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MADOFF PONZI SCHEME BACK IN THE NEWS:
BUT PROBABLY NOT WHY YOU THINK

In yet another spinoff of Bernie Madoff’s fraud comes the New York case of Simkin vs. Blank. While Mr. Madoff was not directly involved in the case the results of his actions were.

Steve Simkin, a partner in the prestigious multi-national law firm of Paul, Weiss, Rifkind, Wharton & Garrison L.L.P, and his former wife, Laura Blank were divorced back in 2006. As part of that divorce Simkin and Blank entered into and had incorporated into their Final Dissolution of Marriage Order an equitable distribution agreement that distributed between them millions of dollars of assets including 5.4 million invested with one Benard Madoff.

When the divorce was finalized, Simkin received the Madoff investment account with the exception of some of the account balance which was withdrawn and paid to Blank as part of an equitable distribution equalization payment. Thereafter Simkin continued to keep a large amount of the funds invested with Madoff. No doubt due to the excellent, but fabricated, investment returns Madoff was obtaining for him. But, move forward to 2008 and the exposure of Mr. Madoff’s fraud and Simkin discovers that he really received nothing or at least much less than he bargained for or accepted in his divorce settlement. Figure out where this is going yet? Yep, Simkin sued Blank requesting that the court order a re-appropriation of the parties’ assets based upon the losses Simkin realized as a result of the Madoff fraud.

While at first glance it would appear that Simkin was suffering from a case of sour grapes based upon the bad deal he made with his former wife his attorneys argued that the parties’ divorce settlement should be modified due to a mutual mistake of fact, i.e., the parties thought at the time of negotiating their settlement that there was, in fact, an actual investment account with Madoff.

The trial court wasn’t in agreement with Simkin’s argument and dismissed the case. But the New York Appellate Court ruled the case could move forward on Simkin’s argument and sent the case back to the trial court. Blank’s counsel, as to be expected, disagreed with the Appellate Court’s holding and appealed that ruling to the New York Court of Appeals, the New York equivalent of our Florida Supreme Court. The New York Court of Appeals held, as did the original trial court, that Simkin did not state a cause of action upon which the parties’ settlement agreement could be modified.

Is this a surprise ruling? No, not really, in fact the case is very similar to a line of cases that arose in Florida after the real estate market decline. For example in Ferguson v. Ferguson, 54 So.3d 553 (Fla. 3rd DCA 2011), at the time of the divorce, in 2008, the Husband agreed to retain ownership of the parties’ marital residence and pay to the Wife $185,000 as and for her equitable share of the residence. When the real estate market rapidly declined thereafter the Husband filed a motion with the court requesting a reformation of the parties’ agreement alleging that the parties could not have anticipated the drastic decline in the property’s value at the time they entered into the agreement. The court in Ferguson, like the court in Simkin disagreed. Holding that a change in value of an asset is not an unforeseen change in circumstances nor would it constitute a mutual mistake of fact. More specifically, in Simkin the Court found that at the time the parties were negotiating their agreement the Madoff account did exist and Simkin, if he chose to do so, could have liquidated that account on the day after the dissolution and received in cash the amount he had bargained for with his former wife.

Does this make sense? Absolutely, especially when you consider the amount of effort that goes into reaching an agreement and finalizing a divorce where assets are present. Assets are valued; some assets, not necessarily of equal value, are exchanged for other assets; compromises are made and finally an agreement is reached. Not to mention, the strong public policy supporting the finality of such agreements where all the requirements of a complete agreement are present. The simple fact that one of the parties ultimately realizes a loss or even an unexpected gain associated with an asset obtained through a dissolution of marriage does not justify a revamping of the distribution agreement.

With that said the outcome of the Simkin case may have been different if the underlying issue was one of spousal and/or child support. Assume for example that Simkin had received, as was the actual case, the Madoff account as part of the equitable distribution scheme reached in the dissolution, but in this scenario the income generated from the Madoff investments had been included with Simkin’s other income sources and utilized to calculate a child support and/or spousal support obligation he owed to Blank. Accepting all other facts of the case, there would be a great likelihood that the Madoff fraud would allow Simkin to modify that child and/or spousal support obligation. Parties to a divorce action should always be aware that child support and alimony obligations are always subject to modification, under the correct circumstances, the same is not true for asset distribution.

 

Article date: May 2012

 



 
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