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COVID-19: Taking into Account Post-Separation Declines in Value: Serra v. Serra

May 11, 2020

Blog 7

COVID-19 Mini Series

In this blog, we discuss what happens if there is a decline in asset value after separation, equalization payments and the meaning of unconscionable.

This is the seventh blog in Davis Martindale’s “Covid-19 Mini Series”.

In our previous Covid-19 blogs, we discussed:

  1. The timeline of the build up to the current social distancing measures;
  2. Use of hindsight in valuation – whether knowledge of the economic impact of Covid-19 can be incorporated into a value determination;
  3. Potential Covid-19 disclosures, and reporting options that you may see in valuation reports;
  4. Impact of forecasting the recovery on valuations;
  5. Valuation techniques; and
  6. Support obligations in the context of Covid-19.

In this blog, we discuss what happens if assets decline in value after separation.

In Ontario – and elsewhere – the Court system has been directly impacted by concerns over the COVID-19 pandemic. On March 17, 2020, the Superior Court of Justice suspended all regular operations, including all non-urgent criminal, family, and civil matters. And while there may be short-term concerns around an overburdened Court system and the need to reschedule Court dates, the long-term financial implications may be far more severe.

At the time of writing, there is admitted uncertainty regarding the long-term economic impacts of COVID-19. Some economists predict an economic recovery in the second-half of 2020, while others paint a bleaker picture. The only certainty, quoting the late J.P. Morgan, appears to be that the market is going to continue fluctuating[1].

Declining stock portfolios and business interests, with no clear indication of when they may return to pre-COVID-19 levels, has many Canadians worried about the future. Furthermore, the impact of these declines may be magnified within the context of a relationship breakdown.

Equalization Payments and Post-Separation Declines

Upon the dissolution of marriage, one spouse may need to pay the other an equalization payment. This payment is calculated by determining the degree to which the net worth of each spouse grew during the marriage – in many circumstances, the spouse whose net worth grew by more must pay the other spouse one-half of the difference. In Ontario, the amount owed (i.e. equalization payment) typically crystalizes on the Date of Separation.

But what happens if assets decline in value after separation, but before the property division is finalized? For jointly owned assets, the answer is straightforward – both parties participate in the decline. For solely owned assets, however, the answer is not as straightforward. As a general principle, the sole owner of the asset bears the full post-separation decline of the assets value – and similarly, they would benefit exclusively from any subsequent appreciation of value.

There are, however, exceptions to this general principle. Paragraph 5(6) of the Family Law Act provides the Court the authority to “award a spouse an amount that is more or less than half the difference between the net family properties if the Court is of the opinion that equaling the net family properties would be unconscionable”. But this leads to a further question – what exactly is “unconscionable”?

Unconscionability in Serra v. Serra

In the landmark case Serra v. Serra (2009 ONCA 195), the Ontario Court of Appeal accepted that a post-separation market-driven decline in value should be taken into consideration. This was an important decision, as the legal question had not been previously decided by the Court.

Mr. Serra’s business, Ajax Textiles, was valued between $9.50 million and $11.25 million, as at the Date of Separation. The value of the business, however, had decreased to between $1.9 million and $2.6 million by the trial date. For many reasons, including the fact that the separation date equalization payment ($4.1 million) was greater than Mr. Serra’s entire net worth, the Court decided the equalization payment would be “unconscionable”, and reduced the payment to $900,000.

The following key factors influenced the Ontario Court of Appeal’s decision:

  • The decline in value was attributable to shifting market forces that adversely affected the entire Canadian textile industry;
  • The decrease was found to be permanent, and not a temporary recessionary decrease;
  • Mr. Serra had conducted business in a prudent manner subsequent to the separation – including depleting his $2 million shareholder loan account, rolling back salaries and laying off staff, selling corporate assets, and increasing corporate debt;
  • Mr. Serra was required to maintain his business in order to maintain his support payments[2]; and
  • The decline in value could not be attributed to any fault or lack of effort on the part of Mr. Serra.

In determining the equalization payment, the Court was not satisfied that a trial-date valuation should simply be substituted with a separation-date valuation. As stated previously, Ontario’s Family Law Act explicitly states that net family property should be crystalized at the earliest of several dates, one of which is the Date of Separation. The Court ultimately dismissed the trial-date valuation, instead relying on case facts to determine what a conscionable equalization payment would be.

Final Thoughts

Lawyers, valuators, and other family law professionals should use caution when approaching Serra in response to the COVID-19 pandemic.  Although a purely market-driven decline in the value of Mr. Serra’s principal asset is at the heart of these proceedings, the case is not about whether a significant post-separation decline should be applied – but rather, whether the post-separation decline should be considered in determining if an equalization payment may be unconscionable. As always, each case should be considered on its own merits.

If you would like a further discussion on any of the topics covered in our mini series, please do not hesitate to call our team


Ron Martindale - Valuation & Litigation Partner - Davis Martindale
Ron Martindale

Valuation & Litigation

Louise Poole - Valuation & Litigation Partner - Davis Martindale
Louise Poole

Valuation & Litigation

[1] According to the Wall Street legend, when a naive young man found himself in the presence of the late J.P. Morgan, he ventured to inquire Mr. Morgan’s opinion about the future course of the stock market. Mr. Morgan famously replied, “Young man, I believe the market is going to fluctuate”.

[2] Serra should be viewed distinctly from cases such as LeVan v. LeVan 2006 CanLII 31020 (ONSC). In LeVan, the owner of a diminishing asset could have sold it in a falling market to preserve some of its value. In contract, the Court ruled Mr. Serra needed to maintain his business to keep up with his child and spousal support obligations.

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