February 5, 2009: Textile-business owner gets break in divorce settlement due to recession

by Jeffrey Cottrill

TORONTO -- With much of the world (especially North America) facing a major economic crisis, many business owners worry about their companies collapsing and ruining them financially. For a business owner undergoing a high-net-worth divorce, the worry is doubled. How can you meet the terms of a multimillion-dollar divorce settlement when you can't even rely on your company to support you anymore?

There may be some good news in this area -- at least in Canada. A new ruling from the Ontario Court of Appeal suggests that a significant drop in a divorcing spouse's net worth can justify a post-divorce adjustment in the division of a couple's assets.

On February 4, a three-judge panel unanimously granted Harold Serra, who owns a textile firm in Ajax, Ontario, a reduction in the amount he must pay to his ex-wife. Serra divorced his wife, Barbara, in 2003, and the court ordered him to pay $4.1 million to her at the time. But due to a collapse in the domestic textile industry that had occurred since the couple's separation in 2000, Serra's company eventually lost about $9 million in assets.

According to the new judgment, Serra now has to pay only $900,000.

More stories on divorce settlements: Getting Settled Cover Your Liabilities What to Expect at a Deposition Securing Your Financial Future Dividing Marital Property

"In my opinion," Justice Robert Blair wrote in the official decision, "a court may take into account a post-separation-date change in the value of a spouse's assets... An equalization of net family property that requires Mr. Serra to pay more than his total net worth (and arguably as much as twice his net worth) because of a marked decline in the value of his major asset post-separation... is, in my view, unconscionable."

Judge Blair added, however, that the decrease in assets must be significantly large in order to warrant such an appeal. "Concluding that it may be considered as a factor does not lead necessarily to a finding on the facts that an equalization order would be unconscionable. This is an important distinction."

Barbara Serra can appeal the ruling with the Supreme Court of Canada if she decides to do so within the next two months. James Morton, Mrs. Serra's divorce lawyer, told Canada's national newspaper The Globe and Mail that the problem with this ruling is that it would be equally valid in more prosperous economic times. "This is the state of law until the Supreme Court decides otherwise," he said, "for at least another two [or] three years."

Serra and his divorce lawyer, Philip Epstein, had put the case to Judge Blair's court that Serra could not pay the original settlement amount because of a decline in the textile sector that resulted when China joined the World Trade Organization in 2001. When this happened, cheap imported products from China had a catastrophic impact on Canada's textile industry, including Serra's business.

"Now, for the first time, if your assets have gone down significantly, you have your foot in the door," Epstein told the Globe and Mail. "Whereas before, even if your assets had dropped in value, you had no arguments."

Fellow family lawyer Stephen Grant agreed that this case would deeply affect future high-net-worth divorce cases in Ontario. "The court was trying redress a very, very serious problem that was, through no making of either party, the result of a worldwide economic collapse," Grant told the same paper.

If we're on the brink of a major worldwide recession -- even a second Great Depression -- it will affect the way we live in countless ways, including the way we marry and divorce.

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