Equalization can’t be mischaracterized as support, case shows

Making the intentions behind the terms of a separation agreement clear from the start may save a divorced couple the trouble of further conflict and litigation down the road, says Toronto family lawyer Michael Stangarone.

Stangarone, a partner with MacDonald and Partners LLP, recently had success representing a man in court when he declared bankruptcy and sought to change the support terms of his separation agreement on a variation proceeding. But the $3.6 million they previously agreed upon was a blended amount and did not break down specifically what portion of the settlement represented support and what represented other payments.

“As family law lawyers we need to be alive to this issue,” says Stangarone. “A practice point is you need to separate it out.”

In contesting the variation proceeding, the wife and support recipient argued that the remaining unpaid amount of the $3.6 million, which exceeded $1 million, was not support for variation purposes under s. 17 of the Divorce Act but was support for enforcement purposes and for the purposes of being released in the bankruptcy according to s. 178 of the Bankruptcy and Insolvency Act.

She also argued that s. 17 of the Divorce Act wasn’t available to her former husband to vary the remaining balance owing because the deal was a blended settlement, and thus the "egg could not be unscrambled."

“You can’t have it both ways,” says Stangarone. “This case makes very clear you can’t, on one hand, take advantage of a government-funded service to enforce a payment characterized as support, and then tell the support payor that he can’t vary that same payment because it was never support to begin with.”

Support orders are meant to survive bankruptcy. But equalization settlements do not. The problem the court had to deal with in Korn v. Korn, 2016 ONSC 241 (CanLII) was that while the original settlement set out how the settlement funds should be paid over time, it stated that it was a settlement of all claims and didn’t break out how much of the final settlement was attributed to support and how much was on account of equalization (property division).

Had it been distinguished when the agreement was originally made, it could have eliminated any future discrepancy, says Stangarone, who was not the counsel who negotiated and drafted the original final settlement.

The problem became more complicated when the recipient took advantage of the Family Responsibility Office (FRO) to further her claim, while at the same time arguing that the payments did not constitute support for variation purposes, in turn attempting to leave the payor with no ability to vary the amount or stay enforcement of the amount.

“It is simply unacceptable to suggest that parties can effectively agree an amount that is not support can be enforceable by the FRO. To do so would allow parties to take advantage of the services of the FRO that are otherwise intended for support enforcement activities only, usurping or misdirecting the resources of the FRO. Private parties cannot expand the legislative mandate of the FRO to serve their own interests,” wrote Justice Wendy Matheson in the Ontario Superior Court decision in Korn.

FRO’s mandate is to enforce support orders which affords the FRO a great deal of power, including the power to garnish wages, take away passports, suspend drivers’ licenses and even land people in jail. Allowing recipients to transform amounts not otherwise support into support to avail themselves of the FRO enforcement measures is contrary to public policy, says Stangarone.

Another aspect of Korn was the question of jurisdiction.

“It’s a well reasoned decision,” Stangarone says. “It confirms that the court’s jurisdiction to vary support cannot be ousted.”

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