What are the effects of debts incurred through crime during a divorce? We analyze this through the case of Paul Manafort. Would both Paul and his wife have to pay the price and how does the Ontario Family Law Act help in these situations?
We don’t know if Paul Manafort’s tribulations have shaken his 40-year marriage quite yet, but we do know his convictions on tax fraud, bank fraud and failing to report foreign bank accounts will cost him dearly. He’s incurred hefty legal bills and is facing the prospect of multi-million dollar fines. If Robert Mueller can prove that his crimes are connected to his real estate holdings, the court could issue a criminal forfeiture order and Manafort would see his homes in Manhattan, Brooklyn, and Virginia auctioned off by the U.S. Marshals Service. If the marriage comes to an end, Manafort’s financial liabilities would have a big impact on a settlement with his wife.
Debts Incurred Through Crime During a Divorce
What would be the repercussions if this kind of situation happened in Ontario? How would debts incurred through crime during a divorce affect asset division in Ontario Family Law Act?
Debts, along with assets, are taken into consideration in a divorce. Under the Ontario Family Law Act, the general rule is that the increase in each spouse’s net worth is equalized on a separation or divorce. Large debts may completely cancel out one spouse’s assets to the detriment of the other spouse.
But if the debts resulted from crime, it seems unfair to penalize the innocent spouse. What happens then?
The Ontario Family Law Act and Related Cases
The Ontario Family Law Act is quite rigid when it comes to applying the rules for asset equalization. There is no exception simply because a result seems unfair. But the innocent spouse could gain relief if an equalization under the normal rules would be “unconscionable.” For debts incurred through crime during a divorce, the innocent spouse could look to the exception in the FLA for a situation that would be unconscionable having regard to debts or other liabilities that were incurred “recklessly or in bad faith.”
Hebo v. Putros
For example, in Hebo v. Putros, the husband had an income tax debt stemming from an illegal scheme to submit false charitable donation receipts. Judge Graham found that the portion of the tax debt consisting of penalties and interest arose from the husband’s fraudulent tax filings. This was a debt that was incurred “recklessly or in bad faith” within the meaning of the unconscionability provision of the FLA. Unfortunately for the wife, the CRA tax statements that were submitted in evidence did not distinguish between the penalties/interest and the rest of the tax debt. Since the judge could not calculate the penalties and interest, he was unable to give the wife any relief. Nevertheless, this case does support the proposition that an innocent spouse will not be penalized by debts arising out of fraudulent activities.
Murphy v. Murphy
In Murphy v. Murphy, Judge Gareau found another justification for relieving an innocent spouse from his wife’s crimes. The wife had been convicted of theft and fraud and was ordered to make a restitution payment to the victim of her crimes. In declining to allow the wife to deduct the restitution debt from her net worth, the judge decided that it would be “contrary to public policy” to penalize the husband for his wife’s criminal activity. Judge Gareau gave the husband added relief by relying on the FLA’s unconscionability provisions to order an unequal division of assets because the wife’s criminal behaviour had a negative economic impact on the husband.
Things to Consider in Such a Scenario
Married couples should be mindful of how their debts can impact each other. Some other important considerations are:
Q. Can I be held responsible for my spouse’s debt on a divorce?
A. Not unless you signed for it, e.g. co-signing a credit card application or loan application.
Q. How do my spouse’s debts affect my credit score?
A. You and your spouse have separate credit scores. However, any joint debts or joint accounts will have an impact on each spouse’s credit score.
Q. What happens to my equalization claim if my spouse is going through a bankruptcy process during our divorce?
A. If you have a claim for asset equalization against a spouse who has gone into bankruptcy after the separation, it will be treated as an unsecured claim in the bankruptcy without any priority over the bankrupt’s other debts. You are unlikely to receive anything from the bankruptcy. However, if the bankrupt has assets that are exempt from bankruptcy (e.g. RRSP or pension), you can ask for an order to lift the “stay of proceedings” that automatically applies to a bankruptcy. This will enable you to pursue a remedy against those assets. If your spouse goes into bankruptcy before the separation and is not discharged at the date of separation, your equalization claim would be dealt with outside the bankruptcy but is unlikely to yield an equalization payment unless your spouse has assets that are exempt from bankruptcy.
Based in Toronto, Nathalie Boutet is an experienced family law lawyer, accredited mediator and certified Family Enterprise Advisor™ 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. www.boutetfamilylaw.com