Skip to content

Should Husband Pay Back for Admittedly “Stupid” Business Decision?

gump

Should Husband Pay Back for Admittedly “Stupid” Business Decision?

If one spouse makes a poor business decision during the marriage, does that automatically mean that the financial repercussions should be reflected in how the Net Family Property (NFP) is calculated?

That was the question in the recent Ontario case in Malandra v. Malandra, where the spouses had separated after more than 40 years of marriage. As part of the divorce, they needed to determine the equalization of family assets between them, so the court’s focus turned to the question of their respective NFP.

The wife asked for an unequal NFP division; among the grounds was that the husband had recklessly depleted the family assets during the marriage. This was because in 2003 – having decided that he was not earning enough money – the husband had decided to quit his job in the pastry company where he had worked for six or seven years, and where he earned about $45,000. (Prior to that, he had worked at a different pastry company for 22 years).

Instead, the husband decided that he would go into business for himself.

Using $20,000 of the money he and the wife had saved, he bought a restaurant called Antonio’s, located in the basement of a downtown office building that also housed federal government offices on several floors. The government employees formed virtually all the restaurant’s clientele; he had relied on the verbal assurances of the former owner that the restaurant was profitable, but did not ask to see the books or cash receipts.

For the first five years, the fledgling business plodded along with some growth in revenues each year. In 2008 the office building in which it was housed was sold to a new owner; at that time, the husband committed himself to another 5-year lease, even though – while at an all-time high profit position – Antonio’s was not meeting his financial expectations. The husband and wife had arranged some refinancing with the bank in order to manage their various business-related and personal debts.

Everything changed after the federal election in 2011, when the government offices moved out of the building in which Antonio’s was located. Two entire floors were cleared out, along with offices on other floors. Antonio’s revenues declined sharply, and in 2012 the husband arranged to abandon what remained of the 5-year lease, and was left with a debt.

In connection with the equalization calculation, the wife protested that husband’s NFP should be reduced by the amount of debt that was still owing in connection with Antonio’s at the date of separation. She said that after the first five years, the husband should have cut his losses, rather than renew the lease for a second five years. The husband countered by pointing out that any debts he incurred were intended to earn a living and pay family expenses, not for his personal use.

The court found that while the husband’s decision to start up a restaurant may have been a “stupid” one (which the husband conceded it was), he did not intentionally set out to deplete the family assets:

I am not persuaded that the decision to start-up Antonio’s was reckless, even though it was not a good business decision. Normally one would expect a purchaser to look at the books and speak to the accountant. Had he done so, he would have learned that the prior owner ran the café for ten years and on the books, basically broke even. This type of business was known to have a significant cash component. For the first seven years the gross revenue did increase from year to year. The event that triggered the failure was the sudden departure of the government tenants, something not within the [husband’s] control.

The threshold consideration was whether, in the context of the entire marital relationship, the husband had deliberately made bad investments to waste assets, to the point where an equal division of NFP was “unconscionable”. That was an exceptionally high legal threshold, and tantamount to “unjust” or a situation that would “shock the conscience of the court”. None of those descriptions applied here; to the contrary, the wife in this case had actually concurred in the investment and had the restaurant actually flourished, she would have shared equally in the gains.

The wife’s claim for an unequal division of the NFP was accordingly dismissed.

For the full text of the decision, see:

Malandra v. Malandra (2014), 2014 CarswellOnt 7937, 2014 ONSC 3533, J. MacKinnon J. (Ont. S.C.J.)

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders. For more information, visit our main site.