ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 33608/11

DATE: 2013-01-31

AMENDED: 2031-07-23

BETWEEN:

JOSEPHINE RACCO

Applicant

– and –

PETER RACCO

Respondent

G. Wells, Counsel for the Applicant
Jason P. Howie, Counsel for the Respondent

HEARD: November 22, 2012

REASONS FOR JUDGMENT

MURRAY J.

[1] There is little factual dispute in this case. The issue is the applicant’s entitlement, if any, to spousal support, both retroactive and prospective.

[2] In May of 2011, the parties came to a consent agreement with respect to parenting the children on a rotating week basis and this agreement resolving the issue of custody was incorporated into a consent order before Justice Hourigan on August 15, 2011.

[3] The parties advised the Court that they have resolved the equalization, except the issue of costs related to equalization is reserved to the trial judge.

[4] The parties agree that there is no dispute with respect to the section 7 expenses incurred to date. With respect to future section 7 expenses, there is an agreement to have such expenses incurred shared in proportion to income.

The Evidence

[5] The applicant was born on July 3, 1967. She grew up in Burlington, Ontario, graduated from high school in 1986, and from Mohawk College in 1989 with a business degree. She married the respondent on June 24, 1989. The parties have two children: a daughter, Marissa, who was born on April 3, 1997 and a son, Jacob, who was born on July 15, 1998. Both Marissa and Jacob are high school students at Corpus Christi Secondary School.

[6] At the outset of the marriage, the applicant worked as a teller in a bank. The respondent was fully engaged in the real estate business. In 1991, she obtained her real estate licence and continued her employment doing administrative/accounting work in a family business. She started working with the respondent in real estate in Burlington in 1994. Her initial involvement in real estate involved managing the respondent's real estate business and the applicant continued to combine real estate with work at the family business. However, in 1995, the respondent decided to leave his management role and the parties both dedicated themselves to selling residential real estate - primarily in the Burlington and Oakville area. Together they became very successful. They worked as a team. They marketed themselves as a team. They shared profits. After Jacob was born, the parties hired a nanny which enabled both parties to have the flexibility necessary to focus on their business enterprise. Together, they successfully combined parenting and business. The business grew. Sales and administrative staff were added. Although formally both were employed by Royal LePage Burloak Services Inc., they marketed themselves as a real estate team, “Team Racco”. The real estate commission generated by Team Racco exceeded $1,100,000 in 2008 and 2010, and provided a very good living for this couple and their children.

[7] The applicant and the respondent also had a property management company, PJR Marketing Inc. (hereinafter referred to as “PJR”), owned 50% by each of them which, at the time of the marriage breakdown, owned seven properties. Income from PJR was paid into a joint account and they split the income generated. The applicant managed the business affairs of PJR.

[8] The parties separated on February 7, 2011. The applicant moved out of the matrimonial home on April 1, 2011. After February 7, 2011, the applicant continued to involve herself in the real estate business but only for a short time. Beginning in March of 2011, the respondent took steps to deprive the applicant of her share of the proceeds of the partnership. Although the parties historically split income, the respondent always had commission cheques payable by Royal LePage directed to him. The cheques were deposited in the parties’ joint bank account. In March 2011, the respondent instructed Royal LePage Burloak Services Inc. to stop depositing commission cheques electronically into their CIBC joint account. On March 29, the respondent cancelled a joint VISA. The partnership was terminated unilaterally by the respondent. They effectively stopped acting as a real estate team. The applicant's efforts to find a way to continue the business notwithstanding the marriage breakdown were repudiated by the respondent. It was very clear that he had no interest in continuing a business relationship with the applicant no matter how successful they had been as a team.

[9] Once the partnership broke down, and the applicant’s efforts to find a way to continue in business together, the applicant decided she wanted to devote herself full-time to her clothing business named Catwalk Corp., operating as “Savvy Couture”, a business which had been a non-profitable sideline business of hers for some years prior to the breakup of the marriage and the partnership. At the time of this trial, the business had still not achieved profitability. In her evidence, the applicant said that she never liked the real estate business and that her primary focus now and in the future will be Savvy Couture.

[10] Pursuant to a consent without prejudice order, the respondent has paid spousal support of $4,000 per month from November 2011 up to and including December 31, 2012.

