Court Confirms Near-$1 Million Loan from Father to Son – But then Values it at $0 For Equalization Purposes
In an interesting matter heard by the Ontario Court of Appeal recently, the court confirmed a trial judge’s conclusion that a large debt the husband had obtained from his father was valid – but that for the purposes of the husband’s equalization payment to his wife as part of their divorce, that debt should be valued at zero.
Robert and Nicole were married for 11 years prior to separating. During the marriage, they lived in a home that had originally been purchased by the husband’s father, Harold, for $1.3 million. They started off paying him rent of $2,000 per month for several years, but eventually the title to the home was transferred into Robert’s name, at a price of $1.2 million. Harold paid the downpayment of $250,000, and the balance was financed. Harold also subsidized an affluent lifestyle for Robert, Nicole and their children. He provided many gifts of money, and made loans to Robert that were documented by various promissory notes. After all was said and done, Robert owed his father about $950,000.
The spouses separated in 2013, and entered into a domestic contract at that time. The terms of that contract later sparked a dispute, since they did not agree on whether it was intended to provide Nicole with a one-half interest in the home on marriage breakdown. At this point, the home was worth $2.93 million. To protect her rights, Nicole registered a matrimonial home designation on title.
At no time prior to the couple’s 2013 separation did Harold ever demand that his son Robert repay the debt under the promissory notes. But that changed in 2015, when Harold sent Robert a notice of demand for payment. After Robert formally acknowledged that he owed the money, Harold sued and obtained a default judgment against him for almost $950,000. (Robert did not defend that action, having obtained legal advice that there were no valid defences to be asserted). Harold filed a writ of execution that was registered with the sheriff, which in law would allow him to seize and sell the property.
From the standpoint of the Family Law equalization between the now-divorcing Robert and Nicole, that large and looming default judgment against Robert would (conveniently) deplete his assets entirely. This meant his equalization payment to Nicole would net out at zero dollars.
Nicole and Robert went to court to have their preliminary issues resolved. For Nicole, the results were mixed: On the up-side, the trial judge confirmed that the wording of the domestic contract was clear, and that she was entitled to a one-half interest in the matrimonial home. But on the downside, the trial judge also confirmed Harold’s $950,000 default judgment against Robert was not a sham, but rather accurately reflected their legal relationship under the promissory notes. The judge refused to set aside Harold’s writ of execution, but did agree to stay its enforcement for the time being, stating:
In the instant case it is clear that Harold took legal advice and then instituted his action to crystalize Robert’s debt to him as supported by the promissory notes. Nicole submits, and I accept as proven, that the enterprise Harold put in place in order to obtain the default judgment was initiated because of Nicole and more specifically what Harold considered to be her greed and Harold’s belief that she had reneged on various agreements. Harold specifically acknowledged that he was aware of Nicole’s matrimonial home designation and her court application seeking an interest in the matrimonial home and that this was the only method by which he could have obtained an encumbrance against [the home] without Nicole’s consent. As well, Harold knew that Robert could not repay him the amount claimed (except from the equity in the home) and he was upset at Nicole for claiming an interest in the home, which he had put money into. The default judgment had nothing to do with actually securing repayment from Robert and everything to do with ensuring that the equity in the home was put beyond Nicole’s reach.
The trial judge ordered that interplay between Harold’s $950,000 default judgment and Nicole’s spousal rights to the home should be determined at a later hearing.
However – in an interesting and important legal distinction – the trial judge concluded that for equalization purposes in the divorce between Robert and Nicole, the value of Robert’s debt to Harold should be set at zero – i.e. essentially it should be ignored for the purposes of making equalization calculations.
These narrow sub-issues of the larger litigation were appealed to the Ontario Court of Appeal, with Robert arguing that these two aspects of the trial judge’s ruling were inconsistent and incompatible with each other.
The Appeal Court disagreed. First, it confirmed the interpretation of the domestic contract that gave Nicole a one-half share of the home. It also acknowledged that Harold had a legitimate claim related to the money he had loaned Robert, and which he was entitled to pursue by legal means against Robert only.
However – and regardless of the debt’s legitimacy – this did not preclude the trial judge from granting the stay in connection with Harold’s writ. It was patently obvious the whole scheme had been set up by Harold to put the equity in matrimonial home beyond his daughter-in-law Nicole’s reach, and defeat her legal claims under the domestic contract. With this in mind, the stay had been validly granted.
On the other hand, the legitimacy of the debt was unrelated to how it should be characterized for equalization purposes in Robert’s hands; they were separate issues. For equalization purposes only, the trial judge had not erred in valuing Robert’s debt to his father at zero. The judge had properly concluded that this was not a “contingent liability” on Robert’s side of the tally, because there was no reasonable prospect that Harold would ever pursue Robert for repayment – indeed the evidence showed that Harold had forgiven several debts owed to him by his children.
The Court of Appeal affirmed those aspects of the trial judge’s preliminary ruling. The various matters would still proceed to a full trial for resolution.
For the full text of the decision, see:
Peerenboom v. Peerenboom, 2020 ONCA 240
