Bernard Madoff, Marital Agreements and Mutual Mistake

Disclosure in matrimonial actions is a matter of public policy. Richter v. Richter, 131 AD2d 453 (2nd Dept. 1987). Parties are required to present, inter alia, documents indicative of their financial holdings, such as institutionally generated portfolio statements whose accuracy and reliability are typically never challenged.

Breaking Evidentiary Ground

In 1991, the First Department, in Elkaim v. Elkaim, 176 AD2d 116 (1st Dept., 1991), appeal dismissed, 78 NY2d 1072 (1991), broke critical evidentiary ground by allowing courts to take judicial notice of institutionally generated financial statements as an exception to the hearsay rule. The Appellate Division stated that their “authenticity cannot be seriously challenged“ and appear “patently trustworthy as to be self-authenticating“ because their “format conform[s] to the type of statements with which banks customarily supply their customers on a monthly basis for the purpose of advising them of deposits, withdrawals and balances.“

The victims of Bernard Madoff received such institutionally formatted statements, albeit criminally fraudulent, on a monthly basis for approximately two decades. Now, Simkin v. Blank, 12/24/2009 NYLJ, 1, (col. 3), a jarring Supreme Court decision, poses devastating consequences for divorcing couples who, unaware of Mr. Madoff's criminal enterprise, relied upon the accuracy of fraudulently generated portfolio statements.

The 'Simkin' Complaint

Nearly three years after dividing their marital property in a settlement agreement, the plaintiff husband learned that he and his wife had suffered severe losses as unwitting victims of Bernard Madoff's fraud. Under the terms of their agreement, plaintiff retained, inter alia, sole ownership of all bank, brokerage and financial accounts in his name. Defendant kept the bank and investment accounts in her name. In addition to this, plaintiff gave her $6,250,000, which included half of what was believed to have been in the Madoff account.

After the news broke that Madoff was running a Ponzi scheme and his investors' portfolios were largely empty, plaintiff sued to reform the agreement with his former wife, contending that she should shoulder “her share“ of the harm he suffered. The complaint laid out two causes of action: 1) Mutual mistake ' that, unbeknownst to them at the time of their agreement in 2006, plaintiff's investment with Bernard L. Madoff Investment Securities did not exist; and 2) Restitution for unjust enrichment ' because defendant unfairly profited from the mutual mistake. He alleged that the parties' intent to distribute the assets equally was thwarted by their mistaken belief that their investment with Madoff was worth $5.4 million, while their account was, in fact, non-existent because Madoff had never engaged in any stock trades ' the account held no assets and was “a fiction.“

Defendant moved to dismiss the complaint based on documentary defense, i.e., the numerous releases, and plaintiff's failure to set forth a cause of action for mutual mistake. The Supreme Court dismissed the complaint.

Mutual Mistake

Fundamental to an analysis of the allegation of mutual mistake in Simkin is that interspousal agreements are contracts subject to principles of contract construction and interpretation. Meccico v. Meccico, 76 N.Y.2d 822 (1990). Releases, as contracts whose interpretation is governed by principles of contract law (Metz v. Metz, 175 AD2d 938 (3rd Dept.1991); Goode v. Drew Bldg. Supply Inc., 266 AD2d 925 (4th Dept., 1999); Greenebaum v. Barthman, 210 AD2d 160 (1st Dept. 1994)), may be set aside for mutual mistake. Mangini v. McClurg, 24 N.Y.2d 556 (1969). Mutual mistake furnishes the basis for reformation and rescission when parties have reached an oral agreement and, unknown to either, the signed writing does not express that agreement. Chimart Associates v. Paul, 66 NY2d 570 (1986); Book v. Book 58 AD3d 781 (2nd Dept., 2009). The term “mistake“ may be used to cover all kinds of mental error, however induced. Rosenblum v. Manufacturers Trust Co., 270 NY 79 (1936).

