Ron Fabian, of Jackson, Michigan, calls our attention to a divorce litigant's efforts to have a "do-over" of his divorce settlement. Of interest is the fact that both litigants are highly-qualified lawyers: Plaintiff Husband Simkin ["H" or "Ex-Husband"] is a partner and chairman of the real estate department at a large and prestigious New York law firm; Defendant Ms. Blank ["W" or "Ex-Wife"] is the deputy senior university director of labor relations at a university in New York. They were married in 1973, separated in 2001, and divorced during the summer of 2006.They negotiated a settlement arriving at September 1, 2004 as the date for division.
On June 27, 2006, they entered into a formal, written, properly acknowledged and executed agreement to divide their property (the "agreement"). They agreed to an approximately equal division of marital property acquired during this long-term marriage. H was to get one residence and W the other, each received his/her retirement accounts, significant personalty was divided between them, H received his partnership interest in the law firm and his interest in Bernhard L. Madoff Investment Securities, an asset in his name only. H was to pay certain marital debts, and H was to pay Wife $6.6 million to equalize the settlement.
The usual boilerplate was included in the agreement, including an acknowledgment that the property distribution represented a fair and reasonable division of their assets, a release of claims provision, and a merger clause (meaning that the terms of the settlement were to be merged in the judgment of divorce). Simkin liquidated some of the Madoff Securities, to make the payment to Ex-W. Imagine how stunned Ex-Wife was when Ex-Husband sought two years later to reform the judgment.
Ex-Husband's claim is certainly novel. In an attempt to avoid the standard defenses to a suit to amend a judgment, (e.g., the judgment / settlement agreement is a contract and the court will not re-write a contract that is not ambiguous, but will enforce it or uphold the terms if they are clear and unambiguous, and absent fraud, duress, unconsionability, etc.), Ex-Husband alleges that the parties were "mutually mistaken" about their assets when they negotiated their settlement. In Ex-Husband's view of the world, the parties only thought they owned $5.4 million in Bernhard L. Madoff Investment Securities. In fact, says Ex-Husband, since Bernie Madoff was running a Ponzi scheme, they owned nothing. Ex-Husband did not discover this right away because he elected to leave his Madoff monies "fully invested" and thus, when that ship was sunk two years following the agreement and divorce judgment, he got nothing. Ex-Husband claims that Ex-Wife benefited when Madoff acknowledged the fraudulent scheme, and Ex-Husband was left holding a large empty bag. [Oh, it's the old Pie in the Sky problem.]
Ex-Husband sued his former wife, Ms. Blank, seeking to recover millions of dollars that she had received in their settlement to make up for the substantial losses he had sustained in the fraud.
According to the New York Times, the Simkin-Blank dispute has riveted New York State’s matrimonial bar, and splintered opinions among the six judges who have already weighed in on the case. Some lawyers are predicting that if the Court of Appeals allows Mr. Simkin to try to revise the agreement, the ruling could affect not only divorce settlements but also other contracts.
“ 'The decision could open the floodgates for people who want to challenge agreements after they go sour,' ” said Peter Bienstock, a divorce lawyer not involved in the case. “ 'Deals are done every single day based on assumptions about what things are worth. If the court allows this lawsuit to go forward, how can we be certain that deals will hold up? '
"Some lawyers also say that if judges allow this agreement to be rescinded, it could lead to more Madoff-related suits by destabilizing all types of contracts struck with the fraud victims. The case, which is expected to be decided later this year, has spawned at least one copycat action.
"In January, a Madoff victim in Middlesex County, Mass., filed a similar complaint against his ex-wife to revise their separation agreement. A family court judge dismissed the lawsuit earlier this month, and the plaintiff’s lawyer is now weighing an appeal.
"A ruling in the Blank-Simkin case would only have a direct effect on New York’s laws, but a decision by the influential court could influence how judges interpret laws in other states.
"Mr. Simkin’s suit rests on the doctrine of “mutual mistake,” a well-established principle that allows for the cancellation of contracts, including divorce agreements, when both parties are innocently mistaken about an essential term. In a famous example, if a violinist sells another violinist what they believe to be a Stradivarius, and it turns out to be a cheap knockoff, they can void the contract."
Richard Emery, a lawyer for Ms. Blank, finds Simkin's legal theories untenable. He says that there was a Madoff account and only the future value was uncertain, not the value on the date of division. Emery says: “Just like other Madoff investors, he was able to redeem his money until the scheme collapsed precisely because he had an account there. To argue that he didn’t have a Madoff account is nothing more than a semantic trick.”
The lawsuit was dismissed in the lower court, but a sharply divided New York appellate court, in a 3-to-2 decision released in January, ruled that Mr. Simkin could sue to revise the deal because of the "mutual mistake" concerning the existence of the Madoff account.
The dissenting opinion of Justice Karla Moskowitz is sharply criticical of the majority opinion. Justice Moskowitz states that it “undermines decades of established precedent favoring finality in divorce cases” and that the ruling could bring “chaos for not only for the court system but for litigants as well, who deserve finality and to move on.”
