News and Views — This Week in Family Law

Valuation of Debts on Date of Marriage that Are Extinguished by Subsequent Bankruptcy 

By: Philip Epstein

Zavarella v. Zavarella, 2013 CarswellOnt 16187 (Ont. C.A.): This is a very significant and important decision of the Ontario Court of Appeal about how to determine the value of a debt on the date of marriage. The majority decision composed of Justices Gillese and Strathy use a discretionary approach to value, whereas Justice Juriansz, in dissent, prefers the strict application of the valuation principles of the Family Law Act. I, respectfully, agree with Justice Juriansz and I think the majority decision is going to lead to considerable doubt and confusion about how to apply certain provisions of the Family Law Act.

The wife made an assignment into bankruptcy shortly before she was married. Within nine months of the marriage she was discharged from the bankruptcy without having to pay any of the debt. The issue for the Court of Appeal was how that debt she had at the date of marriage be treated when calculating her net family property. The trial judge held that the wife must include her debt as a date of marriage debt and rejected the argument that the debt was analogous to a contingent liability because the debt was fixed and existing at the date of marriage. The trial judge noted that the debt was not extinguished until after the marriage and that she should therefore not place a different value on the debt than the actual amount owing at the time of marriage.

The majority of the Ontario Court of Appeal disagreed and went on to value the debt at zero. The majority relied on the line of cases set out in Greenglass v. Greenglass, 99 R.F.L. (6th) 271 (Ont. C.A.), at para. 25 and more particularly Poole v. Poole, 16 R.F.L. (5th) 397 (Ont. S.C.J.).

Following those line of cases the majority determined that " . . .  the court must make a meaningful determination of the value to attribute to the date of marriage debt."

Justice Gillese noted that the debt in this particular case was to be valued based on the reasonable likelihood that the debt would ever be paid and she relied on the expert evidence that there was a very low risk that the wife would ever be called upon to pay the debt. Justice Gillese noted that the evidence showed that the debt was extinguished without any payments ever having been made and therefore it was an error to attribute any value to the debt on the date of marriage. Respectfully, I disagree. Firstly, using hindsight to value the debt is an inappropriate approach to valuation. Secondly, to look at events that occurred after the date of marriage to determine how to value the debt is to bring discretion into the calculation in a statute that is supposed to provide certainty and finality. Ontario, when it enacted the Family Law Act opted for a formulaic approach to the determination of net family property and equalization. It removed, to a very great extent, the discretionary approach. In essence, the Family Law Act created a snapshot approach to valuation being the value of assets and liabilities at the date of marriage and at the date of separation (valuation date).

Justice Juriansz in his dissent disagreed. He noted that it was undisputed in this case that on the date of marriage the wife had significant debts. He finds that once the debt was established on the date of marriage the court below was correct in applying the statutory formula. He specifically rejects using the Poole v. Poole approach because in his view those cases were about transfers of property from a parent to a child, and the issue was really whether the amount advanced was a gift or a loan. See for example Levan v. Levan where an alleged loan was discounted to zero because in essence the trial judge found that it was not a loan but rather a gift.

Justice Juriansz believes that the majority is extending the Poole approach beyond money advanced from parents or as gifts to apply to all debts and that this invites the court, whenever debt issues are raised, to determine, on the evidence, the value of the debt based on the likelihood of whether it will ever be repaid.

Justice Juriansz says the following:

I have grave reservations about extending the Poole approach. Unlike with gifts, there is no suggestion in the FLA formula that certain debts will not be included in the NFP calculation. To repeat, unlike gifts, which are excluded under s. 4(2)1, s. 4 does not contemplate characterizing particular liquidated debts as real or illusory, nor does it mention the possibility of discounting them. . . .  In my opinion, recognizing judicial jurisdiction to value particular debts raises the spectre of family law litigants looking to the court to rate the quality of all of the debts they owe or are owed. Not only would the outcomes be uncertain and unpredictable, but the resolution of each case would require evidence about the particular circumstances. Expert opinion would be required in a great many cases. The certainty and predictability provided by the statutory equalization formula would be undermined. The result would be greatly expanded scope for litigation in the already overburdened family courts  . . .  That is, I believe the correct approach is to simply apply the computations set out in s. 4(1) of the FLA and "let the chips fall where they may".

Justice Juriansz attaches no significance to the fact that the wife was discharged from bankruptcy without having to pay the debts since the subsequent events should have no effect on the calculation on the date of marriage. See for example Dembeck v. Wright, 27 R.F.L. (7th) 264 (Ont. C.A.).

There is an extremely important distinction between the majority and minority reasons in this case. The majority approach, if applied to all debts, will indeed lead to a diminishment of the certainty and finality philosophy of the Family Law Act. It is most unlikely, given the amounts of money involved here, that this case is going to go further and thus we are left with an important appellate decision that may govern the future approach to debts under the Family Law Act.

I would hope that this issue will be revisited by the Ontario Court of Appeal in a subsequent case which will require a five-person court to review this important principle.

There is a secondary issue in this case which bears comment. The parties reached a settlement in the middle of the case in which a host of items were agreed upon. In particular, the parties agreed to include the value of a car on the wife's side of the ledger. It turns out as the trial continued to unfold that the wife did not own the car and that it was leased. The trial judge concluded in dealing with that issue that the parties had made a common mistake of fact in that they both believed the car was owned by the wife and thus he removed it from the items the parties had agreed upon. The Court of Appeal correctly noted that that was an error in law and that the trial judge had no right to remove an item agreed upon and leave the rest in place. While, if it was a common mistake of fact one or both of the parties might have moved to set aside the whole agreement, they could not, based on the doctrine of common mistake, cherry pick to take out one item and leave the rest intact.

This undoubtedly is one of the more important cases of the year and will have some impact in other jurisdictions as well where there are similar statutory provisions with respect to equalization and debts.

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