NY Appellate Court Lets Lawyer Shift Madoff Losses to His Ex-Wife – Huh?


Posted on January 5th, 2011 by Katherine Franke
 4 comments  

Above the Law ran the story below today about a decision from the NY Appellate Division, Simkin v. Blank, in which a divided court allowed Steven Simkin to reopen a divorce settlement on account of money he lost in the Bernie Madoff investment fraud.  In effect, the court allowed him to “claw back” money he contractually agreed to pay his his ex-wife as part of the final divorce settlement agreed upon five years ago.  Richard Emery, the lawyer for Laura Blank, Simkin’s ex-wife, told Business Week today: “Is every divorce agreement to be revisited when values change in the future?”

Judge Karla Moskowitz (Columbia Law School ’66) filed a strong dissent to the ruling, arguing that “the majority’s approach undermines decades of established precedent favoring finality in divorce cases. Thus, the conclusion the majority reaches, not only fails to follow precedent, but is truly “divorced” from reality.”

Here’s the Above the Law summary:

A Millionaire Paul Weiss Partner Might Get Money from His Ex-Wife — Thanks to Bernie Madoff

By David Lat

Steven Simkin is too cool for a necktie.

Being married to a Paul Weiss partner is nice; getting divorced from a Paul Weiss partner is even nicer. Thanks to the prestigious firm’s eye-popping profits, getting divorced from a PW partner should give you a seven-figure payday (assuming the Paul Weiss partner has been a partner for a while and is the “monied spouse” — a pretty safe assumption, unless you work at, say, Goldman Sachs).

But when you get that gigantic payment — like winning the lottery, but without all the taxes — can you feel confident in its finality? Or do you have to worry that your ex-spouse, a partner at a firm known for its aggressive and brilliant lawyering, will find a clever way to get some of that money back from you, years later?

Consider the tale of Steven Simkin, a Paul Weiss partner of almost three decades, and his ex-wife Laura Blank, who works in education. It involves a multimillion-dollar marital estate, residential properties in Manhattan and the tony suburb of Scarsdale, and an investment account with one Bernie Madoff.

And yes, for your voyeuristic pleasure, the tale comes with hard numbers, lots of numbers…

In the summer of 2006, Steve Simkin, a Paul Weiss partner since 1982 and the current chair of its real estate department, divorced his wife of over 30 years, Laura Blank. Pursuant to a detailed, carefully negotiated separation agreement, Simkin paid Blank $6.25 million as a lump sum and transferred an additional $368,000 her way (to equalize their retirement accounts). The parties also divvied up their real property: Simkin got the house in Scarsdale, which seems to be worth about $1.7 million, while Blank got the Manhattan apartment, encumbered by a $370,000 mortgage. Blank waived all spousal support — i.e., no alimony.

Both parties were represented by independent counsel in the negotiations. The agreement they executed contains a merger clause and mutual releases.

Fast forward some two and a half years, to late 2008. Bernard Madoff is arrested for running a massive Ponzi scheme. So Steve Simkin — who kept the Madoff investment account that was titled in his name when the couple divorced, because he valued it as an investment, and who continued to invest with Madoff, even after the divorce — sued his former wife. His claim: mutual mistake, requiring “reformation” of the separation agreement that divvied up their property.

His argument in a nutshell, from the opinion of the New York Appellate Division, First Department, in Simkin v. Blank:

[Plaintiff Steven Simkin alleged] 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.

Therefore the plaintiff, Steven Simkin, wants his wife to make restitution to him — so they can share in the Madoff pain equally. His claim is that there was a mutual mistake as to a fundamental assumption of the contract, requiring it to be set aside.

(One might think that a man with many millions, who continues to earn millions as a partner at one of the world’s top law firms, can afford to let the woman he was married to for over 30 years, the mother of his two children, end up with a little extra gravy — especially since she waived spousal support / alimony. But I admit that my lackadaisical, live-and-let-live, let-bygones-be-bygones attitude — “What’s a few million between ex-spouses?” — isn’t how you make partner at Paul Weiss.)

A trial judge rejected Simkin’s claim and granted Blank’s motion to dismiss the lawsuit, finding no basis for “reformation” of the agreement. But in a decision handed down yesterday, a New York state appeals court ruled in favor of Simkin. From the New York Law Journal:

In a 3-2 ruling, the Appellate Division, First Department, overturned the decision of a Manhattan judge who had dismissed Mr. Simkin’s claim that the pact should be revisited based on the couple’s “material, mutual” mistake about the value of the account, which turned out to be worthless after Mr. Madoff’s fraud unraveled.

