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Accurate financial disclosure is critical to resolving family law matters, including when spouses negotiate a separation agreement. Failure to provide complete financial disclosure may result in the agreement being set aside. Individuals with business interests also need to provide proper valuations for those assets. Parties need to be in a position to make informed decisions about their financial future, or agreements may be challenged at a later date.
Court Can Set Aside a Separation Agreement
In Tsarynny v. Topchiy, the parties were married, but after the applicant discovered the respondent’s affair, they signed a separation agreement that they downloaded from the internet. Neither received independent legal advice. The agreement waived the right to equalization, fixed a nominal amount of spousal support, and provided for zero or table child support from only the applicant, despite the fact that the parties had equal parenting time. The respondent now wished to have the agreement set aside, claiming that the applicant failed to make financial disclosure before they signed the agreement and that they failed to understand the consequences of the agreement.
The separation agreement constituted a domestic contract and was subject to section 56(4) of the Family Law Act (FLA). That section enables a court to set aside a domestic contract or a provision in it if in certain circumstances, including:
- if a party failed to disclose to the other significant assets, or significant debts or other liabilities, existing when the domestic contract was made.
- if a party did not understand the nature or consequences of the domestic contract.
The judge looked to LeVan v. LeVan, which held that any consideration of the section requires a two-step analysis. The first requires considering whether the respondent can demonstrate that she did not understand the nature and consequences of the contract or that she did not have financial disclosure. And the second step asks whether it is appropriate to set aside the agreement.
Applicant Failed to Disclose Investment in His Company
In this case, the respondent wished to set aside the separation agreement, alleging that the applicant had failed to make financial disclosure before they signed the agreement. Here, the respondent had equal access to tax information and information about the parties’ joint assets and liabilities. Additionally, the applicant showed the respondent his bank account balances through a mobile application. However, the judge found that this did not constitute proper disclosure. And even if it was, the judge accepted that the applicant failed to disclose relevant information about his company, which was a significant asset.
The agreement was signed in March 2016, and at the time, the respondent understood that the applicant’s company was insolvent. However, in April 2016, the company received an investment of approximately $4,000,000. The applicant claimed that he did not know of the investors at the time he signed the separation agreement. The judge rejected this and did not accept that the applicant had no idea the investment was forthcoming. Instead, the judge found that by March, the applicant knew there were potential investors who could invest funds into the company. As Justice Sugunasiri commented,
“common sense suggests that no one invests in a company without due diligence where the potential investor would inquire about the financial health of the company and a request to review books and records.”
On cross-examination, the applicant acknowledged that the due diligence process would normally take several weeks to several months. Given his position in the company, the applicant would have been aware of the potential for investment. However, despite having that knowledge, the applicant allowed the respondent to rely on prior information that the company was struggling and was close to bankruptcy.
The applicant argued that he did not have to provide financial disclosure to the respondent due to a release that the parties had previously signed. This purported to release the applicant from claims for damages that may be sustained as a result of the applicant’s shareholdings in the company. Nevertheless, the judge found it would not release him from having to provide disclosure when negotiating a domestic contract. Furthermore, the release was not related to whether the company should be equalized upon marriage breakdown. On a plain reading of the release, it protected the applicant as a shareholder from claims by the respondent for damages, loss or injury to her or her property. As the judge explained, “equalization of assets is neither “damage” nor “loss or injury to person and property.” More was required to show that the parties intended to contract out of the legislative requirements for married couples to equalize their assets upon the end of a marriage. Instead, the judge felt the release merely showed the parties lacked sophistication in contract interpretation.
Misrepresentation Prevented Spouse from Making an Informed Assessment
The first requirement of section 54(1) of the FLA was met since the applicant did not make financial disclosure of a significant asset. The judge determined that failing to provide that disclosure was fatal to the parties’ ability to rely on the separation agreement. Dochuk v. Dochuk set out a non-exhaustive list of factors that courts can consider when deciding whether to set aside a separation agreement. These include:
(a) whether there had been concealment of the asset or material misrepresentation;
(b) whether there had been duress or unconscionable circumstances;
(c) whether the petitioning party neglected to pursue full legal disclosures;
(d) whether he/she moved expeditiously to have the agreement set aside;
(e) whether he/she received substantial benefits under the agreement; and
(f) whether the other party had fulfilled his/her obligations under the agreement.
Justice Sugunasiri looked at these factors and noted that the parties’ separation agreement purported to resolve property as well as child and spousal support issues. It waived any right to equalization and excluded the company from being equalized. However, the judge emphasized that proper financial disclosure is critical to the negotiation of a domestic contract so that the parties can consider the rights they are giving up. But in this case, the parties were not equipped to make informed decisions. Justice Sugunasiri adopted the comments in Dubin v. Dubin, where the judge stated that, while parties can opt out of the FLA,
“fundamental to a choice to opt out of the legislative scheme is a clear understanding of what one’s rights and obligations might be if there was no contract. It is in this context that financial disclosure is critical, in that knowing assets and liabilities at the date of the agreement is fundamental to an eventual calculation of net family property.”
For Justice Sugunasiri, the applicant was, at best, negligent in his material misrepresentation of the company and, at worst, purposeful. In either case, the judge accepted that the respondent would have approached the negotiation differently if she thought there was more to the company than the applicant had led her to believe. Consequently, it was unfair to hold her to the agreement that she made without relevant information.
Johnson Miller Family Lawyers: Your Trusted Family Lawyers On Separation Agreements
Parties need to have accurate financial information when negotiating a separation agreement. Courts will not look favourably at individuals who mislead the outer spouse and provide inaccurate valuations for assets. The team at Johnson Miller Family Lawyers have experience helping clients with separation agreements so that you can obtain a clear financial picture and understand your rights. To discuss your matter further or arrange a consultation, please complete our online questionnaire or contact the firm at 519.973.1500.
