The decision was eagerly watched by divorce lawyers who have been deluged recently with cases where estranged spouses found their businesses and investments shrinking after their separation.
When dealing with divorcing couples, Ontario courts evaluate the assets earned during the marriage and order one of the spouse to make an equalization payment that will enable both sides to end up with roughly the same worth.
“In my opinion, a court may take into account a post-separation date change in the value of a spouse's assets,” Mr. Justice Robert Blair wrote on behalf of the three-judge appellate panel.
The case predates the current economic turmoil, pitting a textile entrepreneur from Ajax, Ont., Harold Serra, who separated from his wife, Barbara, in 2000 and divorced in 2003.
Mr. Serra argued that he couldn't meet the $3.3-million equalization payment he owed Ms. Serra because his business declined shortly after the separation, when an influx of Chinese exports led to the collapse of the Canadian textile industry.
The court of appeal agreed in its ruling.
“An equalization of net family property that requires Mr. Serra to pay more than his total net worth (and arguably as much as twice his net worth) because of a marked decline in the value of his major asset post-separation . . . is, in my view, unconscionable,” Judge Blair wrote.
However, the ruling makes it clear that, while it opened the door to readjusting payments when a person's net worth changes significantly, the change has to meet a high threshold.
“Concluding that it may be considered as a factor does not lead necessarily to a finding on the facts that an equalization order would be unconscionable. This is an important distinction.”
The ruling reduced the amount Mr. Serra had to pay his ex-wife to $900,000.
“Now for the first time, if your assets have gone down significantly, you have your foot in the door. Whereas before, even if your assets had dropped in value, you had no arguments,” said Mr. Serra's lawyer, Philip Epstein.
Ms. Serra's lawyer, James Morton, said she is disappointed and hasn't decided whether to pursue the case further. She has 60 days to decide if she wants to appeal the decision to the Supreme Court of Canada.
“This is the state of law until the Supreme Court decides otherwise, for at least another two, three years,” Mr. Morton said.
Mr. Morton said the ruling could also apply when someone's assets dramatically increases between the time of separation and settlement, opening the door for ex-spouses seeking higher payments.