26 September 2013

Supreme Court Publishes First Decision Dividing Property Under the FLA

Mr. Justice Harvey of the Supreme Court has just released his decision in Asselin v. Roy, a case in which the parties, a couple in a long term unmarried relationship, agreed to use the new Family Law Act to determine how their property and debt would be split between them. Frankly, I'm surprised that we've had a decision on this topic so soon, but the judgment is welcome nonetheless.

Much toner will be spilt chewing over the nuances of this decision, and, on the assumption that sharper minds than mine will have a better analysis than I, I will provide a summary overview only.

Background Facts

The parties began to live together, in British Columbia, in 1987 and separated in 2011. The respondent brought a number of assets into the relationship, namely the family home in BC, a property in Nova Scotia, a pension and an RRSP account. The claimant owned nothing.

In 1990, the parties signed a cohabitation agreement at the suggestion of the respondent. Given that both parties were leaving marriages when their relationship began, the suggestion was sensible. The agreement said that each of them would remain the sole owner of the property he or she owned, and that the only property they would share would be property bought in their joint names. Each of them agreed to waive his or her interest in the other person's property.

The respondent hired a lawyer to draft the agreement, and the parties signed it in the lawyer's office. At the trial, the claimant said that she had not seen the agreement before signing it, that didn't know why they were going to the lawyer's office until they got there and that she didn't have legal advice about the meaning and consequences of the agreement before signing it.

As time passed, the first family home was sold and used to buy a second family home, which was also registered in the sole name of the respondent. The claimant, who was then working as a teacher's assistant, contributed her salary and gifts from her parents toward the second family home, the purchase of furniture and various renovation projects. The respondent, who I'm sure also contributed to these expenses, used his salary and other income, and sizeable inheritance from his mother's estate to invest in real estate in Nova Scotia and cover all of the operating costs of the family homes. The claimant contributed more toward family expenses as her income improved. The parties maintained separate bank accounts throughout almost all of their relationship.

By the time the trial rolled around the respondent owned five properties in Nova Scotia, including the one he'd owned at the beginning of the parties' relationship, the second family home, investments, a violin collection, and other personal property including cash and a car. The parties jointly owned two other properties in Nova Scotia. The claimant owned some investments and an RRSP account she purchase with an inheritance from her mother, some other RRSPs and other personal property including cash and a car.

Apart from the mortgages secured against his various properties, the respondent owed credit card debt of $60,000 at the date of separation. The claimant held no debt, apart from her liability for certain mortgages.

Jurisdiction Under the New Act

As mentioned, at the beginning of the trial the parties elected to have the Family Law Act apply to determine the division of property and debt between them. (Technically, this could not have been an election under the transition rules set out in s. 252(2) as the property division rules of the old Family Relations Act never applied to unmarried spouses. It would have had to have been something like an agreed amendment of the parties' claims to plead relief under the new act.)

The parties's other election was that the court would also have the authority to make decisions about the property in Nova Scotia, under, I presume, s. 106(2)(b) which allows litigants to agree that the court has jurisdiction over property located outside the province and apply our local law to the division of that property under ss. 108(5) and 107(a).

Regardless of how the court assumed jurisdiction to apply the Family Law Act to the trial, it did. The court next determined that the parties were "spouses" as defined by s. 3(1)(b) of the act, having lived together in a marriage-like relationship for more than two years, and concluded that the property division rules applied to the parties.