Reformation requires that the mutual mistake was material, i.e., it must involve a fundamental assumption of the contract; a party need not establish that the parties entered into the contract because of the mutual mistake, only that the material mistake vitally affects a fact or facts on the basis of which the parties contracted. True v. True 63 AD3d 1145 (2nd Dept. 2009).The idea is that the agreement as expressed, in some material respect, does not represent the “meeting of the minds“ of the parties (Carney v. Carozza, 16 AD3d 867 (3rd Dept. 2005); Brauer v. Central Trust Co., 77 AD2d 239 (4th Dept., 1980), lv. to appeal denied, 52 NY2d 703 (1981)), and neither side should profit from a mistake jointly perceived and acted upon. D'Agostino v. Harding, 217 AD2d 835 (3rd Dept. 1995). An objective test is used to determine whether there has been a mutual mistake. Ryan v. Boucher, 144 AD2d 144 (3rd Dept. 1988).

In Salomon v. North British & Mercantile Ins. Co. of New York, 215 NY 214 (1915), the Court of Appeals stated: “The mistake or each mistake must be shared in by both parties. The courts cannot compel ' any party, to enter into or be bound by a contract which it never made.“

The Facts in Simkin

Turning to the facts in Simkin, it is beyond dispute that several million dollars is objectively material and that neither party was aware of Mr. Madoff's scheme in 2006, at the time of the agreement. Despite this, Supreme Court came to the following conclusion, which strains the bounds of law and logic: “In 2006, at the time of their agreement, each of the parties received the benefit of his and her bargain.“ The court missed the essence of mutual mistake as it applied to this case, for while in 2006 the parties believed that they had come to a fair bargain, mutual mistake of fact now reveals that Mr. Simkin did not receive what he had bargained for because he bought out his wife's purported interest in the fraudulent account.

Specific issues and contingencies are identified in specific merger clauses, not general merger clauses. Neither party had reason to question the legitimacy of Mr. Madoff's monthly account statements, thereby rendering it impossible to have contemplated “this“ contingency. Mr. Simkin, a prominent attorney, anticipated that his investments would be impacted solely by market trends. He would never have signed an agreement which exposed him to an investment scam contingency, hence the absence of such a specific merger clause. A mutual mistake and a negotiated specific contingency cannot coexist. The Supreme Court impermissibly fashioned a new contract by implying a specific merger clause into the agreement.

Furthermore, the wife had also accepted the Madoff statements as valid. Undoubtedly, had the situation been reversed, or had Madoff's investments been legitimate and the statements erroneously reflected a reduced value, she would have brought the action to vacate the agreement under mutual mistake.

Releases, Mutual Mistake

The court focused on “the multiple comprehensive mutual releases“ in the agreement, including that the agreement was “in full and complete settlement of all claims including equitable distribution of all marital property,“ and that “each party relinquished all claim to the property of the other.“

When acted upon by the courts in refusing to give full effect to a general release, the theory of mutual mistake is based on a determination that the minds of the parties failed to meet in agreement upon the essential elements of the instrument; in such cases, courts will say the release, though general in terms, was only intended to be a release of injuries known to the plaintiff at the time of settlement or execution. Viskovich v. Walsh-Fuller-Slattery, 16 AD2d 67 (1st Dept. 1962), aff'd, 13 NY2d 1100 (1963). The Supreme Court even acknowledged the Court of Appeals' precedent, set down in Da Silva v. Musso, 53 NY2d 543 (1981), that a stipulation may be modified or rescinded despite the releases it contains, where it is the product of a mutual mistake so material that it goes to the foundation of the agreement.

Mr. Simkin contended that the releases were limited in that the parties did not intend them to encompass the Madoff contingency. The Supreme Court stated that “this limitation was nowhere expressed in the agreement, which sets forth repeatedly that each of the parties waived any claim to or upon the property of the other.“ However, expression of “this limitation“ in the agreement is evidenced by the parties' conspicuous selection of general releases rather than specific merger clauses.

Elliott Scheinberg, a member of this newsletter's Board of Editors, is an appellate attorney whose practice is limited to matrimonial law. E-mail: [email protected]. This article first appeared in the New York Law Journal, an ALM sister publication of this newsletter.

