House of cards 2.jpgContinuing to demonstrate New York’s public policy enforcing settlement agreements and the finality they bring to bear on divorce litigation, the Court of Appeals on April 3, 2012 held that the post-agreement discovery that the fact that a marital account had been invested with Bernard Madoff and retained by the husband upon the divorce was not a sufficient basis to set aside that agreement when the Madoff scheme later surfaced.

In 2006, former spouses Steven Simkin and Laura Blank entered a divorce settlement agreement under which Ms. Blank, among other terms, waived spousal support and marital property rights in the value of the husband’s law practice. The husband paid his wife $6.25 million.

Three years later, when the now ex-husband learned he was a victim of Bernard Madoff’s massive Ponzi scheme, he commenced an action against his former wife asking that the 2006 agreement be “reformed” to reflect the mutual mistake made by the parties, i.e., the assumption  that there was an account with Madoff worth $5.4 million. Mr. Simkin alleged that the payment made to his ex-wife under the 2006 agreement was intended to accomplish an “approximately equal division of [the couple’s] marital assets.” In reliance upon that mistaken assumption, the ex-husband claimed he paid his wife $2.7 million which should now be returned.

New York County Supreme Court Justice Saralee Evans dismissed the ex-husband’s “reformation” action upon the ex-wife’s motion. Justice Evans held that because the ex-husband did not assert in his complaint that in 2006 the account could not be redeemed for value, there was no mutual mistake sufficient to now reform the agreement.

The Appellate Division, First Department, reversed Justice Evans and reinstated the complaint. In a 3-2 decision on January 11, 2011, the appellate court held that Justice Evans had improperly determined facts (the assumptions made by the parties) on a motion to dismiss. That motion should only have been decided as a matter of law and should have assumed all the allegations of the ex-husband’s complaint were true. Factual disputes are to be resolved at trial; not by motion.

On appeal to New York’s highest Court, the Court of Appeals in Simkin v. Blank reversed the Appellate Division and reinstated Justice Evans’ dismissal. The Court noted that, generally, court-ordered relief is reserved only for “exceptional situations.” A mutual mistake sufficient to avoid a contract (including a marital settlement agreement and the releases contained) must be substantial”; “so material that … it goes to the foundation of the agreement.” “The parties must have been mistaken as to a basic assumption of the contract … Basic assumption means the mistake must vitally affect the basis upon which the parties contract.”

Generally, post-agreement substantial changes of value in property retained by one of the spouses is not a basis to set aside an agreement. “Stuff” happens.

Consistent with that general rule, here, two factors seemed to have been dispositive. First, the parties’ agreement did not “show their work.” The reader is not taking through a first-stated overall intention to equally divide the assets, only after which is the husband’s retention of the Madoff stock is merely the means chosen by both parties to implement that contractual vision. Instead, the agreement stated only the end-game: the waiver by the wife of ceratin rights; her receipt of a specified payment.

Second, as Justice Evans noted, the account was not demonstrably non-existent, no less worthless at the time the parties entered there agreement. Indeed, Mr. Simkin acknowledged he drew down on that account to make a portion of his $6.25 million settlement payment to his then wife. The husband could not dispute that until Madoff’s Ponzi scheme began to unravel in late 2008—more than two years after the property division was completed—it would have been possible for the husband to redeem all or part of the investment.

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.

In that context, the agreement simply reflected Mr. Simkin’s 2006 business decision to continue his investment with Mr. Madoff. The account could have been equally divided “in kind.” The account could have been liquidated. Mr. Simkin continued to make such investment decisions with that account every day until the collapse. However, such is no different than those who waited too long to get out of the bubble, the 2007-8 stock market crash, the real estate downturn.

While the facts may be extraordinary, the principle should not be changed. The marital property cut-off date incident to the filing the summons which commences a divorce action or as otherwise agreed by the parties must be respected. After that, each “former” spouse is captain of his (or her) own ship, and must take responsibility for the decisions made and ever-changing investment stage.