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Posted on February 21st 2006 in Legal Articles

Financial Disclosure: Part II

Financial Disclosure: Part II

In the last edition of Legal Issues, we introduced you to the topic of financial disclosure in the context of family law matters. We explained the importance of financial disclosure when negotiating marriage contracts, cohabitation contracts, separation agreements and child and spousal support. The following article reviews a recent court case1 that aptly demonstrates the consequences of failing to make full financial disclosure.

The Marriage
The Ms married in 1978 and had three daughters. Their’s was a traditional marriage. Mrs. M was a stay-at-home wife and mother and Mr. M worked for himself. In 1995, after 16 years of marriage, the Ms separated. At the time Mrs. M was 40 years old, in good health and the children were in school full-time. Mr. M was earning approximately $25,000 a year from his business, GSM. In addition to GSM, Mr. M had a second business, Videoservices, which was in a deficit position.

The Separation Agreement
That same year, the couple entered into a separation agreement. Although Mr. M provided information about GSM, he failed to disclose his interest in Videoservices.

Under the agreement, the parties agreed that Mrs. M would receive the bulk of the family capital to help her establish a new home for her and the three children in lieu of ongoing payments for child support. They further agreed that in the event Mr. M’s income increased by a material amount during the course of the children’s upbringing, his obligation to pay child support could be recalculated with reference to this higher income. The agreement also included a release of spousal support.

Mrs. M acknowledged that she had signed the separation agreement voluntarily and that when she signed it, she believed that the terms were fair and reasonable.

The Post Separation Years
Shortly after the Ms separated, Mr. M’s income increased significantly and at one point he was earning in excess of $300,000 a year. Despite this substantial change in his income, he took no steps to recalculate his child support obligation.

In 2000, the oldest daughter moved in with Mr. M and in 2002 the youngest daughter followed suit. The middle daughter also lived with him when she was not away at university. While Mr. M and his daughters lived extremely well, Mrs. M had been forced to move in with her mother while she tried to get back on her feet financially.

The Lawsuit
In 2001, Mrs. M became aware of Mr. M’s more prosperous financial situation. When he failed to respond to a request for financial disclosure, she commenced litigation to have the separation agreement set aside, including her release of spousal support.

In support of her position, Mrs. M pointed to the husband’s failure to disclose the existence of Videoservices at the time the agreement was negotiated. She argued that this amounted to a material non-disclosure as contemplated in the Family Law Act, and justified setting the agreement aside.

She also pointed to Mr. M’s failure to advise her of his change in income. She submitted that there existed an interdependency in the agreement between child support and spousal support, and that his failure to adjust child support vitiated the spousal support release. However, in the circumstances Mrs. M argued that the most appropriate remedy was spousal support rather than child support.

The Decision
Mrs. M failed on the Videoservices argument. Although Mr. M should have disclosed its existence, given the inactivity and deficit position of Videoservices in 1995, the failure to disclose did not amount to a material non-disclosure such that the agreement should be set aside.

Mrs. M was successful on the income argument. As a result, the spousal release provision was set aside because of Mr. M’s non-disclosure of his increased income.

The Court concluded that the separation agreement had imposed a positive obligation on Mr. M to advise Mrs. M of any significant increases in his income and to recalculate his child support obligations accordingly. The child support and spousal support provisions were interdependent such that Mrs. M’s release of spousal support was contingent on Mr. M meeting his child support obligations. Therefore disclosure was essential to the objectives of sharing the financial consequences arising from the care of the children and reducing the economic hardship imposed on Mrs. M as a single mother with three children, but with limited career opportunities.

The Court noted that had the financial disclosure been made as anticipated, the separation agreement would have continued to be effective.

The Result
Mrs. M was entitled to retroactive spousal support in the amount of $233,911 together with pre-judgement interest. In addition, she was entitled to ongoing support in excess of $5,500 a month for an indefinite period.

The Moral
This case underscores the importance of making full financial disclosure at the time a separation agreement is being negotiated. While the Ms’ separation agreement was not set aside because of Mr. M’s non-disclosure of his second business, this was only because it had had no value at the relevant time.

This case also highlights the potentially severe consequences of failing to make ongoing disclosure as required by a legal agreement. Had Mr. M made disclosure concerning his income in a timely fashion, the release of spousal support would not have been set aside and the only issue would likely have been increased child support for a finite period of time.

This case has been appealed. However, as of this printing a decision had not been rendered by the Court of Appeal.