reformation of contract

Last year, I wrote a post on this blog about the Madoff Mess hitting the divorce Courts, the trial court’s decision in that case and even a podcast that I had participated in about the decision.

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.

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.

At the time, I wondered about the ultimate fairness of this and said:

That said, if this case was in New Jersey, there may be the possibility of a recovery here. Though the general rule is that equitable distribution is not-modifiable, the issue may turn on whether there was $5.7 million in the account at the time of the divorce or whether that was simply an illusion created by Madoff’s alleged fraud. If the account really had no value at that time, then the parties made a "mutual mistake". In that case, the settlement agreement could be re-formed to create an equitable result. If the money was actually in the account at that time, there could be a different result. One could argue that this really wasn’t any different than any other investment that loses value – though that result seems harsh. However, assuming the husband had that money in your ordinary stock account, given the stock market over the last year and current financial crisis, it seems unlikely that his $5.4 million would still be $5.4 million. If there were just stock losses, it is highly unlikely that he would be entitled to any relief. Moreover, it is not unlikely that if the wife invested her $2.7 million in stock or real estate, that she has her full $2.7 million either.

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.

It turned out, the Appellate Division in New York agreed with my logic and reversed the dismissal of the trial court matter and allowing the matter to be opened up.Continue Reading Madoff Mess Hits the Divorce Courts Part II – The Appellate Court Speaks