[11] In June, 2011, the respondent was charged criminally with sexual assault. He was convicted in October of 2011. The respondent was sentenced to 60 days in jail in April, 2012. The summary conviction was under appeal at the time of this trial.

[12] The respondent was terminated by Royal LePage Burloak Services Inc. on or about November 1, 2011. The conviction received substantial local publicity and is perceived by both parties as a significant factor impairing Mr. Racco’s reputation and adversely impacting his ability to earn money through the sale of residential properties. The respondent was hired by Prudential By the Lake Realty in January 2012.

[13] Although the evidence established that the commissions paid to the respondent in 2011 aggregated to $663,000, there is no evidence with respect to that portion of that aggregate income was paid to the applicant. The income tax returns filed for 2011 by the respondent show expenses related to the applicant in the gross amount of $152,386 which she did not receive. This has unfairly exposed her to an income tax liability for income which she did not receive. By order of this Court made by Justice Hourigan on August 8, 2012, the amount of $70,000 has been placed in trust to cover potential tax liability for the applicant as a result. It is not disputed that the commission income earned by the parties in 2011, in whole or in large part, was diverted to the respondent for his use and the respondent did not treat the applicant fairly on the termination of the partnership. Respondent’s counsel was candid in saying that the applicant did not receive $152,386 in 2011. There was no evidence on what amount was actually received by her.

Analysis

[14] Although over the years the applicant said that her job functions were distinct and that she played a minor role in development of the real estate business, there is little doubt on the evidence that she and the respondent dedicated themselves to building a very successful real estate business while employed by Royal LePage Burloak Services Inc. and that they operated as a very effective team in the sale of residential real estate. I do not find that she was a nominal or junior participant in the real estate operation as she asserts. I find she was an equal partner in Team Racco and shared equally in the income generated by their partnership.

[15] It is also clear that since November, 2011 there has been a dramatic reduction in the ability of the respondent to generate income. I find that this reduction in income has, in large part, resulted from his own misconduct which led to a well-publicized conviction which has had an adverse impact on his ability to attract work in the Burlington and Oakville area. It is probably also likely that the breakup of the partnership will mean that he is less successful than when he and the applicant worked together as a partnership. However, the respondent is responsible not only for his own misconduct but also for the unilateral termination of the partnership with the applicant.

[16] There are a number of cases which support the proposition that when inability to pay is brought about by misconduct, the party should not be able to gain advantage from such misconduct. See for example: Luckey v. Luckey, [1996 ] O.J. No. 1960, Marucci v Marucci, [2001 ] O.J. No. 4888. The British Columbia case of Myatt v. Myatt, 1993 1144 (BC SC), 45 RFL (3rd) 45 considered the payor spouse’s criminal conviction and resulting dismissal from his position as a police officer. The Court did not provide any relief for his spousal and child support obligations notwithstanding a clear change in material circumstances because he was responsible for his current predicament. As a practical matter, imputing significant income to the respondent for support purposes will likely create ongoing obligations which are not capable of being paid by the respondent, at least for the foreseeable future. However, if the applicant is entitled to spousal support, a lump-sum payment may be an appropriate response to the practical reality of the respondent's reduced income-earning capacity. In this regard, see Sharpe v. Sharpe, 1997 12236 (ON SC), [1997] O.J. No. 336 and Davis v. Crawford, 2011 ONCA 294, [2011] ONCA 294, 106 O.R. (3d) 221.

[17] The applicant has voluntarily elected to leave a lucrative real estate business where she and her husband had achieved success to devote her time to her clothing business. The clothing business has been operated by her for number of years without generating a profit. While one must respect her right to pursue whatever career ambitions she has, she too has voluntarily left a career in which she had been very successful and in which she has demonstrated significant capacity to earn. The applicant has elected to pursue a much less lucrative career. In Marucci, the payor spouse sought to vary a support order on the basis that he had abandoned his employment and returned to college in order to pursue further education and training. Justice Haines of the Superior Court of Justice concluded there was no reasonable justification for the payor applicant to pursue the course of action that he did when the obvious consequence was to render him unable to provide support for his children. The Court imputed an income to him notwithstanding the observation that it was laudable for individuals to pursue further education and training. At para. 7 of the Judgment, Justice Haines found that such decisions “must be tempered with reason and the consequences must be considered with some care.” Similarly, in this case, the applicant had to temper her decision to abandon the real estate business with reason and consider with some care the consequences. The applicant voluntarily gave up a lucrative career and she must accept the implications of that decision when she seeks spousal support.

