There Are No “Do Over’s” of Divorce Settlements to Recover Madoff Losses

Don’t you just love it when you are right?

Three years ago, I wrote about the lawyer who was trying to re-open his divorce settlement to recover his Madoff losses.  In consideration of the wife retaining the marital residence and other assets, the lawyer had retained his “investment” in Madoff funds. Of course, after the divorce, the Madoff investment became worthless.  The Husband wanted to  reopen the divorce settlement.

At the time, I wrote:

Had the account value gone up, it is doubtful that husband would have shared the profits with his ex-wife. Alternatively, had the wife poorly invested the cash she received from the husband, she would have no claim against the ex-husband for her loss. And what about all the people who bargained for the marital home, which is now worth substantially less than it was one year ago-should they look to have their former spouses share in the loss?

There is a practical reason why the husband cannot win this case-if the mere fact that some former marital asset lost value could subject a settlement agreement to attack, there would be no finality to divorce. Every agreement would be at risk for a post divorce attack. In order for there to be finality, in absence of fraud, duress or coercion etc., agreements must be enforced.

The case wound its way up to the New York Court of Appeals which ruled that the agreement could not be reopened.   In Simkin v Blank, New York’s highest court stated in language eerily similar to my prediction:

This 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. Viewed from a different perspective, had the Madoff account or other asset retained by husband substantially increased in worth after the divorce, should wife be able to claim entitlement to a portion of the enhanced value? The answer is obviously no.

The Husband had argued that the agreement should be set aside because the parties made a mutual mistake about the existence of the Madoff account.  The Court rejected that theory because there was an actual Madoff account which the Husband could have cashed out of any time prior to the collapse of the Ponzi scheme.

Had this settlement been reopened, every agreement, not just divorce agreements, could be subject to attack with the benefit of hindsight.  At least now, a settlement agreement has some finality.

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