“Contrary to defendant’s contention, mutual mistake can be based on a statement by a third party,” the majority wrote in an unsigned ruling.

In a sharply worded dissent, Justice Karla Moskowitz said the majority’s approach in Simkin v. Blank “undermine[d] decades of established precedent favoring finality in divorce cases.” She added, “Thus, the conclusion the majority reaches, not only fails to follow precedent, but is truly ‘divorced’ from reality.”

You can check out the opinion and the dissent over here. If there was a mere mistake as to the valuation of the Madoff account, then Simkin would be out of luck — a point the majority and the dissenters appear to agree on. But according to the majority, there was a mutual mistake as to something more fundamental than mere valuation, namely, the existence of the account:

[D]efendant and the dissent ignore the allegations of mutual mistake as to the actual existence of the account itself. Both defendant and the dissent attempt to foreclose plaintiff’s claims by transmogrifying the claim of mutual mistake into a claim of mistake in valuation.

The dissent states: “[a]t the time of the agreement, Steven had an account in his name with [Madoff].” Untrue. Steven never had an account in his name with Madoff; on Madoff’s own admission there were no accounts within which trades were made on behalf of investors.

The dissent then states, “Steven liquidated part of the account to fund his payments to Laura.” Untrue. In Madoff’s Ponzi scheme what appeared to Steven and Laura to be a partial liquidation of an account was simply a payment to Steven that came from funds deposited by a more recent “investor” in what the “investor” believed was his own account.

The dissent further observes, “[Steven] did not liquidate the rest of the Madoff account . . . and he continued to invest in it.” Untrue. There was no account which could be liquidated, as became apparent when Madoff received $7 billion worth of “liquidation” calls from investors in 2008. Nor was Steven “investing” in an account; his further contributions went directly to pay other “investors” in the scheme.

This seems like sophistry — and not even the good kind (e.g., the kind that people pay Paul Weiss partners $1,000 an hour for). Of course there were “accounts” with Madoff, even if Madoff may have lied about their value. These “accounts” are the basis for the various actions being taken by Madoff trustee Irving Picard, who is trying to collect and disburse monies to Madoff investors — some of whom have paid up to settle lawsuits brought by Picard, such as the estate of Jeffry Picower, and some of whom will be getting part of their principal back, perhaps as much as 50 cents on the dollar.

(It’s not clear from the opinions whether Steve Simkin was a “net winner” from the Madoff scheme or a true victim. If the latter, then he should be getting money back from Picard — on account of his “account” with Madoff.)

These are just some off-the-cuff ramblings. For a more carefully thought-out response to the majority, see Justice Moskowitz’s dissent, which is fierce.

Read (or skim) the dueling opinions. Who do you think has the better of the argument? Your perspectives are welcome in the comments.

Simkin v. Blank [New York – Appellate Division, First Department]
Redo on ‘Madoff’ divorce $$ [New York Post]
Seems Bernie Madoff was good for something — lawyer may recoup some of his $6.6M divorce settlement [New York Daily News]
Lawyer May Seek Return of Ex’s ‘Windfall’ From Madoff Account [New York Law Journal]
Paul Weiss Partner Gets Divorce Deal Do-Over Because of ‘Mutual Mistake’: Madoff Account [ABA Journal]

4 comments

  1. NY Appellate Court Lets Lawyer Shift Madoff Losses to His Ex-Wife – Huh? http://wp.me/ploC4-Q4

  2. RT @GenderSexLaw: NY Appellate Court Lets Lawyer Shift Madoff Losses to His Ex-Wife – Huh? http://wp.me/ploC4-Q4

  3. Gees! Can’t believe Paul Weiss may actually benefit from a scum-bag like Bernie Madoff

  4. Seems to me Richard Emery ought to get beyond the formalities here and look at the rationale for application of “mutual mistake.” That doctrine usually applies where a buyer discovers that what he or she has purchased is drastically different from what it was assumed to be (at least by the buyer and perhaps by the seller as well). Since sellers ordinarily have the best access to information about the state of an asset and the actual or potential defects in it, the law places the risk of loss in such a case on the seller, essentially re-establishing the status quo ante.

    This is not Simkin’s situation at all. He did not receive a defective asset from Blank. He had it all along and he bargained to keep it. He’s got no actual rationale for applying the “mutual mistake” doctrine in his case. He can’t rely on the usual fairness argument, that the person with the best information ought to take the loss.

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