Valuation of Debts on Date of Marriage that Are Extinguished by Subsequent Bankruptcy
By: Philip Epstein
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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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