4/19/2004
Smith and Smith – Undoing A Done Deal

By NEIL L. MAISEL, BComm, CA•CBV Partner Business Valuation & Litigation Support Group

The Ontario Superior Court of Justice recently released judgment on Smith* and Smith, a family law case in which I testified. Based on the facts contained in the case, the Judge ruled that the separation agreement entered into by the parties should be set aside by virtue of certain inactions of the husband.

Ms. Linda Smith (Ms. Smith) and Mr. Jerry Smith (Mr. Smith) separated in 1994. They entered into a separation agreement in October 1995. At the time, Mr. Smith owned a 50% interest in an advertising and marketing company.

In October 1995, it was estimated that Mr. Smith’s income was $47,000. Of this amount, $21,000 per year was to be paid to Ms. Smith for a three-year period as spousal support, after which there was to be no more spousal support payable to Ms. Smith. After the three-year period, Mr. Smith’s income was estimated to be $47,000 per year.

The parties calculated the amount of child support that would be owing to Ms. Smith, assuming that each of the three children remained dependent until the age of 23 and assuming an income level for Mr. Smith of $25,000 for the first three years after the agreement was signed and $47,000 thereafter.

The agreement contained the following clause:

“The parties further acknowledge and agree that in the event the husband’s income increases by a material amount above the amounts set out above for the period set out above during the course of the children’s upbringing, the husband’s obligation to pay support for the children, may then be recalculated with reference to the then income of the husband and the wife and to the needs of the children at that time.”

The parties estimated that the lump sum child support that should be paid by Mr. Smith to Ms. Smith to satisfy his long-term child support obligation was $84,000.

Shortly after signing the agreement, Mr. Smith’s company became more profitable. In fact, in one year the company earned over $700,000, before management wages and income taxes.

As the expert retained for Ms. Smith, I calculated Mr. Smith’s average annual income from 1995 to 2003 at approximately $200,000. The expert retained by Mr. Smith calculated his average income over that period at approximately $166,000.

As noted in the judgement, “Whichever expert opinion is accepted, both indicate that there was a material change in Mr. Smith’s income over the years, when compared to the threshold amounts of $25,000 and $47,000 used to calculate child support…”

An important legal issue in this case centered on the question of who bore the responsibility to recalculate the child support that was owing to Ms. Smith pursuant to the agreement. Mr. Smith’s position was that Ms. Smith had the right to recalculate and had never requested same until 2001. Ms. Smith’s position was that, without the production of financial information from Mr. Smith, she would have never known that his income had “increased by a material amount…” Mr. Smith believed that Ms. Smith had to ask for the child support, and that he had no duty to advise her that his income had changed.

In her ruling, the Judge indicated that she found, “Mr. Smith’s lack of disclosure not to be the sort of outcome that Ms. Smith should be expected to have reasonably contemplated at the time the agreement was made.” As a result, the Judge ruled that Mr. Smith’s non-disclosure of his increased income violated the implicit terms of the agreement and, therefore, the separation agreement was set aside.

In calculating the income of Mr. Smith, the Judge “pierced the corporate veil” and added back a portion of Mr. Smith’s 50% share of the annual pre-tax corporate income of the company. The Judge calculated that Mr. Smith’s average income from 1995 to 2003 was approximately $187,000.

As a result of setting aside the agreement, the Judge awarded Ms. Smith both retroactive and on-going spousal support. There was no retroactive child support owing as Ms. Smith had abandoned her claim in favour of the spousal support claim.

The message from this case is clear. People who are required to pay support should regularly disclose their financial affairs to the recipient of that support. Had this been done in the Smith case, then it is unlikely that the separation agreement would have been set aside.

Neil L. Maisel

As partner in charge of our Business Valuation & Litigation Support group, Neil concentrates on the financial aspects relating to matrimonial matters, shareholder disputes, personal injury matters, damages claims, business valutation and other litigation support.

You can contact Neil at 416 963 7116 or nmaisel@soberman.com.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.