No Mistake in Simkin v. Blank Divorce Agreement

A divorcing couple whose assets included a Madoff ponzi scheme account must abide by the terms of their contract, the New York Court of Appeals unanimously ruled today in the closely-followed case of Simkin v. Blank. As we noted here, the couple’s 2006 divorce agreement allocated a Madoff brokerage account to the husband and fairly apportioned all other marital assets. The husband sought to rescind the deal under the doctrine of mutual mistake; the wife disputed making a mutual mistake and said the divorce setting warranted special deference to the contract.

The court sided with the wife on both points, resting in part on the general contract law of mutual mistake and in part on the specific context of a divorce settlement agreement. The court makes the case look easy, though as my previous posts and the litigation history suggests, it was a bit tougher than the court made it seem.

The court may wish to discourage any copycat suits arising from the Madoff scam, whether divorce settlement agreements or otherwise. But there is at least a little wiggle room based on the facts that the court makes pivotal, especially the express terms of the agreement and the reality that the account did have value when the contract was formed, though not once the scheme unraveled.

Following are the highlights of the opinion (citations omitted):

Marital settlement agreements are judicially favored and are not to be easily set aside.  Nevertheless, in a proper case, an agreement may be subject to rescission or reformation based on a mutual mistake by the parties. . . . Based on these contract principles, the parties here agree that this appeal turns on whether husband’s amended complaint states a claim for relief under a theory of mutual mistake.

Turning to general contract law, the court stresses that any mutual mistake justifying rescission must exist when a contract is formed and be substantial–-meaning the excuse is recognized only in “exceptional circumstances.” It then acknowledges that its opinions have never “addressed mutual mistake claims in the context of marital settlement agreements,” though canvasses several lower court opinions in New York that have. Each of those gives some weight to the divorce setting, as contrasted with the general run of contract cases.

Having reviewed two cases favorable to each side, the court says that “Applying these legal principles, we are of the view that the amended complaint fails to adequately state a cause of action based on mutual mistake.”

First, the agreement made no mention of the Madoff account, unlike one of the pro-husband precedents. That suggested that its existence was not a “substantial” foundation of the contract which, the court stresses, was “extensive and carefully negotiated.”

Second, besides language, the Madoff account did exist when the contract was formed, as the husband acknowledged “it would have been possible for him to redeem all or part of the investment.” That undercut the requirement of general contract law that any mutual mistake must exist when a contract was formed. The case was more like that of an asset declining in value rather than an asset that did not really exist, the court said.

A fairly clean and clear opinion, I suppose, given the circumstances, thoughI would have appreciated a bit more detailed analysis of the contours of the doctrine of mutual mistake. I take from the case that New York does indeed adhere to a stricter conception of the doctrine of mutual mistake than may appear in the broader common law.


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3 Responses

  1. Ken Rhodes says:

    I am confused by the confusion.

    A lot of the reasoning of your previous post centered on the question of whether the “account” was “real.” You wrote this:

    Their bargain was to split economic value both parties thought to be $5.6 million. They were both innocently mistaken about that. In reality, there was nothing to split. There were no investments, securities, or returns or losses, and without those attributes the idea of an account is a nullity.

    I have a different view. The “accounting” was bogus, but if Steven could have signed a withdrawal slip and taken $5.6 million from the Madoff firm, then the “account,” whatever it represented, had that dollar value at that moment. The idea of the account was not a nullity, because even though there were no underlying investments, securities, etc., there definitely was “something to split,” as could have been done had they simply agreed to close the “account” and split the cash.

    The mutual mistake had to be whether the so-called “account” had a redemption value at that moment in time, which apparently it did.

  2. George says:

    A comment at the NYT post shows the error of the NY opinion. It incorrectly ignores federal law that would have rendered any Simkin withdraw from the account illegal. In Ponzi schemes, anyone who withdraws proceeds holds the fraudulent funds in trust for allocation among all victims. (The comment at the NYT is #2, at 6:40 am 4/4/12, calling the judge’s “ignorance of the law” hard to believe and saying the deicion is “wildly unfair”