Court of Appeal Says Legitimate $1 Million Dollar Loan Valued at $0 for Equalization
In the recent Court of Appeal for Ontario case, Peerenboom v. Peerenboom, 2020 ONCA 240 (CanLII), the Court confirmed that a husband’s loan of nearly $1 million from his father, though legitimate, could be valued at zero for equalization.
Robert and Nicole were married for 11 years. At the beginning of their marriage, they moved into the matrimonial home that Robert’s father, Harold, owned. For four years, Robert and Nicole paid Harold monthly rent of $2,000.00 until eventually title to the house was transferred into Robert’s name alone for a price of $1.2 million. Harold paid for Robert’s down payment of $250,000.00; and Robert financed the balance with a bank loan of $950,000.00. Harold also bankrolled a lavish lifestyle for Robert and Nicole. Harold provided them with many gifts of money and loans to Robert that were documented by promissory notes. During the marriage, Harold had never asked Robert to repay the loans under the promissory notes. Eventually, Robert owed Harold almost $950,000.00.
In 2007, Robert and Nicole began to have a difficult time in their marriage. They entered into a domestic contract, the contents of which became significant at trial. Robert and Nicole could not agree on whether the contract intended to give Nicole a one-half interest in the home upon a breakdown of the marriage. By the time the parties separated in 2013, the matrimonial home was worth $2.93 million.
In 2014, Nicole registered a matrimonial home designation on the title to protect her rights. She also commenced an application at Court seeking an interest in the matrimonial home. Shortly after, Harold sent Robert a notice of demand for repayment. Robert then signed an acknowledgment of the debts he owed Harold. Harold then used this acknowledgment to sue Robert in civil Court and obtained a default judgment for $948,840.00 when Robert failed to file a Defence. Harold even obtained a writ of execution that was filed with the sheriff of the City of Toronto, which allowed Harold to seize and sell the property.
From a family law perspective, the default judgment against Robert would entirely deplete his assets. Meaning his equalization payment to Nicole would amount to precisely zero dollars. Notably, the trial judge would later note that the default judgment, although legitimate, was too convenient for Robert and “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.”
At trial, the Hon. Justice Moore addressed several other issues but concluded that:
- the wording of the domestic contract afforded Nicole entitlement to a one-half interest in the matrimonial home;
- the default judgment against Robert was not a sham, but accurately reflected their legal relationship under the promissory notes;
- Harold’s writ of execution should not be set aside but stayed pending further notice under section 21 of theFamily Law Act, RSO 1990, c F.3 (“FLA”); and
- the decision between Harold’s default judgment and Nicole’s rights to the matrimonial home should be determined at a later hearing.
Most importantly, the trial judge concluded that for equalization, the value of Robert’s debts to Harold, although legally recognizable, should be set at zero. There was adequate authority for the principle that the value of outstanding debts could be “dramatically discounted for equalization purposes because the likelihood it would ever be repaid was extremely low” (para 190).
Robert appealed this decision. He pleaded that the trial judge’s rulings were inconsistent and incompatible with each other. The Court of Appeal disagreed. The Court stated that although the FLA could not be used to stay executions, section 106 of the Courts of Justice Act, RSO 1990, c C.43 could be relied on to stay an execution as it states that: “a court on its own initiative or on motion by any person, whether or not a party, may stay any proceeding in the court on such terms as are considered just.” The Court further stated that Harold’s execution warranted a stay because Harold satisfied the test for a stay – he was a judgment creditor who was engaged in a process that was oppressive, vexatious or an abuse of process of the Court, and the stay would not cause injustice to him. The Court stated that the very purpose of Harold’s execution was not to pursue Robert, his son who he had historically supported, but to put the equity in the home beyond the reach of his daughter-in-law, Nicole. The Court also viewed the execution as problematic because it amounted to an indirect way for Harold to register an encumbrance on the matrimonial home – an encumbrance that Nicole never agreed to as a mortgage.
Ultimately, this decision must force litigants (and their counsel) to rethink the use of “loans” from parents to reduce exposure in equalization. If the matter proceeds to trial, there is ample authority that for equalization, Courts can value such debts as zero. To circumvent such debt discounting, all debts should probably appear legitimate and more like an arm’s length transaction – i.e. commitment letters, interest, monthly payments etc..