The Law

The court described the purpose of the Family Law Act as creating "more certainty for litigants in the division of their assets," and observed that "the broad judicial discretion formerly available under the FRA has been replaced with a more formulaic approach to both the identification and division of family property." The court then reviewed the founding assumptions of the new act about the division of property:
  1. under s. 81(a), all property qualifying as "family property" is to be divided equally, and responsibility for all debt qualifying as "family debt" is top be allocated equally;
  2. under s. 95, family property and family debt can be divided unequally, but only if an equal division would result in "significant unfairness;"
  3. under s. 84, "family property" is all property owned by either or both spouses on the date of separation, and the amount by which any property excluded from the pool of family property has grown in value during the relationship; and,
  4. under s. 81(b), the date of separation is the date on which property is characterized as either family property or excluded property.
Comparing this new regime to the old act, the court said this:
"[160] ... Unlike the former legislation governing property division, there is no requirement under the Act to establish entitlement to an asset before its characterization as ‘family property’. There is no requirement of ordinary usage or contribution to the asset; rather the court merely has to determine that such property existed on the date of separation and at least one spouse owned it or had a beneficial interest in it."
Certainly, this seems much simply than the regime under the Family Relations Act, which required proof that property was "ordinarily used for a family purpose" to be a shared, "family asset." However, 
"[106] To implement the objectives [of the legislation], more mathematical certainty from a clear evidentiary record is required. Where inheritances are said to come into play, estate documents should be produced. Where exclusion of property is sought, on whatever basis, documents showing the value of property as at the time cohabitation commenced and at the date of separation will be critical in the assessment which the court is to perform. Where one party suggests, as is the case here, that excluded property has changed character into another asset, documents should be provided to allow the court to trace the transaction back to the property said to be excluded."
The point the court is making here is that the focus of the act has shifted from "ordinary use for a family purpose" to the dates that the spousal relationship began and ended, and, particularly in terms of excluded property, the value of property on the dates that the relationship began and ended.

The Agreement

The first issue for the court was whether the cohabitation agreement was binding on the parties. The respondent unsurprisingly took the view that the agreement was fair, except with respect to the family home. The claimant, on the other hand, argued that the agreement "was both unfairly constituted and significantly unfair in substance — in other words, the agreement was unfairly reached and, if the agreement was followed, the result would be unfair as well.

The court reviewed s. 93 of the new act, which sets out the reasons why the court can set aside an agreement about the division of property and debt, and summarized its effect as follows, with the particularly important bits in bold:
"[124] Seemingly, the proclamation and bringing into force of the Act heralds a new age for property division in the province of British Columbia. The tenor of the new Act appears to favour a less interventionist approach than its predecessor, the FRA
"[125] Section 93 contemplates a two-pronged inquiry as to the enforceability of an agreement. The first inquiry is directed at the formation of the agreement; the second stage, its effect. 
"[126] Even if the court determines the agreement was unfairly reached, there is still discretion to decline to set aside or vary the agreement if the result would not be substantially different from that which is contained in the agreement. s. 93(4) 
"[127] If an agreement was fairly reached, having regard the enumerated factors in s. 93 (3), the court must go on to consider whether the agreement is significantly unfair having regard to the enumerated criteria in s. 93(5). 
"[128] Judicial discretion has been modified, particularly as it relates to the assessment and enforceability of agreements. Under the previous legislation, a finding of unfairness based on one of an enumerated factors in s. 65(1) was sufficient to allow the court to, in effect, rewrite the parties’ Agreement to achieve the fairness found lacking in the original version. 
"[129] Critics of the legislation argued the threshold for judicial intervention was low, resulting in uncertainty which, in turn, encouraged litigation. 
"[130] Certainty is no doubt a desirable objective and parties should be encouraged, where mutually desired, to establish regimes of property entitlement which deviate from the statutory scheme. 
"[131] However, certainty should not trump either procedural or operational fairness as defined in s. 93."
Cutting to the chase, the court ultimately found the cohabitation agreement to unenforceable for want of procedural fairness, for four reasons:
  1. the claimant did not have legal advice before signing the agreement;
  2. the respondent's financial disclosure in the agreement was incomplete as he failed to provide values for the assets he owned at the time; and,
  3. the claimant therefore did not have the "necessary information to fully consider her position" in deciding whether to sign the agreement.
Having concluded that the agreement was procedurally unfair, the court then proceeded to divide the parties' property and debt.

The Division of Property

This exercise may have proved more troublesome than expected because of the quality and sufficiency of the financial evidence available to the court. The court noted various deficiencies in the information produced concerning: the value of the property existing at the date of cohabitation; the value of the parties' pensions at the date of cohabitation and at present; the value of each party's inheritances when received and at present; the parties' use of their inheritances during the relationship; and, the source of funds used to acquire property during relationship.

