May 31st, 2011

Simkin v Blank: when is a property settlement not final?

The decision of the New York appellate court in the post-divorce lawsuit of Steven Simkin and Laura Blank is a lulu.

The well-heeled couple were married thirty-three years and divorced in 2006, with a property settlement that involved a complex series of transactions, juggling several properties, autos, accounts, and cash. One of the assets the couple valued at about 5.4 million dollars at the time was an account with Bernard Madoff, although that only constituted a little less than a third of their estate.

We all know how the Madoff investment turned out. But at the time it seemed like a good deal. Now the ex-husband, who retained the major portion of the Madoff account in exchange for the wife giving up certain other things, has sued to recoup some of the assets she got in the divorce as part of the deal because he says that no such account ever existed (it was a “mutual mistake”). The majority of the court agreed with him in a close 3-2 decision.

That went against the time-honored ruling that property settlements in divorce are final (custody and child support arrangements, on the other hand, can be re-opened by either party as long as the child is a minor and there are changed circumstances). Financial investments are inherently risky, and the only relevant value they have is the value at the time of the settlement, not what happens afterward, whether bad or good. The decision also has the potential for “destabilizing all types of contracts struck with the fraud victims,” not a good idea either.

The ruling in Simkin v Blank is not a man vs. woman thing; the results would be the same if the sexes were reversed, and the results would be equally stupid. You can read the entire judgment here if you like. I’m impressed with the well-reasoned dissent, which states, among other things:

Instead of enforcing the plain language of the agreement between the parties, the majority relies on the doctrine of “mutual mistake” to rewrite it. However, even if one accepts that mutual mistake is the appropriate analysis, the complaint fails. It fails first because the alleged mutual mistake does not involve a fundamental assumption of the contract. It further fails because the alleged mistake did not exist at the time the parties entered into their agreement. Moreover, the majority’s approach undermines decades of established precedent favoring finality in divorce cases. Thus, the conclusion the majority reaches, not only fails to follow precedent, but is truly “divorced” from reality…

Under the settled doctrine of mutual mistake, the alleged mistake must exist at the time the parties executed their agreement…The amended complaint repeatedly identifies the mistake to be that the parties thought they had an investment account [with Madoff] worth $5.4 million, when it was actually nonexistent. However, this allegation clearly conflicts with the allegation in the amended complaint that Steven withdrew actual money from this “nonexistent” account at the same time in 2006 to pay Laura. Thus, even looking at the amended complaint in isolation (i.e., without the agreement), plaintiff has failed to plead a mutual mistake that existed at the time the parties entered into their contract…Because Steven received significant value in exchange for the payment of $6.25 million to Laura, his retention of the Madoff account and subsequent losses render this case no different than the legion of cases denying a spouse’s request to open up a divorce settlement where the final value of an asset was not what the parties believed at the time of the divorce…

They say hard cases make bad law. I’m not completely certain this is a hard case, but if the appellate ruling were to stand, it would certainly be a bad law.

9 Responses to “Simkin v Blank: when is a property settlement not final?”

  1. gs Says:

    That went against the time-honored ruling that property settlements in divorce are final…

    But it is consistent with the accelerating trend that the government, including the courts & legal profession, can meddle in anything it wants anytime it pleases for any reason. (Of course judicial meddling is legal: the courts say so!) For example, consider the Indiana Supremes’ recent ruling that citizens have no right to resist police who are in their homes illegally. Consider Kelo. Consider Raich.

    According to Mark Steyn, the US is behaving like a nation that wants to die. IMO that statement is over the top–but i can’t put it out of my mind.

  2. csimon Says:

    It sure sounds like bad law to me.

    This is eerily similar to the situation my brother finds himself in. He and his wife were married for 25 yrs.

    As I have written here a no. of times, my family lost almost all our lives’ savings with Madoff. My father, my brother and I pooled our monies along with a few small trusts that remained from my mother and grandmother and formed one entity to comprise our account w/ Madoff. (Second big mistake. First was investing with Madoff at all (hind sight is 20/20, blah, blah…) Combining all our individual money into one entity turned out to be a mistake because then all our monies were considered as one account. Had we invested individually, each person’s investment, as well as the trust’s, would have been considered separate accounts and each would have been eligible for at least the SIPC (insurance) $500,000 reimbursement so each of us would have recouped at least that much. With a single account, we received only one $500,00o payment which we distributed pro rata as per the amts. we initially contributed.

    Back to my brother: After two years of contentious wrangling, and going through 5 lawyers between them, my ex-sister-in law finally agreed to mediation. But in the ensuing time, my brother was just worn down. They were not wealthy by most standards, but were upper middle class with some nice savings and a house that is almost paid off (they each own 1/2 of that property but it’s value is essentially in limbo as it is in S. Florida where the housing bust was the worst, and it currently does not have the value they expected it to). They also had 2 kids to put through college. (Those savings, fortunately were not invested in the Madoff acct.) To make a long story a bit shorter, my brother just gave in to just about every demand and she walked away w/ more than 63% of their assets PLUS alimony for life! (I am female, and I still don’t understand why women are so favored with life income from a man when they are no longer married, the children are grown and out of the house, etc. ) My brother’s income has been drastically reduced due to the economy and the loss of the Madoff investment which was intended to generate additional income .

