court must decide whether the equalization of net family properties would be unconscionable under s. 5(6), having regard to the factors listed in paragraphs 5(6)(a) through (h). See Rawluk v. Rawluk 1990 CanLII 152 (S.C.C.), [1990] 1 S.C.R. 70 at pp. 93-94; Berdette v. Berdette reflex, (1991), 3 O.R. (3d) 513 (C.A.), at pp. 525-526; Stone v. Stone 2001 CanLII 24110 (ON C.A.), (2001), 55 O.R. (3d) 491, at para. 39; LeVan v. LeVan 2006 CanLII 31020 (ON S.C.), (2006), 82 O.R. (3d) 1 (S.C.J.).

[46] In my opinion, a court may take into account a post-separation date change in the value of a spouse’s assets, and the circumstances surrounding such a change, for purposes of determining under s. 5(6) of the Family Law Act whether equalizing net family properties would be unconscionable. An order for an unequal division of net family properties is exceptional, however, and may only be made on such a basis (i) 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 (ii) 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)).

[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”: see Merklinger v. Merklinger reflex, (1992), 11 O.R. (3d) 233 (Ont. Gen. Div.), aff’d 1996 CanLII 642 (ON C.A.), (1996), 30 O.R. (3d) 575 (C.A.); Roseneck v. Gowling 2002 CanLII 45128 (ON C.A.), (2002), 62 O.R. (3d) 789 (C.A.); McDonald v. McDonald reflex, (1988), 11 R.F.L. (3d) 321 (Ont. S.C.); and LeVan (S.C.J.).

I note, for example, the following comments of Backhouse J. in LeVan, and of Jennings J. in Merklinger:

LeVan, at para. 258:

“Unconscionability” is a much more difficult test to meet than “fairness” and as a result, the courts have only minimal discretion to order anything other than an equal division of family property. Unconscionable conduct has been defined as, among other things, conduct that is harsh and shocking to the conscience, repugnant to anyone's sense of justice, or shocking to the conscience of the court. [Citations omitted].

Merklinger, at para 54:

Section 5(6) of the Family Law Act, 1986 permits me to order an unequal allocation of value if to do otherwise would be unconscionable. The legislature deliberately chose to strictly define the severity of the result of the application of s. 5(1) which must pertain before there can be any judicial intervention. The result must be more than hardship, more than unfair, more than inequitable. There are not too many words left in common parlance that can be used to describe a result more severe than unconscionable. [Emphasis added].

[49] However, it does not follow that because the threshold is exceptionally high the factors to be taken into account in assessing whether that threshold has been crossed should not include post-separation changes in the value of a spouse’s assets and the circumstances surrounding that change. In an article published after the trial decision in LeVan, but before the argument on appeal, Professor Bala stated:[12]

It is submitted that while the outcome in LeVan may well be correct, the courts should interpret the vague, general words of s. 5(6)(h) to include the factor of a post-separation decline in property values that renders an equalizing of net family properties as evaluated on separation date to be unconscionable. It seems inappropriate for there to be judicial recognition only of post separation increases in property values, with post-separation declines ignored, even in situations of “unconscionability.” While in some circumstances it is appropriate to expect the titled spouse to dispose of the assets after separation or bear the full risk of not doing so, there are circumstances when such a disposition would be unreasonable.

[50] I agree. This is precisely one of those situations.

[51] Elmer E. Driedger first articulated what is now accepted as the guiding principle of modern statutory interpretation when he said:[13]

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context, in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

This principle has been adopted as the standard by the Supreme Court of Canada on numerous occasions. See, for example, Rizzo & Rizzo Shoes Ltd., Re, 1998 CanLII 837 (S.C.C.), [1998] 1 S.C.R. 27, at para. 21, and Bell ExpressVu Ltd. Partnership v. Rex, 2002 SCC 42 (CanLII), [2002] 2 S.C.R. 559, at para. 26.

[52] The rationale behind the statutory direction in s. 5 of the Family Law Act that net family property is to be shared equally – with the rare exception provided in s. 5(6) – is set out in s. 5(7) of the Act:

The purpose of this section is to recognize that child care, household management and financial provision are the joint responsibilities of the spouses and that inherent in the marital relationship there is equal contribution, whether financial or otherwise, by the spouses to the assumption of these responsibilities, entitling each spouse to the equalization of the net family properties, subject only to the equitable considerations set out in subsection (6). [Emphasis added.]

[53] This rationale is affirmed in the preamble of the Act, which states:
Whereas it is desirable to encourage and strengthen the role of the family; and whereas for that purpose it is necessary to recognize the equal position of spouses as individuals within marriage and to recognize marriage as a form of partnership; and whereas in support of such recognition it is necessary to provide in law for the orderly and equitable settlement of the affairs of the spouses upon the breakdown of the partnership, and to provide for other mutual obligations in family relationships, including the equitable sharing by parents of responsibility for their children; [Emphasis added.]

[54] There is a jurisprudential theme running through the cases to the effect that relief may only be granted under s. 5(6) where there has been fault-based conduct on the part of the asset-owning spouse, that is, that the word “unconscionable” embraces factors relating to “unconscionable conduct” only: see, for example, von Czieslik v. Ayuso 2007 ONCA 305 (CanLII), (2007), 86 O.R. (3d) 88 (C.A.); LeVan; and Merklinger. In von Czieslik, for instance, Lang J.A. noted in obiter, “the legislative restriction of s. 5(6)’s application to certain enumerated circumstances, none of which have to do with ownership, but all of which relate to fault-based conduct on the part of the other spouse” (at para. 29).