One statement of Justice Moskowitz really struck a chord with me. She noted that the agreement did not specify how Simkin was to pay Ms. Blank the $6.6 million. He could have done it in a number of ways, including a home equity loan. The justice stated:
"Certainly, had the Madoff account substantially increased in value, Laura would not be able to share those benefits. [Citations omitted] Steven negotiated successfully to retain the Madoff account, presumably because he expected the Madoff account to continue its highly profitable performance. After the valuation date of September 1, 2004, he invested more money in it. Accordingly, he alone took on the risk that he might not be able to recoup his investment. [Emphasis supplied.]
In fact, Simkin made a decision to invest with Mr. Madoff for two and a half years after the divorce. Justice Moskowitz wrote that Ms. Blank cannot be responsible for Simkin's decision to invest with Madoff for two and a half years after their divorce.
“Just as she would not have benefited from any increase in the value of the account, she should not have to bear the burden of its loss,” she wrote. “Steven received exactly what he bargained for. He alone took on the risk that he might not be able to recoup his investment.”
This case reminds me very much of Reed v Reed, in which Mrs. Reed sought to invalidate the parties' prenuptial agreement. One of the three grounds for invalidation was similar to (but a reverse image of) the claim made in the Simkin case--that the value of the parties' assets had increased so much the it was unconscionable for H to keep it all.
Mr. Reed walked away from the divorce with almost all of an estate worth about $8 million. The parties' pre-nup, entered into shortly before the marriage and shortly after Mr. Reed graduated from law school, stated clearly that each of them would keep their earnings and assets acquired during the marriage separate. Significant earnings were made by each and Mrs. Reed spent hers on family expenses; Mr. Reed spent his on real estate and other investments. By the time of the divorce in this long-term marriage, Mr. Reed had millions in property titled in his name only; Mrs. Reed had little, having spent her income on family expenses.
Mrs. Reed argued that because of the change in circumstances between the time the agreement was executed and the time of the divorce, it would be unfair and inequitable to enforce the agreement as interpreted by her husband. The Court of Appeals disagreed, stating:
In essence, the parties agreed to be captains of their own financial ships and to "decide their own destiny." [Citations omitted]. Having agreed to do so, it was clearly foreseeable at the time the agreement was entered that the parties would acquire separate assets over the course of the marriage. Further, that the parties' separate assets could grow at disparate rates and that one party's assets might grow significantly more than the other party's would have been readily apparent. In sum, the fact that the parties' assets grew significantly over many years can hardly be considered an unforeseeable changed circumstance that justifies voiding the parties prenuptial agreement. Similarly, the benefit accruing to one party from the disparate growth of his assets is simply not a changed circumstance rendering the agreement unfair and unreasonable to enforce.
The case also reminds me of a case decided in Michigan just the other day: In Smith v Smith, Docket No. 295243, For Publication (Decided May 25, 2011) Mrs. Smith attempted to re-open the property settlement after a proper settlement agreement containing all necessary terms and the same kinds of boilerplate provisions seen in Simkin v Blank. The parties had established specific values for their assets accumulated in a 40 year marriage. Their agreement stated that these assets, each described and assigned a value, were to be divided equally. A February 2009 IRA statement was the basis for valuation of Mr. Smith's 401k.
Prior to entry of judgment, however, Mrs. Smith discovered that Mr. Smith's IRA had substantially increased in value after February 2009. She claimed that the property settlement agreement should be modified to restate the value of Mr. Smith's IRA and to divide it equally between the parties in the judgment. The trial court rejected this effort, and the Court of Appeals affirmed, stating as follows:
"The values of the retirement accounts were stated in fixed terms. It is well known that stocks fluctuate on a daily basis. The parties were free to fix the values of the accounts at any time. They could have fixed the value at the time divorce was filed, or at the time the judgment of divorce was entered. They could have expressly provided that the division of the retirement accounts was subject to modification due to market fluctuation."
Once again, it was the clear and unambiguous language of the contract that controlled the property distribution. Had the Smiths wanted to provide for gains or losses in value of assets, their property settlement agreement could have been clearly and unambiguously worded "The XXX 401k will be divided equally between the parties, effective on the date of distribution, plus or minus all gains or losses since the effective date of this property settlement agreement."
Some commentators have opined that if Mr. Simkin is able to overturn the property settlement agreement based upon his "mutual mistake" theory and if PSAs are subject to avoidance because of some of the other theories advanced (such as unjust enrichment or unconscionability) that litigants will spend years in court and it will provide a lucrative field for family law attorneys. In other words: "Let the wild rumpus begin!"
Read the New York Times article here: Lattman, Peter. Madoff Victim Seeks Divorce Do-Over, May 30, 2011.
Read the New York Court decision here. Simkin v Blank, Docket No. 3016, NYLJ 1202477009087 (App. Div., 1st, Decided January 4, 2011)
Read my prior post discussing Reed v Reed here.
Read Smith v Smith, Docket No. 295243, For Publication (Decided May 25, 2011) here.
Comments