    The relevance of all this to Neo’s post? Upon finalizing the agreement — which was made maybe a month, a few weeks before the Madoff implosion, my brother withdrew 1/2 of their investment and gave it to her in cash. The problem is — the investment did not really exist at the time of that agreement. The money had been lost unknowingly at that time. We believed she should return 1/2 of the amount she received: if she owned 1/2 of the investment, surely she should own 1/2 of the loss. Notably, she contends she is also owed 1/2 of the pro rata portion of the SIPC remuneration that my brother received which is a small fraction of their investment. Further complicating the situation, is the fact that the court-appointed receiver, Irving Picard, has announced his intent to try to “clawback” monies (i.e. principle) that were withdrawn shortly before the truth came out as that is ostensibly an indication that it is likely persons who did this knew something of the truth. He is also trying to clawback from people who invested 20-30 yrs. ago, and have been receiving earnings and distributions over those years which didn’t ever actually exist. These earnings were paid with other people’s money (á la classic pyramid scheme), and they received many, many times more than their initial investment over the years — both in distributions and accumulated income as per the phony statements that were distributed by Madoff as part of the scam. (These people insist they are entitled to all the funds appearing in their account as per last statement received.

    Unlike Neo, I do not have a law degree. But in the case cited between Simkin and Blank, as well as in my brother’s situation, there seems to be a big hole in the basic premise of the decision. This is to be seen in:

    “… the complaint fails. It fails first because the alleged mutual mistake does not involve a fundamental assumption of the contract. It further fails because the alleged mistake did not exist at the time the parties entered into their agreement. ”

    The fact is, the mistake ABSOLUTELY DID exist at the time the parties entered into their agreement. The fact that it was not yet public knowledge, does not mean funds existed at the time of the divorce agreement where they indeed did not and had been stolen long before the time of agreement. The illicit generation of phony statements by Madoff should not entitle one party to benefit by receiving value of something that did not exist in exchange for other real assets.

    At least, that is the way I see it.

  3. Curtis Says:

    Most people probably think the New York Supreme Court has ruled on the issue and found that a mutual mistake occurred.

    The NY Supreme Court hasn’t.

    It ruled that the Motion to Dismiss was improperly granted and that the Complaint may move forward. Note the following from the decision:

    “Order, Supreme Court, New York County (Saralee Evans, J.), entered January 5, 2010, which granted defendant’s motion to dismiss pursuant to CPLR 3211, reversed, on the law, without costs, the motion denied and the complaint reinstated.”

    The Motion to Dismiss has a harder standard for being granted than a finding at trial. For one, the alleged facts (called “ultimate facts”) are taken as true. Note how that was applied in one instance:

    “First, in the context of a CPLR 3211 motion, plaintiff’s motivations as alleged by defendant are irrelevant because the allegations in the amended complaint must be accepted as true.”

    Now, as for the “law” part. The defendant does not make a defense against the “mutual mistake” allegations:

    “Finally, defendant and the dissent ignore the allegations of mutual mistake as to the actual existence of the account itself. Both defendant and the dissent attempt to foreclose plaintiff’s claims by transmogrifying the claim of mutual mistake into a claim of mistake in valuation.”

    The NY Supreme Court has not ruled in the plaintiff’s favor as to whether or not there was a “mutual mistake.” It has made a ruling about the sufficiency of the Complaint to move forward. Such rulings, at the pleading stage, are always granted a very liberal reading for the plaintiff so as to give every dog his day in court.

    As to the strength of the “mutual mistake” claim: (from the state of California state and consumer agency)

    Mutual mistake. A mutual mistake occurs when both parties are mistaken, and neither is at fault, or both are equally to blame. #128 A contract entered into on the basis of a mutual mistake, whether of fact or law, which affects an essential element of the contract, and is harmful to one of the parties, is subject to rescission by the party who is harmed. #129 A contract entered into on the basis of mutual mistake is voidable if, (1) the mistake relates to a basic assumption on which the contract was made; (2) the mistake has a material effect on the agreed exchange of performances; and, (3) the mistake is not one as to which the party seeking relief bears the risk. #130

    The issue, then, is not whether the financial investment was risky, but whether it contained a “mutual mistake.”

    Although my sentiments are not with the attorney, he, like anyone else, is entitled to a trial of the full facts. Since this is, I believe, a court in equity, he will not be entitled to a jury trial. A “bench” trial will decide, that is a trial by a judge or judges.

  4. Curtis Says:

    One last note:

    I can’t help but see how a couple of the findings of the dissenting judges is not supported by argument. The first:

    “It fails first because the alleged mutual mistake does not involve a fundamental assumption of the contract.”

