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Property Settlement Process: Parties Generally Share Financial Losses Unless the Loss Was Caused by Negligence

property settlement process

How are financial losses dealt with in the property settlement process?

The property settlement process involves an assessment of the parties’ financial losses and gains over the course of the relationship. Where there are losses stemming from a party’s financial activities, they other party make attempt to persuade the court that the responsible party should bear the loss entirely. The circumstances under which the court may allocate the loss to particular party is the topic of this blog post.

In Charles & Charles [2017] FamCAFC 3, the Full Court of the Family Court heard the appellant’s appeal against the trial judge’s orders that the parties’ property be divided 55-45 under the Family Law Act in favour of the wife, and an equal division of superannuation.  The parties had been married for 10 years.  The husband was 41 years of age, worked in the financial services industry and had an annual income of approximately $110,000.  The wife was 37 years of age and primarily responsible for care of the children aged 5 and 3.  She was unemployed and living off of both Centrelink benefits and child support.  The parties’ property was valued at $1,665,665 and their superannuation was valued at $209,755.

The trial judge assessed the parties’ contributions at 60/40 in favour of the husband.  This finding was largely attributable to the husband’s initial financial contributions of $390,000 compared to the wife’s lesser contribution of $70,000.  A section 75(2) adjustment of 15% was made in favour of the wife on account of her care of the children of the relationship.

The wife’s appeal was in part predicated upon the claim that the property settlement process had been erroneous with respect to a failure to find that certain property should have been notionally added back.  The property in question related to a $40,000 to $50,000 loss referrable to what the wife described as the husband’s “risky share trading” and a suspension of mortgage payments caused by the husband.  As a result of the husband’s failure to continue financing the mortgage, the wife argued that there was approximately $20,000 less property to distribute between the parties.  Treating these losses as add-backs means that they should have been deducted from the husband’s share of the property.

Fundamental to the wife’s argument was the submission that the trial judge’s failure to make these findings during the property settlement process amounted to a misapplication of the principle enunciated in Kowaliw and Kowaliw (1981) FLC 91-092) and other relevant authorities.  The principle in question is the proposition that “wantonly, negligently, negligently, or recklessly causing a diminution in the pool available for distribution between the parties” justifies an adjustment in favour of the innocent party.

Does “Risky Investing” Bear Upon the Property Settlement Process?

The Full Court rejected the wife’s claim that the property settlement process was erroneous on account of the trial failing to apply the relevant legal principles.  Accordingly, there was no basis for deducting the parties’ financial losses from the husband’s share of the property settlement.

Add-backs may not be relied upon in support of a claim that a loss should be deducted from the share of property ultimately awarded to the party responsible for the loss.  Add-backs refer to property that is no longer exists; that is, property that has been lost, dissipated or wasted.  So, relying on the concept of add-backs in support the claim that a loss should deducted from a party’s share of the property to be divided involves altering an interest in property that no longer exists. This is because the non-existent property which has a negative value is, in effect, transferred to the culpable party. However, as the High Court noted in Stanford, the court only has the power to alter interests in party’s property, provided that it exists.  Accordingly, if the wife’s claim that the losses should be added-back amounts to a claim that the court should alter interests in property that no longer exists, then such a claim would be consigned to failure.

The issue that arises with respect to the court altering the parties’ interests in property can be circumvented when the losses in question are characterised as a ‘fact or circumstances to be taken into account’ under s 75(2)(o) of the Family Law Act.   Whether a loss in the value of the asset pool can justify an adjustment in favour of the innocent party under s 75(2)(o) is matter of judicial discretion.  Such adjustments, however, are generally the exception, rather than the rule.

In light of these principles, the Full Court determined that an adjustment should not be made in favour of the wife in view of the husband’s unreasonable refusal to re-finance the mortgage.  Apparently central to this finding was the Full Court’s view that both parties were responsible for the loss.  The husband’s responsibility consisted in the fact that he had the means to re-finance the mortgage, but he chose not to.  The wife, on the other hand, could have filed an interim application to deal with this issue so as to limit the extent to which the losses devalued the parties’ property.  She chose not to.

Similarly, the Full Court reaffirmed the trial judge’s finding that no adjustment should be made with respect to the husband’s so-called “risky investing.”  The husband had not acted wantonly or recklessly.  Nor had he acted with the object of dissipating the parties’ property.  On the evidence, it appeared that the husband was a competent investor.  Consistently with the Full Court’s decision in Browne & Greene [1999] FamCA 1483, these findings would appear to support the inference that no adjustment should be made in favour of the wife.  Had the investment yielded substantially greater returns, the wife would have sought to claim a part of it. And she would have been justified in doing so.  There must be compelling reasons to depart from the principal that losses must also be shared in the context of the property settlement process, barring any negligence or deliberate attempts to dissipate matrimonial property.  This flows from the principle that in the context of a relationship, the parties generally, and perhaps tacitly, agree to share the profits (and, by extension, losses) of their financial decision making.

Only Exceptional Lossess Significantly Affect the Property Settlement Process

The principle that an adjustment in favour of the innocent party stemming from a loss caused by the other party is the exception rather than the rule is neither a new nor controversial principle.  Accordingly, the value in providing an exposition of the decision in Charles consists in its ability to illustrate what constitutes an unexceptional case.  In Charles, the fact that both parties were partly responsible for the losses related to the mortgage brought part of the case within the bounds of the ordinary.  Moreover, losses that stem from a party’s usual investing activities may also militate against the inference that the case under consideration is exceptional to an extent that warrants an adjustment pursuant to s 75(2)(o).