Disclosure in matrimonial actions is a matter of public policy. Richter v. Richter , 131 AD2d 453 (2nd Dept. 1987). Parties are required to present, inter alia, documents indicative of their financial holdings, such as institutionally generated portfolio statements whose accuracy and reliability are typically never challenged.

Breaking Evidentiary Ground

In 1991, the First Department, in Elkaim v. Elkaim , 176 AD2d 116 (1st Dept., 1991), appeal dismissed, 78 NY2d 1072 (1991), broke critical evidentiary ground by allowing courts to take judicial notice of institutionally generated financial statements as an exception to the hearsay rule. The Appellate Division stated that their “authenticity cannot be seriously challenged“ and appear “patently trustworthy as to be self-authenticating“ because their “format conform[s] to the type of statements with which banks customarily supply their customers on a monthly basis for the purpose of advising them of deposits, withdrawals and balances.“

The victims of Bernard Madoff received such institutionally formatted statements, albeit criminally fraudulent, on a monthly basis for approximately two decades. Now, Simkin v. Blank, 12/24/2009 NYLJ, 1, (col. 3), a jarring Supreme Court decision, poses devastating consequences for divorcing couples who, unaware of Mr. Madoff's criminal enterprise, relied upon the accuracy of fraudulently generated portfolio statements.

The 'Simkin' Complaint

Nearly three years after dividing their marital property in a settlement agreement, the plaintiff husband learned that he and his wife had suffered severe losses as unwitting victims of Bernard Madoff's fraud. Under the terms of their agreement, plaintiff retained, inter alia, sole ownership of all bank, brokerage and financial accounts in his name. Defendant kept the bank and investment accounts in her name. In addition to this, plaintiff gave her $6,250,000, which included half of what was believed to have been in the Madoff account.

After the news broke that Madoff was running a Ponzi scheme and his investors' portfolios were largely empty, plaintiff sued to reform the agreement with his former wife, contending that she should shoulder “her share“ of the harm he suffered. The complaint laid out two causes of action: 1) Mutual mistake ' that, unbeknownst to them at the time of their agreement in 2006, plaintiff's investment with Bernard L. Madoff Investment Securities did not exist; and 2) Restitution for unjust enrichment ' because defendant unfairly profited from the mutual mistake. He alleged that the parties' intent to distribute the assets equally was thwarted by their mistaken belief that their investment with Madoff was worth $5.4 million, while their account was, in fact, non-existent because Madoff had never engaged in any stock trades ' the account held no assets and was “a fiction.“

Defendant moved to dismiss the complaint based on documentary defense, i.e., the numerous releases, and plaintiff's failure to set forth a cause of action for mutual mistake. The Supreme Court dismissed the complaint.

Mutual Mistake

Fundamental to an analysis of the allegation of mutual mistake in Simkin is that interspousal agreements are contracts subject to principles of contract construction and interpretation. Meccico v. Meccico , 76 N.Y.2d 822 (1990). Releases, as contracts whose interpretation is governed by principles of contract law ( Metz v. Metz , 175 AD2d 938 (3rd Dept.1991); Goode v. Drew Bldg. Supply Inc. , 266 AD2d 925 (4th Dept., 1999); Greenebaum v. Barthman , 210 AD2d 160 (1st Dept. 1994)), may be set aside for mutual mistake. Mangini v. McClurg , 24 N.Y.2d 556 (1969). Mutual mistake furnishes the basis for reformation and rescission when parties have reached an oral agreement and, unknown to either, the signed writing does not express that agreement. Chimart Associates v. Paul , 66 NY2d 570 (1986); Book v. Book 58 AD3d 781 (2nd Dept., 2009). The term “mistake“ may be used to cover all kinds of mental error, however induced. Rosenblum v. Manufacturers Trust Co. , 270 NY 79 (1936).

