HUSBAND FILES TO MODIFY DIVORCE SETTLEMENT BASED ON INVESTMENTS LOST TO MADOFF PONZI SCHEME

A New York couple that had divorced in 2006 was back in court after the former husband sued his former wife to set aside his marital settlement agreement based on what the former husband claimed was a “mutual mistake”.  The “mistake”, the former husband alleges, was that the account that the parties had with Bernard Madoff was real.

The couple split after 33 years of marriage.  One of the marital assets subject to equitable distribution was funds that the couple had invested with Bernard Madoff.  The couple split their marital assets pursuant to a marital settlement agreement but the former husband kept much of his funds invested in his account with Madoff.  The former wife, who had no desire to continue to invest with the former husband, received her equitable distribution award in cash. 

As is set forth in the opinion of the New York Supreme Court, Appellate Division:

In the amended complaint, the former husband alleges that at the time of their agreement the parties believed that they owned an account (hereinafter referred to as the “Madoff Account”) with Bernard L. Madoff Investment Securities which was their largest asset (purportedly $5.4 million as of the cut-off date). Of $6,618,000 that plaintiff paid defendant pursuant to the 2006 agreement, $2.7 million was attributable to defendant’s share of what the parties believed to be their $5.4 million Madoff Account. This account was titled in plaintiff’s name. Plaintiff alleges that in reality, there was no such account because Madoff was running a Ponzi scheme. . . He also asserts a claim for unjust enrichment/restitution claiming that the former wife has been unjustly enriched based on the mutual mistake concerning the Madoff account and that she should pay the former husband restitution that “would put the parties in the position they intended.

After the Madoff ponzi scheme came to light, the former husband learned that his share of the investment funds were worthless.  The former husband then contacted the former wife, advised her that he had been victimized by the Madoff fraud and filed an action to modify the terms of their marital settlement agreement on the theory that the parties were mistaken as to the existence of the Madoff account.  The former husband is asking a court to require the former wife to turn over to him millions of dollars that she received in cash under the marital settlement agreement.  From the former husband’s perspective, there was a mistake.  From the former wife’s perspective, the former husband made a bad business deal. 

Earlier this year, the New York court of appeal declined to dismiss the former husband’s lawsuit.  The court credited the former husband’s argument (for purposes of evaluating the sufficiency but not the merits of his claims) that the parties were mistaken as to the existence of an account.  According to the former husband, the funds that were available to him were really nothing more than funds deposited by a “more recent investor” in the ponzi scheme. 

There was a dissenting opinion in the court which points out that at the time of the divorce, the amounts invested by the parties could have been withdrawn and, therefore, the mistake upon which the former husband relied did not exist when the parties signed the marital settlement agreement.  The dissent also argued that the approach taken by the court in this unique case undermined the desire to achieve finality in divorce cases.

Marital settlement agreements are subject to the same laws and rules of interpretation as any other contract.  In this case, the former husband is attacking the marital settlement agreement as a contract under a legal doctrine known as mutual; mistake.  While the court of appeals allowed the former husband’s claim to go forward, there has been no ruling on the merits of this case. 

The former husband’s position is that the Madoff account never really existed.  The issue is whether the demise of the account as a result of the fraud which came to light after the divorce was final constitutes grounds to revise the parties’ marital settlement agreement.

Under Florida law concerning contracts and marital settlement agreements, the parties are responsible for evaluating the assets and liabilities that are proposed to be awarded under a marital settlement agreement.   On the doctrine of mutual mistake, Florida courts have said, that the doctrine of mutual mistake was not created to relieve a party of “agreements entered into improvidently”.  The parties’ marital settlement agreement did not provide for the equal distribution of the Madoff account.  It would appear that the former husband chose to continue to invest his funds with Madoff after the divorce.  As stated by the dissenting opinion, “the former husband’s 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.

The marital settlement agreement did not specify how the former husband was to pay the former wife.  Under those circumstances, the former husband may have difficulty when the time comes to try his case.  The former husband could have elected to liquidate the Madoff investment and invest the funds elsewhere at the time of divorce but he elected not to do so.  Are these circumstances much different than a spouse who elects to buy out his or her spouse’s marital interest in a business that later fails?  If the business later fails should that give rise to an action attacking the marital settlement agreement and the equitable distribution award? 

If the former husband is successful, this case will open the door to attacks on other agreements where the parties’ assumptions about the value and quality of assets prove wrong.  As for morals of this story, there are many – too numerous for this venue.

I have drafted many marital settlement agreements, prenuptial agreements, cohabitation agreements and post nuptial agreements and spent hundreds of hours litigating contested cases in Martin, Palm Beach, Broward and Miami Dade counties.  Although much of my practice involves divorce litigation, my ability to negotiate and draft comprehensive and well written agreements is as important to my clients as my skills in a courtroom.  Judges in Palm Beach County like to see qualified and well trained family lawyers in their courtrooms but they would prefer that the cases are settled voluntarily. 

The New York cases discussed here presents what appears to be a unique set of circumstances.  Nevertheless, the implications of this case can be addressed by a comprehensive and well drafted divorce settlement agreement.

Martin Kofsky is a partner with Ward Damon.  He is an experienced family law attorney handling divorce and other family law matters in Palm Beach, Broward and Miami-Dade counties and the treasure coast.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s