In February, I wrote a blog entitled Madoff Mess Hits Divorce Court.. 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 Madoff Ponzi scheme that has essentially rendered the account worthless, the husband has filed suit seeking the $2.7 million that he paid the wife. The husband (a prominent attorney with a large NY law firm) alleged that because the account turned out to be valueless, the spirit of the agreement was broken. The wife’s position was the husband withdrew probably $3 million to pay the wife, so the asset did exist at the time of the settlement agreement.
The decision was reported last week and the husband lost. 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 public policy of the finality of settlements was upheld. Whether is is ultimately fair since the asset may not have really existed is another story. It is different than retaining a stock account and then the market goes up or down because in that instance, there really was an asset as opposed to a fictional asset. It is also different than holding on to a home whose value has decreased, as I have blogged on before.