Reformation requires that the mutual mistake was material, i.e., it must involve a fundamental assumption of the contract; a party need not establish that the parties entered into the contract because of the mutual mistake, only that the material mistake vitally affects a fact or facts on the basis of which the parties contracted. True v. True 63 AD3d 1145 (2nd Dept. 2009).The idea is that the agreement as expressed, in some material respect, does not represent the “ meeting of the minds “ of the parties ( Carney v. Carozza , 16 AD3d 867 (3rd Dept. 2005); Brauer v. Central Trust Co. , 77 AD2d 239 (4th Dept., 1980), lv. to appeal denied, 52 NY2d 703 (1981)), and neither side should profit from a mistake jointly perceived and acted upon. D ' Agostino v. Harding , 217 AD2d 835 (3rd Dept. 1995). An objective test is used to determine whether there has been a mutual mistake. Ryan v. Boucher , 144 AD2d 144 (3rd Dept. 1988).

In Salomon v. North British & Mercantile Ins. Co. of New York , 215 NY 214 (1915), the Court of Appeals stated: “ The mistake or each mistake must be shared in by both parties. The courts cannot compel ' any party, to enter into or be bound by a contract which it never made.“

The Facts in Simkin

Turning to the facts in Simkin, it is beyond dispute that several million dollars is objectively material and that neither party was aware of Mr. Madoff's scheme in 2006, at the time of the agreement. Despite this, Supreme Court came to the following conclusion, which strains the bounds of law and logic: “In 2006, at the time of their agreement, each of the parties received the benefit of his and her bargain.“ The court missed the essence of mutual mistake as it applied to this case, for while in 2006 the parties believed that they had come to a fair bargain, mutual mistake of fact now reveals that Mr. Simkin did not receive what he had bargained for because he bought out his wife's purported interest in the fraudulent account.

Specific issues and contingencies are identified in specific merger clauses, not general merger clauses. Neither party had reason to question the legitimacy of Mr. Madoff's monthly account statements, thereby rendering it impossible to have contemplated “this“ contingency. Mr. Simkin, a prominent attorney, anticipated that his investments would be impacted solely by market trends. He would never have signed an agreement which exposed him to an investment scam contingency, hence the absence of such a specific merger clause. A mutual mistake and a negotiated specific contingency cannot coexist. The Supreme Court impermissibly fashioned a new contract by implying a specific merger clause into the agreement.

Furthermore, the wife had also accepted the Madoff statements as valid. Undoubtedly, had the situation been reversed, or had Madoff's investments been legitimate and the statements erroneously reflected a reduced value, she would have brought the action to vacate the agreement under mutual mistake.

Releases, Mutual Mistake

The court focused on “the multiple comprehensive mutual releases“ in the agreement, including that the agreement was “in full and complete settlement of all claims including equitable distribution of all marital property,“ and that “each party relinquished all claim to the property of the other.“

When acted upon by the courts in refusing to give full effect to a general release, the theory of mutual mistake is based on a determination that the minds of the parties failed to meet in agreement upon the essential elements of the instrument; in such cases, courts will say the release, though general in terms, was only intended to be a release of injuries known to the plaintiff at the time of settlement or execution. Viskovich v. Walsh-Fuller-Slattery , 16 AD2d 67 (1st Dept. 1962), aff ' d, 13 NY2d 1100 (1963). The Supreme Court even acknowledged the Court of Appeals ' precedent, set down in Da Silva v. Musso , 53 NY2d 543 (1981), that a stipulation may be modified or rescinded despite the releases it contains, where it is the product of a mutual mistake so material that it goes to the foundation of the agreement.

Mr. Simkin contended that the releases were limited in that the parties did not intend them to encompass the Madoff contingency. The Supreme Court stated that “this limitation was nowhere expressed in the agreement, which sets forth repeatedly that each of the parties waived any claim to or upon the property of the other.“ However, expression of “this limitation“ in the agreement is evidenced by the parties' conspicuous selection of general releases rather than specific merger clauses.

Elliott Scheinberg, a member of this newsletter's Board of Editors, is an appellate attorney whose practice is limited to matrimonial law. E-mail: [email protected]. This article first appeared in the New York Law Journal, an ALM sister publication of this newsletter.