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Madoff Mess Hits the Divorce Court – The End

Posted in Equitable Distribution, Modification, Practice Issues

The Simkin v. Blank case in New York has been a frequent topic on this blog.  It was game over for Mr. Simkin today when the NY Court of Appeals ruled that this Madoff victim could not revise his divorce deal.

 We first wrote when the case was filed.  In this case, in June 2006, the parties agreed to evenly split the $5.4 million in an account they had with Madoff Securities. As a result, the husband gave the wife $2.7 million in cash, and retained the account. As a result of the alleged Madoff Ponzi scheme that has essentially rendered the account worthless, the husband filed suit seeking the $2.7 million that he paid the wife. The husband alleges that because the account turned out to be valueless, the spirit of the agreement was broken.

We next wrote when the trial court first ruled, dismissing the matter.   I even participated in a podcast about this ruling. Acting New York State Supreme Court acting Justice Saralee Evans decided that the husband is stuck with his decision to keep the account instead of withdrawing his money before the December 2008 collapse of Bernard L. Madoff Investment Securities LLC. The Justice noted that while the husband claimed the Madoff account held no assets, he did not allege it had no value. Key to the decision was that in 2006 and "the several years after that plaintiff maintained this investment," the account "could have been redeemed for cash, presumably significantly in excess of its 2004 value." In addition, the Justice held that "An investor’s ability to redeem an account for value, was the assumption on which the parties relied in dividing their property and in doing so they made no mistake."

The next installment was about the Appellate Division’s decision which reversed the trial court decision and reinstated the Complaint.  The Appellate Court found that dismissal was improper and the husband had the right to try to pursue both the issues of mutual mistake (i.e. there never really was an account) and that the wife was unjustly enriched. In coming to its decision, the majority of the court held:

The dissent states: “[a]t the time of the agreement, Steven had an account in his name with [Madoff].” Untrue. Steven never had an account in his name with Madoff; on Madoff’s own admission there were no accounts within which trades were made on behalf of investors.

The dissent then states, “Steven liquidated part of the account to fund his payments to Laura.” Untrue. In Madoff’s Ponzi scheme what appeared to Steven and Laura to be a partial liquidation of an account was simply a payment to Steven that came from funds deposited by a more recent “investor” in what the “investor” believed was his own account.

The dissent further observes, “[Steven] did not liquidate the rest of the Madoff account … and he continued to invest in it.” Untrue. There was no account which could be liquidated, as became apparent when Madoff received $7 billion worth of “liquidation” calls from investors in 2008. Nor was Steven “investing” in an account; his further contributions went directly to pay other “investors” in the scheme.

On April 3, 2012, the NY Court of Appeal (the highest court in NY) reversed the Appellate Division and ruled that the complaint should be dismissed.

As an initial matter, the Court rejected Mr. Simkin’s claim that the alleged mutual mistake undermined the foundation of the settlement agreement.  The Court noted that the agreement provided that the $6,250,000 payment to wife was "in satisfaction of [her] support and marital property rights," along with her release of various claims and inheritance rights. The court further noted that:

 Despite the fact that the agreement permitted husband to retain title to his "bank, brokerage and similar financial accounts" and enumerated two such accounts, his alleged $5.4 million Madoff investment account is neither identified nor valued. Given the extensive and carefully negotiated nature of the settlement agreement, we do not believe that this presents one of those "exceptional situations" warranting reformation or rescission of a divorce settlement after all marital assets have been distributed.

The Court then rejected the claim that the account was non-existent when the parties executed their agreement, noting:

Even putting the language of the agreement aside, the core allegation underpinning husband’s mutual mistake claim — that the Madoff account was "nonexistent" when the parties executed their settlement agreement in June 2006 — does not amount to a "material" mistake of fact as required by our case law. The premise of husband’s argument is that the parties mistakenly believed that they had an investment account with Bernard Madoff when, in fact, no account ever existed. In husband’s view, this case is no different from one in which parties are under a misimpression that they own a piece of real or personal property but later discover that they never obtained rightful ownership, such that a distribution would not have been possible at the time of the agreement. But that analogy is not apt here. Husband does not dispute that, until the Ponzi scheme began to unravel in late 2008 — more than two years after the property division was completed — it would have been possible for him to redeem all or part of the investment. In fact, the amended complaint contains an admission that husband was able to withdraw funds (the amount is undisclosed) from the account in 2006 to partially pay his distributive payment to wife. Given that the mutual mistake must have existed at the time the agreement was executed in 2006, the fact that husband could no longer withdraw funds years later is not determinative.

Rather the court analogized this to an asset that lost value after the divorce, when it stated:

This situation, however sympathetic, is more akin to a marital asset that unexpectedly loses value after dissolution of a marriage; the asset had value at the time of the settlement but the purported value did not remain consistent. Viewed from a different perspective, had the Madoff account or other asset retained by husband substantially increased in worth after the divorce, should wife be able to claim entitlement to a portion of the enhanced value? The answer is obviously no. Consequently, we find this case analogous to the Appellate Division precedents denying a spouse’s attempt to reopen a settlement agreement based on post-divorce changes in asset valuation.
 

While this case now seems to be over, we are still left to question whether the parties really got the benefit of their bargain here since, notwithstanding the ability to access the account for some time, the account really did not exist.