A lot of talk is spreading about the effect that Bernie Madoff may have on divorce settlement agreements across the country.¹ And no, that effect does not arise from his nickname “winky dink,” but instead more seriously through the infamous ponzi scheme funds that are at the center of a heated dispute now in a post-divorce case in New York State. The case is Simkin v. Blank.
In that case, a New York State appellate court reinstated Mr. Simkin’s lawsuit (which the trial court had thrown out) against his ex-wife, Ms. Blank, seeking to force her to renegotiate their settlement agreement that they and their respective attorneys finalized back in 2006. The case consisted of over 13 million dollars in assets to divide between the parties, who were both prominent attorneys in New York. Despite the large amount of assets and the parties’ local prominence, the divorce was unexceptional. What was unusual, however, is that nearly 2 ½ years passed before Mr. Simkin filed suit against his ex-wife (in 2008). Final settlements like this are rarely reopened after such time.
So why is Mr. Simkin now being allowed to contest the settlement? Because of the Madoff funds at the center of it. Mr. Simkin chose to keep the Madoff accounts that he and his wife jointly acquired during marriage, and to do this, he had to pay his wife the then-current value that they were worth.² That was 2.7 million dollars. Of course, 2 ½ years later they suddenly became worthless.
Now, Mr. Simkin is demanding that his ex-wife return the millions of dollars based on a contract law principal called “mutual mistake.” His argument goes something like this: “your honor, there was no such ‘account’ because Madoff was running a ponzi scheme. The Madoff ‘accounts’ were not what either of us believed them to be, and were in fact something quite different and unexpected, something that neither of us knew . Therefore, we were both ‘mutually mistaken.’ ”
Is this really a case of “mutual mistake”?
“Mutual mistake” generally allows either party to a contract to void the contract when it can be shown that they were both mistaken about an identical basic assumption at the time the deal was made, and that such assumption materially affected the exchange. For instance, “mutual mistake” has been perhaps most famously applied where a man sold a cow he believed to be barren, which made the cow far less valuable. He found a buyer, and they negotiated a price based on the mutual understanding that the cow was barren. Before the exchange, however, the cow was found to be pregnant. The seller refused to sell, and when the buyer sued to enforce the sale, the buyer sought to void the sale and get his pregnant cow back. The seller won because the court concluded that both the seller and the buyer were “mutually mistaken” about a basic assumption that materially affected the exchange, precisely the assumption that the cow was barren.
So how does this compare to Mr. Simkin’s and Ms. Blank’s case? In my opinion, it simply doesn’t.
Here, instead of relying on a mistaken belief, both Mr. Simkin and Ms. Blank clearly relied on the true then-current value of the Madoff funds. There was no mistake as to the value – The value remained true until the scheme collapsed in 2008. Before then, investors could in fact sell the funds back to Madoff’s firm for the stated value.
Mr. Simkin, however, is arguing that they both were mistaken about the nature of what the “accounts” actually consisted. As we now know, the “accounts” were not as stated on the financial reports provided to investors. Instead of purchasing stocks, investment funds and engaging in the complicated trades that Madoff told investors he was doing, he eventually admitted that since the start of the ponzi scheme (which he said was in the early 1990’s), he was not trading at all. He was simply putting investors’ money into his own Chase Manhattan Bank business account, and paying investors out of this account when they wanted to take their money out.
However, given the nature of both divorce and of liquefiable assets, I don’t think Mr. Simkin’s argument flies.
First, it seems highly unlikely that Ms. Blank relied on any basic assumption about what particular funds the “accounts” actually consisted of when she let Mr. Simkin take them off her hands. As a contractual matter, that is, the elements of “mutual mistake” just don’t seem to apply here. As noted earlier, the mutual mistake doctrine does not apply if: 1) the parties’ mutual basic assumptions were not in fact “mistaken”; 2) the parties did not rely on any “identical” mistaken basic assumption; or 3) the mutually mistaken basic assumption had only an “immaterial” affect on the exchange.
Most significantly, unlike the cow case where both parties “mistakenly” thought that the cow was currently barren, here neither Mr. Simkin nor Ms. Blank was currently mistaken about the value of the Madoff funds. The funds actually were valuable and liquifiable at the time the parties divorced.
Also, it is unlikely that the parties had any “identical” basic assumption about what the Madoff accounts actually consisted of, or, even if they did, that it “materially” affected the exchange. The parties were divorcing and simply had to divide their assets. Ms. Blank was selling her funds for the market price, and the only question was to who. Even if Ms. Blank considered the nature of the specific accounts at all, it seems that such an assumption would have been immaterial to the ultimate exchange; her decision would most likely have been to simply to cash them out, period.
Second, not only do the “elemental” aspects of “mutual mistake” seem lacking, but equitably speaking, a decision forcing Ms. Blank to return the money seems wrought with peril for the nature of marriages and divorces as a whole.
In a divorce, where parties are generally expected to at least try to work towards settlement, and to avoid costly litigation and overburdening the courts, it would be quite unusual and rather uncooperative for Ms. Blank to obstruct the settlement by not selling Mr. Simkin the investment funds for the exact same value that she could have sold them back to Madoff’s firm. I can even imagine some courts considering such a refusal by Ms. Blank to be sanctionable conduct. Essentially, the question would be posed, “why would Ms. Blank, except in bad faith, obstruct a settlement by refusing to let Mr. Simkin take the asset she did not want for its current fair market value?”
In divorce proceedings, the gold standard used to divide assets is current fair market value. And this is for good reason. In dividing marital property, the parties are not freely engaging like two willing cow merchants in a contractual deal with each other. They are dividing their assets between themselves because they have to; because one wants out of the marital relationship. This is regardless of whether or not one spouse wants that. And, if one party wants to sell his or her half of a marital asset, she has that right, and the other party can’t stop them – they can only choose whether they want to be the one to buy it.
Here, Ms. Blank had the absolute right to sell her half of the Madoff funds. Ordering her to now repay Mr. Simkin because she simply chose to sell to him instead of Madoff, would completely change the right of a divorcing person to freely dispose of his or her share of marital property upon divorce. It results in the marital obligations extending further than ever before, and preventing the parties from starting free lives of their own. Allowing Mr. Simkin to recoup his losses from Ms. Blank essentially will be turn divorce on its head and make marriage more like a life sentence. Undoubtedly, this would be an interesting social experiment, but it would be quite a major one, and one most family law practitioners (and probably many others) do not seem to stand behind. For those who disagree, feel free to chime in and share your views by commenting below.