Lesson from appeal decision: Don’t play games with financial disclosure – Article in The Lawyer’s Daily

By Nathalie Boutet and Gary Joseph

This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

In an era where many families engage in legitimate complicated tax and estate planning, the Ontario Court of Appeal has once again highlighted that a separating spouse’s obligation to provide complete and understandable financial disclosure is not a game of hide and seek.

Obligation to provide proactive financial disclosure

The court in Hevey v. Hevey 2021 ONCA 740 reaffirms that it is up to the party with the assets to make the disclosure and the valuation of the assets, and that it is not up to the other party to “ferret out” information about the income and assets of the other party.

The facts of the Hevey case are not uncommon, where the family’s financial affairs are intertwined through complicated legitimate tax planning strategies.

During their marriage, the Heveys set up trusts and corporations as part of legitimate tax planning. During their non-court legal separation process, the husband swore a Financial Statement showing his Net Family Property at $0. Some financial explanations about the corporate and trust structures, and Charles Hevey’s assets, were provided through the exchange of lawyers’ letters. The wife, Lynne Hevey, also had access to the corporate lawyer who set up the structures, and to other financial information. She relied on the husband’s representations about his Nil Net Family Property statement. They settled without an equalization of their assets.

Despite the fact that people have significant assets at separation, a Nil Net Family Property may happen when the sum of the liabilities on separation and the value of the assets brought into the marriage exceed the value of the assets at separation.

Eleven years after the divorce, when Charles sold one of the family’s commercial properties, Lynne’s commercial lawyer discovered that a document Charles gave the bank around the time of the separation disclosed assets worth more than $21 million.

Lynne brought an application for equalization and spousal support well after the expiry of the
limitation period for seeking an equalization. Charles alleged that the wife, as a sophisticated
businesswoman who ran her own business, had been a trustee of the trusts and was a preferential non-voting shareholder in one of the companies, understood exactly how his financial affairs were managed and what his interests were at the time. He said that she also knew that his net worth vacillated as he bought and sold properties, and in addition, that his financial affairs were especially bad around the time of their separation following a financial crash.

The Court of Appeal noted that while Lynne had bookkeeping experience and access to some (though not all) of the trust information, it would be unfair to infer that she understood the complexity and consequences of the corporate and trust arrangements. She had relied on the information provided by Charles. The Court of Appeal permitted a trial of the equalization and support claims.

Same financial disclosure obligation in or outside of court

Most separating families resolve their financial affairs without access to the courts, through
collaborative negotiation, traditional negotiation or mediation, with the negotiation of separation agreements.

Parties to non-court processes also have an obligation to provide full and truthful financial
information. A separation agreement may be set aside if a party failed to disclose to the other
significant assets, or significant debts or other liabilities, existing when the separation agreement was negotiated.

Unlike the obligation to file a sworn 13.1 Financial Statement in court, there is no prescribed form for the financial disclosure when negotiating a separation agreement nor an obligation to produce a sworn statement at any point during a non-court process.

While it is good practice to exchange sworn 13.1 Financial Statements and disclosure briefs before starting negotiations outside of the court process, a person may meet his or her obligation to provide full and truthful financial disclosure through the production of a list of their assets and liabilities, with separate valuation reports as needed, so long as the information is complete and accurate. Many financial advisers and accountants facilitate the financial disclosure process through the production of Excel or Word documents.

In collaborative negotiations and mediation, some lawyers and mediators are reluctant to insist on the production of a sworn 13.1 Financial Statement at the outset because some information required on the form — for example, the valuation of jointly held real estate or the calculation of certain notional disposition costs — are “positional” issues that could be better addressed through the use of “interest-based negotiation” during the negotiation process. It is highly recommended, though not a legal requirement, that clients do swear to the truth of the information they produced before the conclusion of the negotiations.

Lawyers are bound by Rule 3.2-7 of the Rules of Professional Conduct not to knowingly assist in or encourage any dishonesty, fraud, crime, or illegal conduct; or do or omit to do anything that the lawyer ought to know assists in, encourages or facilitates any dishonesty, fraud, crime or illegal conduct by a client or any other person. The collaborative process goes further by making it mandatory for a lawyer to withdraw from the case if the client has withheld or misrepresented
important information.

Fully transparent and detailed disclosure is beneficial to all involved in the matrimonial breakdown. For the parties it provides a level of assurance that a fair result can be achieved and one that is likely to last, thus ending the dispute. For counsel, assurance that informed advice can be given to the client based upon evidence rather than conjecture is a comfort against LawPro claims. Disclosure speeds the process and saves the clients legal fees. It is a win-win and should be embraced by the profession.

Gary S. Joseph is the managing partner at MacDonald & Partners LLP and was successful counsel with his associate Stephen Kirby on the Hevey appeal. A Certified Specialist in Family Law, Joseph has been reported in over 350 family law decisions at all court levels in Ontario and Alberta. He has also appeared as counsel in the Supreme Court of Canada. He is a past Family Law Instructor, Ontario Bar Admission course and the winner of the 2021 OBA Award for Excellence in Family Law. Nathalie Boutet, of Boutet Family Law & Mediation in Toronto, is an experienced family law lawyer, accredited mediator and certified family enterprise adviser. She is skilled at providing unique strategies and out-of-court results to the complex legal, financial and human matters related to separation or divorce for high-net-worth families and business owners.

 

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