Two decisions rendered by the New York Court of Appeals since mid-2011 have reinforced a strong public policy in New York: “a deal is a deal.” In Commodity Futures Trading Commission v. Walsh, 17 N.Y.3d 162 (2011), andSimkin v. Blank, 19 N.Y.3d 46 (2012), the gravity of the financial catastrophes which unfolded after the parties’ divorce settlements failed to persuade the court to reform the settlement agreements because of a strong public policy in favor of the finality of marital settlement agreements. Even when facts (or sympathies) may exist which could support an argument for a different outcome, the message being delivered by the court in these cases appears to be that so long as a spouse entered into an agreement in good faith and with clean hands, giving fair consideration, he or she can rely on the agreement being upheld.
The husband and wife in Walsh entered into a settlement agreement in November 2006, after 25 years of marriage. The agreement provided, among other things, that the husband would pay the wife a distributive award of $12.5 million, paid out biannually through 2020. The wife waived any further claim for a distributive award or an award of equitable distribution with respect to any property acquired by the husband. Two years after the divorce, the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) charged Stephen Walsh with violating the anti-fraud provisions of the Commodity Exchange Act and the Securities Exchange Act, alleging that he and his business partner misappropriated $550 million, between 1996 and 2009, from funds they managed for institutional investors.
The CFTC and SEC targeted only the husband for violations of the acts; there was no indication that the wife was aware of the husband’s alleged fraud. However, the CFTC and SEC named the wife as a relief defendant, arguing that she lacked a legitimate claim to the assets she had received pursuant to the settlement agreement, and sought disgorgement of those assets.
The U.S. Court of Appeals for the Second Circuit reserved judgment on the request and certified two questions to the New York Court of Appeals, as the agencies’ request implicated issues of New York law. The first question was whether marital property, within the meaning of Domestic Relations Law (DRL) §236, includes the proceeds of fraud. The second question, which flowed directly from the first, was whether a spouse pays “fair consideration” under New York Debtor and Creditor Law (DCL) §272 when she relinquishes, in good faith, a claim to the proceeds of fraud. The court recognized that there were “significant policy considerations” in this case because the answers to these questions involved the interplay between New York’s Domestic Relations Law and its Debtor and Creditor Law.
Can marital property include proceeds of fraud? The CFTC and SEC asserted that the stolen goods received by the wife pursuant to the settlement agreement should not be considered part of the marital estate, and could therefore not be retained or transferred through equitable distribution. The court rejected that argument, noting that case law demands that the scope of marital property—defined as “all property acquired by either spouse during the marriage”—must be construed broadly. As a result, the court concluded that the proceeds of fraud can constitute marital property under DRL §236.
The agencies further argued that public policy favors the return of stolen goods to their rightful owner, insisting that the original owner has an absolute right to such goods. The court admitted that this argument had “appeal”; however, it nevertheless concluded that stolen goods cannot be followed into the hands of one who has received it in a bona fide transaction. Judge Victoria Graffeo expounded that “at its core, [the court's ruling] favoring innocent transferees of stolen funds over defrauded owners [was] rooted in New York’s concern for finality in business transactions.” The court held that:
[s]imilar concerns are relevant in the matrimonial realm. Ex-spouses have a reasonable expectation that, once their marriage has been dissolved and their property divided, they will be free to move on with their lives. To hold that the proceeds of fraud acquired by one spouse unbeknownst to the other cannot be subject to equitable distribution or conveyed through a settlement agreement as marital property would undermine one of the fundamental policies underlying the equitable distribution process, namely finality.
17 N.Y.3d (emphasis added).
Consequently, to avoid rendering the process of equitably distributing marital assets either after trial or by agreement “unworkable,” the court held that “monies obtained by fraud cannot be followed by the original owner into the hands of an innocent former spouse who now holds them (or assets derived from them) as a result of a divorce proceeding where that spouse in good faith and without knowledge of the fraud gave fair consideration for the transferred property.” 17 N.Y.3d at 174.
Does a spouse pay “fair consideration” when she relinquishes in good faith a claim to the proceeds of the fraud? The court then turned to the question of whether there could be “fair consideration” given by a spouse for waiving a right to share in the proceeds of the other spouse’s fraud. Using the plain language of the Debtor and Creditor Law as its determining factor, the court decided that the answer to this question turned on the definition of “fair consideration” and, more specifically, whether the spouse relinquished rights to untainted assets in the marital estate.
In analyzing the issue of “fair consideration,” the court emphasized that New York recognizes many forms of consideration, including intangible and nonmonetary forms; and further, that the law presumes that transfers made pursuant to valid separation agreements incorporated into judgments of divorce are made in good faith. Examples of such nonmonetary consideration cited by the court included the waiver of a right to spousal maintenance, the waiver of inheritance rights and, possibly, even concessions with respect to child custody or visitation.
