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Mar 7, 2019

Just because your ex failed to disclose assets, doesn't mean you get a cut

By Laurie H. Pawlitza
Special to the National Post View original

Family lawyers advising their clients inevitably tell them something like this: Provide full financial disclosure to your spouse or your agreement could be set aside.

Despite the ubiquity of this counsel, the non-disclosure of assets is a recurring theme in family court. But it isn’t just the amount, or the fact of non-disclosure itself, that can be an issue.

Determining the effect of non-disclosure on a negotiated settlement can be a challenge too, a difficulty highlighted in the case of Turk v. Turk, recently decided by the Ontario Court of Appeal.

In Ontario, the Family Law Act says that “a court may … set aside (an) agreement or a provision in it, if a party failed to disclose to the other significant assets, or significant debts or other liabilities, existing when the (agreement) was made.”

Given this provision, separating spouses usually provide detailed disclosure, including such things as financial statements and tax returns for private corporations in which they have an interest. To buttress the disclosure, even when a matter is being resolved out of court, lawyers commonly ask the parties to complete the same sworn financial disclosure form required in litigation.

The disclosure requirements of the Family Law Act have often resulted in litigation. Because the legislation requires an equalization of the net worth each spouse built up during the marriage, full disclosure of the existence and value of assets and debts is necessary to do the calculation required by the Act. Similarly, to determine what support is owed, it is critical to understand the income and benefits each spouse has available to her or him.

For many reasons, including “settlor’s remorse,” spouses who have signed agreements sometimes seek to set them aside, alleging that the other spouse failed to provide complete disclosure.

In Ontario, the courts must first decide whether there was non-disclosure of significant assets or debts. If the answer is ‘yes,’ only then will the court decide whether it will exercise its discretion and set all or part of the agreement aside.

The courts have taken a holistic approach, assessing non-disclosure in the context of the “entire relationship,” saying that the undisclosed asset or debt “should not be considered in isolation of all of the surrounding circumstances.”

Generally, negotiated settlements are thought to be the preferred way to resolve family law issues as these settlements avoid litigation. In Turk, this did not turn out to be the case.

The Turks lived an extravagant lifestyle for a good part of their 19-year marriage, but the husband suffered a significant business reversal around the end of the marriage in 2008. After a protracted series of mediation sessions, which stretched over 18 months, they signed a separation agreement in 2010.

The parties attended mediation mainly without their lawyers present. The mediator was responsible for obtaining the financial disclosure from the parties — an unusual role for the mediator.

During the lengthy mediation, compromises made by the husband on property issues included an agreement not to deduct significant assets he owned at the date of marriage when calculating the increase in his net worth between marriage and separation, and the inclusion of a property bought after separation.

Fortunately for the husband, he had a wealthy family on whom he was able to rely to support him through many years of business troubles after separation. As a result, other compromises during the mediation included his agreement that the husband’s income was $421,000 for support purposes, even though the gratuitous payments from his father were only $180,000 per year.

In 2017, a 22 day trial was heard by Justice Carolyn Horkins in which the wife sought to set aside the separation agreement. Many other claims were also made by each party.

Justice Horkins reviewed the voluminous evidence and accepted that the husband had not disclosed his interests in two companies owned at separation nor had he disclosed a $480,000 tax-free capital dividend he had received during the mediation.

Expert evidence was led by the wife about the value of the two undisclosed companies, as in prior case law, the Court of Appeal directed that when deciding whether an asset or debt is “significant,” such must be assessed by measuring the value of the asset against a party’s disclosed net assets.

Justice Horkins found for several reasons, that non-disclosure of the companies during mediation was not significant, including because the husband’s father, and not the husband, controlled the companies. Despite the size of the capital dividend, as it was a one-time payment relevant to support, made when the husband was being supported by his family, Her Honour also held that the dividend was not significant.

Despite the husband’s obvious failure to disclose, Justice Horkins decided that “measuring the significance of the non-disclosure against the disclosed net assets is impractical on the facts of this case … because too many monetary compromises were made during mediation.”

Justice Horkins dismissed the claims made by each party, and refused to set aside the separation agreement.

As is often the case with litigation aptly described by Her Honour as “lengthy and bitter,” the wife appealed to the Court of Appeal.

In its decision, released in December 2018, the Court of Appeal upheld the trial decision, holding that “determining the significance of non-disclosed assets is not … the purely mathematical exercise of comparing the value of the non-disclosed assets against the value of the disclosed assets.”

The Court of Appeal upheld the trial judge, who found that “more disclosure would not have ‘changed the outcome’ for the (wife).” The Court of Appeal confirmed that the trial judge appropriately applied the law on the evidence before her: the non-disclosed assets had no bearing on the property settlement and were irrelevant to support, because the parties agreed to a support amount based on income higher than the husband’s actual income.

Turk v. Turk shines a spotlight on the difficulty in determining the effect of non-disclosure in the context of a negotiated settlement.

Whether this will embolden spouses to avoid their future disclosure obligations when settling matters still remains to be seen.

This article was originally published in the National Post