The court offered the following criticisms and the sort of evidence that would have been helpful:
"[169] Unfortunately ... neither party prepared a [schedule of assets and values] evidencing the assets or debt in existence as at the triggering event, [the date of separation] and, where appropriate, their value on that date. 
"[170] In the result, absent evidence at trial as to the identity and valuation of assets as at the date in question, I have relied upon the parties’ Form 8 financial disclosure statements in ascertaining the identity of various accounts not discussed in the evidence. If amongst them are accounts which did not exist as at [the date of separation] then such should be deleted from the following list of family assets. 
"[171] As to the value of the assets, those assets which are family property consisting of accounts and financial institutions subject day to day use, such as checking accounts, the valuation should be taken as at the date of separation. 
"[172] For those accounts representing long-term investments, specifically the RRSPs of each party found to be family property; those are to be divided in specie at the time of division unless it can be shown contributions were made post-separation. In such case, the amount of such contribution should be subtracted from the divisible portion of the asset."
Relying on the parties' financial statements and the evidence presented at trial, the court concluded that the excluded property consisted of the equity in the second family home attributable to the respondent's inheritance and the sale proceeds of the first family home, the savings accumulated by the claimant as a result of her own inheritance, and a portion of the equity in two of the Nova Scotia properties attributable to the claimant's inheritance. All other assets, the court concluded, were family property.

The court then addressed the question of whether it would be "significantly unfair" to equally divide the family property as required by s. 81. However, the question of what "significantly unfair" means has not yet been addressed by a court, and with this judgment will remain so:
"[251] ... I conclude that an equal division of the family property as earlier found would not be 'significantly unfair' to either party. 
"[252] In concluding this, I refer to the remarks of Justice Stewart who, in Jacobellis v. Ohio, (1964) 378 U.S. 184, famously stated: 
I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description ["hard-core pornography"]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.
"[253] I, too, will leave to others to formulate an intelligible definition of 'significantly unfair' as that term is defined in section 95 and elsewhere in the Act
"[254] However, 'I know it when I see it' and this, save for my possible reservations concerning pension division, this is not 'it'."
Advice for Future Litigants

The court, it is clear, was vexed with certain aspects of the evidence before it, and offered these comments for other litigants:
"[104] Future litigants referencing this decision would be well advised to avoid some of the problems encountered by the parties in this litigation by preparing a Scott Schedule detailing the assets and liabilities of each party as of the date of separation."
A "Scott Schedule" is a chart that shows each asset and each debt that is at issue in a case and gives certain information about each item, including how it is owned, the date of purchase, the cost to purchase, present value, and each parties position on the item, if known.

It seems to me that the critical information with respect to property would be something like this:
  • Date of purchase, purchase price.
  • If brought into the relationship, value at the date of cohabitation or marriage, whichever is earlier.
  • If bought during the relationship, source of purchase funds and amount of contribution of each party toward purchase.
  • Amount and source of any funds contributed by either party to improvement of asset during relationship.
  • Value of property, and any associated debt, at date of separation.
  • Value of property, and any associated debt, at date of trial.
In the case of inheritances, court awards and gifts:
  • Date of acquisition, value when acquired.
  • Amount, if any, contributed to excluded property and family property during relationship.
  • Value at date of separation.
  • Value at date of trial.
In the case of debts:
  • If brought into the relationship, balance at the date of cohabitation or marriage, whichever is earlier.
  • If incurred during relationship, date incurred, amount incurred and reason incurred.
  • Value of any debt proceeds applied to or spent on excluded property and family property during relationship.
  • Balance outstanding at date of separation.
  • Amount of debt incurred to maintain family property after separation.
  • Balance outstanding at date of trial.
Finally, I should thank the brave lawyers who leapt in the deep end of the ocean to argue the first case on the division of property under the Family Law Act. You have helped us spot the sharks.

2 comments:

  1. athiele@lklaw.ca27/9/13 10:36 AM

    Thanks,JP. this trial was week 1 of the new Act. As counsel in the case for the wife, we were handicapped by the position of the husband until virtually the week before the case that we were going to be arguing contribution under the FRA and the validity of the agreement and neither party having good records of their finances. Husband's counsel conceded the case would proceed under FLA apparently as he believed he would have a better position to uphold the agreement under the new statute. So rather than getting the time to do a Scott Schedule and historical records, we were scrambling around changing direction.

    ReplyDelete
    Replies
    1. Great case, Angela, and congratulations. I expected there was a reason for the missing Scott Schedule; the judge's comments nevertheless offer a lesson for us all.

      Delete