In light of the “myriad types of consideration that arise in the unique context of marital dissolution” (17 N.Y.3d at 175), the court reformulated the second question as follows: Is a determination that a spouse paid fair consideration precluded where part or all of the marital estate consists of fraud? The court’s answer was no, and held that in the totality of the circumstances, the wife had, indeed, given fair consideration for the assets received pursuant to the agreement.
‘Simkin v. Blank’
The Simkin court had a different focus than the court in Walsh, as the agreement in Simkin was before the court due not to the criminal acts of one of the parties to the agreement, but of an individual completely unrelated to the action—Bernard Madoff, who conducted the most colossal Ponzi scheme in history. The driving force behind the husband’s post-judgment application to reform the agreement in Simkin was the loss of millions of dollars of value to the Madoff investment account retained by the husband pursuant to the parties’ settlement agreement.
The parties in Simkin executed a settlement agreement in June 2006 which provided for a comprehensive division of marital property. Pursuant to the agreement, the wife was to receive a payment of $6.25 million from the husband, the parties’ Manhattan apartment, an automobile, her retirement accounts and any financial accounts in her name; for his part, the husband was to receive the parties’ Scarsdale residence, and was to retain title to three automobiles, his retirement accounts, and the financial accounts in his name. Nowhere in the agreement was there any representation that the parties intended an equal (or any other proportional) distribution of the marital estate.
At the time the parties executed the agreement, one of the husband’s brokerage accounts (not specified by name in the agreement) was maintained by Bernard Madoff Investment Securities. On Sept. 1, 2004 (the agreed-upon cut-off date), the Madoff account was valued at $5.4 million. After the divorce, the now ex-husband continued to invest in the Madoff account (and used funds from that account toward the satisfaction of his obligations to the wife under the agreement) until the knowledge of Madoff’s fraudulent actions became public in December 2008.
The ex-husband commenced this action in New York County Supreme Court in February 2009 alleging that the settlement agreement was intended to accomplish an approximately equal division of the marital assets, and that this intention was frustrated by the alleged “mutual mistake” of a joint belief that the Madoff account was a legitimate investment account. The husband argued that the court should alter the settlement agreement to reflect an equal division of the marital assets by taking into account the substantially diminished value of the Madoff account and adjusting the asset split accordingly. The wife moved to dismiss the husband’s complaint, and the Supreme Court granted her motion. The Appellate Division, First Department reversed and reinstated the action, granting the wife leave to appeal to the Court of Appeals.
The Court of Appeals acknowledged that a marital agreement may be subject to rescission or reformation based on mutual mistake. However, the mistake must exist at the time the contract was entered into, must be substantial, and must be such that “the agreement as expressed, in some material respect, does not represent the meeting of the minds of the parties.”
Ultimately, the court held that the circumstances of the case—including the two years of negotiation leading up to the execution of the agreement, and the fact that there was no express statement of intention to divide the parties’ assets on an equal basis—precluded a finding that this was one of those “exceptional situations” which would warrant “reformation or rescission of a divorce settlement after all marital assets have been distributed.” 19 N.Y.3d at 54.
The court further expressly noted that as of the execution of the agreement—the time at which the alleged “mutual mistake” must exist—both parties were under the impression that the Madoff account not only existed, but had a value of $5.4 million; that subsequent events would demonstrate that belief to be untrue does not retroactively create “mutual mistake” sufficient to ignore the well-established principle that “[m]arital agreements are judicially favored and are not to be easily set aside.” 19 N.Y.3d at 52.
Sympathy but no Remedy
In Walsh, the court noted that “we are not unsympathetic to the interests of parties who were fraudulently deprived of their investments and who, understandably, seek the return of a portion of their stolen monies.” However, the Walsh court ultimately concluded that this sympathy must be outweighed by public policy concerns, and that “an innocent spouse who received possession of tainted property in good faith and gave fair consideration for it should prevail over the claims of the original owner or owners consistent with this State’s strong public policy of ensuring finality in divorce proceedings.” 17 N.Y.3d at 177. The sanctity of the agreement was to be preserved.
Similarly, the court in Simkin noted that “[t]his situation, however sympathetic, is more akin to a marital asset that unexpectedly loses value after dissolution of a marriage; the asset had value at the time of the settlement but the purported value did not remain consistent…. Consequently, we find this case analogous to the Appellate Division precedents denying a spouse’s attempt to reopen a settlement agreement based on post-divorce changes in asset valuation.” 19 N.Y.3d at 55.
As the court aptly opined, had the Madoff account increased in value, rather than being effectively wiped out, the husband would have wished to retain the benefit of his bargain by retaining the entirety of that upside; so should the wife get the benefit of her bargain by being protected from the downside which actually came to pass. Again, the strong public policy favoring finality in divorce proceedings prevails over what may be understandable sympathy for an “out-of-pocket” individual. The clear message from the Court of Appeals, however, is that sympathy cannot trump long-standing public policy considerations such as the presumption that, in matrimonial actions, “a deal is a deal,” not to be easily undone.
Alton L. Abramowitz is a partner at Mayerson Abramowitz & Kahn and is national president-elect of the American Academy of Matrimonial Lawyers.