    This is a ludicrous assertion. The fundamental assumption of the contract was that the Madoff securities were not a Ponzi scheme. A fundamental assertion was that they had value. Consider this. If the day before the signing of the Marital Separation Agreement, Madoff’s Ponzi scheme became public, do you think the plaintiff would have signed?

    Or turn the thing around. Suppose it had been the defendant who had received the Madoff securities. Would any sane person think she would not ask for some type of relief?

    The second merely asserted finding:

    “It further fails because the alleged mistake did not exist at the time the parties entered into their agreement.”

    This is a legal conclusion but no supporting facts or cases were cited. It might just be the heart of the case. I don’t know. But when did the mistake occur? When Madoff went sour? When the Madoff securities were purchased? When the Martial Separation Agreement was signed? It seems to me, that as one of the most important terms of the contract was the division of property, that the “mistake” occurred when both parties “misunderstood” the value of the Madoff securities. That event was certainly before, not after the divorce.

    And the “finality” of a divorce decree does not cover fraud, unilateral mistake (slightly less than fraud) or mutual mistake. Therefore, merely reciting the term “finality” out of context, doesn’t make it so. What would have worked is some case law with respect to mutual mistake. I didn’t see any of that. No stare decisis is shown. Claimed, but not cited.

  5. Curtis Says:

    OOOOPS!

    I did not read the whole dissenting opinion. It is rather a strange opinion in that the dissenting opinion is pretty much the whole thing. However, there are argument and cases cited. A full reading is necessary.

  6. neo-neocon Says:

    csimon: did you read the entire dissenting opinion? It needs to be read as a whole to be understood. The relevant facts in this particular case are the following:

    (a) it was explicitly not meant to be an equitable (equal) distribution of property

    (b) the account with Madoff DID exist, because the husband withdrew some of it and used the monies to pay the wife (if I understand your brother’s situation, it seems this was the case for him as well). Therefore I don’t see how a person could claim it did not exist. It did not exist in the way people thought it did in terms of value. But it did exist, and the monies were available to be withdrawn at that time. Granted, if all Madoff investors had decided to withdraw their monies at once, Madoff would have been unable to pay them. Also, he never invested the money as he said he had. But he knew who the investors were and kept records of that, and right up until the time he was caught, individuals were able to withdraw money from their accounts, which in that sense existed.

    (c) the dissent also mentions the clawback. The fact that a clawback might happen at some future date is irrelevant because it has not happened yet at this time, it is just a possibility. Here is the relevant part:

    To the extent the unjust enrichment claim seeks to compel Laura to indemnify and defend Steven from any attempts by the trustee overseeing the liquidation of Madoff Securities to seek clawback from Steven, this lawsuit is not yet ripe, and indeed may never be.[FN2] First, the trustee is not pursuing Steven at this time. Moreover, for the trustee ever to recover against Steven as an innocent investor in a Ponzi scheme, the trustee would likely have to show that Steven was: (1) a “net winner” and (2) that amounts Steven received in profit were within the limitations period (see e.g. Donell v Kowell, 533 F3d 762, 776 [9th Cir 2008], cert denied 555 US —, 129 S Ct 640 [2008]; Citicorp Trust Bank, FSB v Makkas, 67 AD3d 950, 952 [2009] [statute of limitations for constructive fraud under New York's Debtor and Creditor Law is six years from the date of the fraudulent transfer]). Thus, if and when Steven will be liable is a far-off contingency (see Heine v Heine, 176 AD2d 77, 91 [1992] [tax impact evidence too speculative to support a claim for credit for taxes]). Accordingly, the unjust enrichment claim should be dismissed as speculative. Whether Steven can state a claim for unjust enrichment against Laura, if and when the trustee does bring a claim against Steven, is a question for another day.

    What you and your family and all the other Madoff victims went through is terrible. But I still don’t think it means that people who divorced before Madoff was exposed should be able to get money back from ex-spouses.

  7. Curtis Says:

    I’m still reading!

  8. David in NY Says:

    I think the Appellate Division misapplies the “mutual mistake” doctrine by misunderstanding it’s proper rationale. The doctrine usually applies where a buyer discovers that what s/he bought isn’t what it was assumed to be (at least by the buyer and putatively by the seller). Since the seller had the best access to information about the asset in question, it is the seller who gets stuck with the loss (foregoing the necessity for an inquiry into fraud in every such case).

    This is not such a case. Simkin is not an aggrieved recipient of an asset from his spouse that has turned out to be fake (in which case he might argue she should have to take it back because she had the best access to information about it). The asset was his all along, he bargained to keep it, and there’s no reason he should escape the bargain. There’s certainly no substantive rationale for applying the “mutual mistake” doctrine in his favor.

  9. David in NY Says:

    That’s “its.”

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Previously a lifelong Democrat, born in New York and living in New England, surrounded by liberals on all sides, I've found myself slowly but surely leaving the fold and becoming that dread thing: a neocon.
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