Can a Divorce Settlement be Invalidated?

This week lawyers across the board have been up in arms over the case of a divorced man who is a victim of Bernie Madoff’s Ponzi scheme.  He is asking the court to re-open his divorce settlement.  The contention is based on the legal issue that both husband and wife made the mutual mistake of believing that their Madoff investment account existed when in fact it did not.  The effect of reopening this case would set a precedent that would counter the finality of divorce settlements across the board.

According to Peter Lattman, “After 33 years of marriage, Steven Simkin and Laura Blank divorced in 2006. They agreed to split their considerable wealth equally. She got the apartment on the Upper East Side; he got the house in Scarsdale, N.Y.

Afterward, they spoke infrequently, mostly concerning their two grown sons.

More than two years later, Ms. Blank received a voicemail message that stunned her: Mr. Simkin wanted to revise their settlement. She refused, and he sued.

While divorce agreements are generally ironclad and rarely rescinded, this challenge has now reached New York’s highest court. Deeply divided appellate justices requested what is considered an unusual review of settled law involving contracts.

What made Mr. Simkin’s call for a do-over even remotely possible has its roots in Bernard L. Madoff’s Ponzi scheme.

When the couple split their assets evenly, the largest chunk of money was invested with Mr. Madoff. Mr. Simkin kept much of his funds in the Madoff account, which was held in his name. Ms. Blank, who said she had no interest in investing with Mr. Madoff, received her settlement proceeds in cash.

Shortly after Mr. Madoff admitted wrongdoing in December 2008, Mr. Simkin, a lawyer at one of the country’s most powerful law firms, Paul, Weiss, Rifkind, Wharton & Garrison, filed court papers to drastically alter the terms of his divorce settlement. Ms. Blank, he argued in the lawsuit, should be required to turn over millions of dollars that she had received in their settlement to make up for the substantial losses he had sustained in the fraud.

The Simkin-Blank dispute has riveted the state’s matrimonial bar, and splintered opinions among the six judges who have already weighed in on the case.

Some lawyers are predicting that if the Court of Appeals allows Mr. Simkin to try to revise the agreement, the ruling could affect not only divorce settlements but also other contracts.

“The decision could open the floodgates for people who want to challenge agreements after they go sour,” said Peter Bienstock, a divorce lawyer not involved in the case. “Deals are done every single day based on assumptions about what things are worth. If the court allows this lawsuit to go forward, how can we be certain that deals will hold up?”

Some lawyers also say that if judges allow this agreement to be rescinded, it could lead to more Madoff-related suits by destabilizing all types of contracts struck with the fraud victims. The case, which is expected to be decided later this year, has spawned at least one copycat action.

In January, a Madoff victim in Middlesex County, Mass., filed a similar complaint against his ex-wife to revise their separation agreement. A family court judge dismissed the lawsuit earlier this month, and the plaintiff’s lawyer is now weighing an appeal.

A ruling in the Blank-Simkin case would only have a direct effect on New York’s laws, but a decision by the influential court could influence how judges interpret laws in other states.

Mr. Simkin’s suit rests on the doctrine of “mutual mistake,” a well-established principle that allows for the cancellation of contracts, including divorce agreements, when both parties are innocently mistaken about an essential term. In a famous example, if a violinist sells another violinist what they believe to be a Stradivarius, and it turns out to be a cheap knockoff, they can void the contract.

In this case, Mr. Simkin, chairman of the real estate department at Paul Weiss, and Ms. Blank, a labor lawyer for the City University of New York, believed at the time of their divorce that $5.4 million of their $13.2 million in assets was in a Madoff account. To divvy up things, Mr. Simkin withdrew some money from his Madoff account and put it toward a $6.6 million cash payment to Ms. Blank. He continued to invest with Mr. Madoff.

But once the Madoff empire collapsed, Mr. Simkin began arguing that he and Ms. Blank were mistaken about the existence of the account. “There was in fact no account and no securities or other assets,” wrote Mr. Simkin’s lawyers in a recent filing. “There was only a Ponzi scheme of unprecedented size and duration.”

Richard Emery, a lawyer for Ms. Blank, counters that Mr. Simkin did have an account with Mr. Madoff. Any mistake, he contends, involved the account’s future value — not its existence. Under the law, an error about an account’s future value would not justify rewriting the agreement.

“Just like other Madoff investors, he was able to redeem his money until the scheme collapsed precisely because he had an account there,” Mr. Emery said. “To argue that he didn’t have a Madoff account is nothing more than a semantic trick.”

Last year, a trial judge dismissed Mr. Simkin’s suit. But in January, a sharply divided New York appellate court, in a 3-to-2 decision, ruled that Mr. Simkin could sue to revise the deal because of the fraud, citing their “mutual mistake” about the existence of the Madoff account.

In her dissent, Justice Karla Moskowitz sharply criticized the majority opinion, writing that it “undermines decades of established precedent favoring finality in divorce cases.”

She said the ruling could bring “chaos for not only for the court system but for litigants as well, who deserve finality and to move on.” Ms. Blank, the judge wrote, cannot be responsible for Mr. Simkin’s decision to invest with Mr. Madoff for two and a half years after their divorce.

“Just as she would not have benefited from any increase in the value of the account, she should not have to bear the burden of its loss,” she wrote. “Steven received exactly what he bargained for. He alone took on the risk that he might not be able to recoup his investment.”

Mr. Simkin’s lawyers — his colleagues at Paul Weiss — described their partner in court papers as “gravely damaged” and suffering “extreme hardship” as a result of the Madoff fraud.

The annual profits per partner at Paul Weiss are about $3 million, according to The American Lawyer magazine. Last October, Mr. Simkin sold his Scarsdale home for $5.7 million and bought another in nearby Mamaroneck for $4.1 million, according to state real estate records. Paul Weiss, a law firm renowned for its litigation department, is representing Mr. Simkin free of charge.

Mr. Simkin and his lawyers declined to comment.

The legal community is divided on the case. “On one hand, the contract law principle of mutual mistake makes a strong case to cancel this divorce agreement,” said Lawrence A. Cunningham, a law professor at George Washington University who has written about the dispute. “On the other, judges are reluctant to rescind these contracts because there is a strong interest in maintaining the finality of divorce. It’s a close call.”

Ms. Blank, who also declined to comment, plans to fight her former husband’s lawsuit if the court does not dismiss the case, said Mr. Emery, her lawyer.

“The finality of divorce is important for financial reasons and legal reasons, but it’s also important for emotional reasons,” he said. “Five years ago Laura thought she had moved on with her life, but it’s now been put on hold.”