[18] I have concluded that the applicant does not qualify for ongoing spousal support. This conclusion does not preclude a claim for some transitional spousal support for the period immediately following the termination of the partnership by the respondent.

[19] In 2011, the respondent unilaterally and arbitrarily terminated the applicant's involvement in the partnership. Her income loss, and the immediate change in her standard of living, was a direct consequence of the termination of the partnership. The termination of the partnership by the respondent was a direct consequence of the marriage breakdown. As a partner in the real estate venture, the applicant contributed to the commissions earned and had a right to participate in those earnings in 2011. The respondent was paid $663,000 of commission income in 2011. From the evidence, it is not possible to conclude that the applicant received any of this income. The line 150 income for 2011 for the respondent is stated as being $132,844.59 after all deductions and expenses. The income tax returns filed for 2011 by the respondent show expenses related to the applicant in the gross amount of $152,386 putting her at risk for tax liability for money she did not receive.

[20] The applicant is entitled to be compensated for her share of the commissions received by the respondent in 2011 which she did not receive because of the unilateral termination of the partnership by the respondent. A payment of spousal support to the applicant is also consistent with an obligation on the respondent to have provided reasonable notice of termination. The fact of the marriage breakdown did not provide the respondent with any cause to terminate their partnership and to terminate her participation in commission earnings. The evidence established that the applicant was prepared to continue the business but that the respondent repudiated any such initiative. In sum, it was the respondent who terminated the applicant from the partnership and put an end to the successful real estate team.

[21] It was the respondent who by virtue of his own misconduct was charged criminally and adversely impacted his ability to earn commissions in 2011 and after. The real estate business of the respondent seriously declined following his conviction for sexual assault.

[22] The applicant asserts that the diminution of income is a result of his misconduct and asserts that she and the children should not suffer as a result. She therefore asks for income to be imputed to the respondent in the amount of $400,000 for 2011 and $150,000 per year thereafter for purposes of calculating support. The applicant asks for a lump sum payment on the basis that the respondent's ability to pay support on an ongoing basis has been compromised.

[23] I agree that the respondent had an obligation to provide to the applicant spousal support immediately after termination of the partnership in order to provide her with a replacement income for a transitional period during which she could have explored other opportunities in the real estate business or during which she would have an income to focus on her own business venture. In either event, she was entitled to transitional spousal support following the breakup of the partnership.

[24] The applicant suggests that the effective income of the respondent after expenses in 2011 is $400,000. Taking into account deductions made by the respondent, I agree. See Szitas v Szuitas, and Joy v Mullin. The evidence is consistent with the conclusion that the respondent retained for himself all commissions earned in 2011.

[25] Given the commissions earned by the partnership in previous years, it is safe to conclude, on a balance of probabilities, that aggregate income of the partnership in 2011 and 2012 would have been well in excess of $663,000 per year but for the conduct of the respondent. It is also reasonable to conclude that had it not been for the criminal misconduct of the respondent, his income would have been substantially in excess of $150,000 for 2012.

[26] I conclude that the applicant is entitled to transitional support for a number of reasons, including the following:

1. the respondent unilaterally terminated the applicant from their lucrative real estate partnership without proper compensation for commissions earned by the partnership prior to the termination of the partnership;

2. the respondent unilaterally terminated the applicant from their real estate partnership without proper compensation for her interest in the partnership at the time of termination;

3. the respondent retained for himself and his ongoing business, all books and records of the partnership including client lists thereby adversely affecting her ability to carry on as a real estate agent with AE LePage or elsewhere;

4. the respondent did not give the applicant any notice of termination thereby depriving her of any reasonable opportunity to seek employment with another real estate brokerage or any opportunity to make plans for alternative employment other than in the real estate business;

5. the termination of the partnership and the significant and immediate economic disadvantage suffered by the applicant was a result of the breakdown of the marriage;

6. the respondent refused to engage in any meaningful discussions with the applicant about carrying on the business after the breakdown of the marriage;

7. the respondent paid no spousal support to the applicant immediately after he terminated the partnership when she was financially vulnerable;

8. the respondent paid $4000 a month on a without prejudice basis to the applicant for 13 months commencing in November, 2011 to December 31, 2012.