[55] Respectfully, I do not think this proposition is correct. First, it is clear that not all of the enumerated circumstances in s. 5(6) relate to fault-based conduct on the part of a spouse. Three of them – 5(6)(a), (b) and (d) – do. Four of them – 5(6)(c), (e), (f) and (g) – do not. One – 5(6)(h), the general basket clause at issue here – may or may not arise in conduct-related circumstances. Accordingly, there is no basis for concluding that the general basket clause in the list must take its colour and meaning from a previous list of specific conduct-based factors and, therefore, that the “circumstances” referred to must themselves embody fault-based conduct. That is not the case.

[56] Secondly, neither the purpose or object of the s. 5 equalization payment scheme, the s. 5(6) exception, nor of the Act itself call for such an interpretation. The design of the legislation is to promote the goals of certainty, predictability and finality in the resolution of property matters following the breakdown of marriage. This, in turn, is founded on the central premise articulated in s. 5(7) that “inherent in the marital relationship there is equal contribution, whether financial or otherwise, by the spouses to the assumption of [their joint] responsibilities, entitling each spouse to the equalization of the net family properties, subject only to the equitable considerations set out in subsection (6).” (emphasis added)

[57] Thus, to ensure adherence to the policy choices made by the Legislature, and reflected in s. 5(7) and the preamble of the Act, equalization of net family properties is the general rule. As with most rules, however, there are exceptions – in this case, the high-threshold unconscionability provisions of s. 5(6). This exception is expressly contemplated by the caveat “subject only to the equitable considerations set out in subsection (6)” set out in s. 5(7). Judicial discretion with respect to equalization payments is therefore severely restricted, by statutory design, but it is not eliminated altogether since there is discretion to order an unequal payment where “the court is of the opinion that equalizing the net family properties would be unconscionable”: see, for example, Skrlj v. Skrlj reflex, (1986), 2 R.F.L. (3d) 305 at p. 309 (Ont. S.C.).

[58] There is no principled reason that I can see, given the language of the Act and its purpose or objects, to confine the word “unconscionable” in s. 5(6) only to circumstances arising from fault-based conduct on the part of one of the spouses. Although unconscionable conduct is obviously an appropriate consideration in determining whether equalizing the net family properties would be unconscionable, in my opinion the true target of the limited exception to the general rule is a situation that leads to an unconscionable result, whether that result flows from fault-based conduct or not.

[59] I do not read this Court’s decision in von Czieslik as requiring anything to the contrary. That case evolved out of pre-separation misconduct on the part of the husband. He had “gifted” a large portion of his assets to a friend just prior to the separation, thus reducing his net family property and frustrating his former wife’s right to share in what had been accumulated during the marriage. It was in this context that Lang J.A., understandably, focussed on the “fault-based conduct” of the husband. However, the s. 5(6) issue in the case was whether, in making a s. 5(6) award, courts are restricted to the difference between the parties’ net family properties (the court held it was not). The issue was not, as here, whether post-separation circumstances that do not involve misconduct on the part of the asset-owning spouse may be taken into account.


[64] It is worth emphasizing that the legal issue in question here is whether a market-driven decline in value of a spouse’s assets post-separation may be considered as a factor in determining whether an equalization of net family property is unconscionable under s. 5(6). Concluding that it may be considered as a factor does not lead necessarily to a finding on the facts that an equalization order would be unconscionable. This is an important distinction, in my view, and may sometimes be overlooked in the heat of the debate over finality and certainty versus discretionary fairness.

[65] Although a purely market-driven decline in the value of Mr. Serra’s principal asset is at the heart of these proceedings, 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. In the circumstances here, however, I am satisfied that an equalization of net family property would be unconscionable, given the dramatic downward turn in Mr. Serra’s fortunes and the factors giving rise to, and surrounding, it.

[66] This is not a situation where any of the other factors listed in clauses (a) through (g) of s. 5(6) come into play to be weighed in the analysis against the market-driven decrease in value. For example, there is no fault-based conduct on the part of Mr. Serra that could – if it existed – be evaluated in the s. 5(6) analysis against the market-driven factors affecting his assets, as there was in such cases as LeVan, von Czieslik and others.[14] As the trial judge noted, “[t]here is no suggestion that the decline in the value of the business is other than market-driven.” Nor – for reasons mentioned above – is this a situation like LeVan where Mr. Serra could have disposed of the business (or of his shares in it) as a hedge against their downward trend in value, another factor that could otherwise be considered in the mix. It was necessary to keep Ajax Textiles afloat to enable him to continue to meet the interim support and capital obligations he had been ordered to pay.

[67] In these circumstances, an equalization of net family property that requires Mr. Serra to pay more than his total net worth (and arguably as much as twice his net worth) because of a marked decline in the value of his major asset post-separation – over which he had absolutely no control and in spite of his best efforts to save the business in the face of Ms. Serra’s trust claims, the preservation order and the need to comply with his support obligations – is, in my view, unconscionable. In so concluding, I have taken into account that Ms. Serra is not a woman without means. The trial judge found she left the marriage “with assets worth a considerable amount.” She has net family property of about $1 million in addition to her interest in the Florida property. She has lived, and continues to live, a life of relative luxury, 6 months in Canada and 6 months in Florida. The trial judge found she had been “very well compensated” for her contributions to the business during the course of the marriage...."

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