[27] I fix in the amount of $200,000 as transitional spousal support to be paid as a lump-sum by the respondent to the applicant.

Conclusion

[28] The applicant is entitled to spousal support fixed in the amount of $200,000, to be paid by the respondent as a lump-sum to the applicant.

[29] The applicant and the respondent are the only shareholders of PJR. They are in agreement that the respondent has benefited $20,000 more than the applicant from PJR. Further, the parties wish to attempt a distribution of assets owned by PJR without the necessity of liquidation. It was further agreed that in the course of distribution, the applicant will receive $20,000 more than the respondent. However, if agreement is not possible within 60 - 90 days of the date of this decision, both parties/shareholders are in agreement that this Court has jurisdiction to make an order winding up the company pursuant to the Business Corporations Act, R.S.O. 1990, CH.B.16.

[30] Neither party asked for the appointment of a liquidator for purposes of winding up the affairs of the company and distributing its property. If this is an issue, I can be spoken to.

[31] The order of the Court in this case relates to transitional spousal support. Based on representations of the parties, the Court understands that there is no final decision with respect to whether the applicant will be required to pay tax on the amount of $152,386 which the respondent claimed as an expense incurred by him for purposes of his 2011 tax return. It is conceded that this amount was not paid to the applicant but there is a risk that she will be required to pay tax on this amount. What should be done with the $70,000 held in trust depends on the resolution of this issue. Therefore, an order shall go that the $70,000 will remain in trust until the issue is resolved one way or the other. In the absence of agreement by the parties, the Court shall remain seized of any dispute related to the payment of the $70,000 currently in trust pursuant to the order of Mr. Justice Hourigan. The order to keep the money in trust is not to be construed by the parties as a decision by this Court with respect to the proper resolution of the underlying issue. This is a matter to be worked out by the parties, or if they cannot come to a resolution of this issue, then the Court remains seized.

[32] The parties both ask for divorce.

[33] This Court therefore makes the following orders:

1. IT IS ORDERED THAT a divorce is granted;

2. IT IS ORDERED THAT the respondent pay forthwith to the applicant the amount of $200,000 as lump-sum spousal support;

3. Unless the parties agree to the distribution of assets owned by PJR within 90 days from the date of this decision, IT IS ORDERED THAT PJR Marketing Inc. is to be wound up pursuant to the Business Corporations Act, R.S.O. 1990, CH. B.16.

4. IT IS ORDERED THAT the $70,000 currently in trust shall remain in trust pending the resolution of 2011 income tax issues by the parties.

5. IT IS ORDERED THAT the applicant and the respondent shall share section 7 expenses related to the two children Marissa, born on April 3, 1997 and Jacob born on July 15, 1998 in proportion to their annual income which for these purposes have been agreed to be $150,000 for the respondent and $50,000 for the applicant.

[34] If, as a result of my decision there is an issue with respect to child support, I remain seized of this issue.

Costs

[35] The applicant has been successful and is entitled to her costs on a partial indemnity basis.

[36] As ordered by Justice Hourigan, the issue of costs incurred relating to equalization remains to be determined by the trial judge.

[37] The Court is prepared to accept brief written submissions with respect to costs. The applicant shall have her costs submissions with respect to both the trial and equalization costs served and filed by the end of February, 2013 and the respondent by the end of March, 2013.

[38] If the parties would prefer and if it is more efficient for the clients, then rather than brief written submissions on the costs issues, counsel may address the Court on a day convenient to them. For this purpose, I am prepared to have an early start in Milton at 9:00 a.m. or 9:30 a.m. before the commencement of regular court proceedings at 10:00 a.m. on any morning in which I am sitting at the Milton courthouse and which is convenient counsel.

MURRAY J.

Released: January 31, 2013

COURT FILE NO.: 33608/11

DATE: 2013-01-31

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

JOSEPHINE RACCO

Applicant

– and –

PETER RACCO

Respondent

reasons for judgment

MURRAY J.

Released: January 31, 2013

Amended: July 23, 2013