Boundary lines: post Madoff

A post judgment action presently pending in Manhattan Supreme Court may well be this millennium’s “O’Brien”.1 In O’Brien, the definition of marital property was broadly interpreted to include a professional degree earned during the marriage and the enhanced earnings resulting therefrom subject to equitable distribution. New York stands alone among the 50 states in its interpretation. Judicial good intention to right marital wrong opened “Pandora’s Box,” unleashing a plethora of vexing cases for years to come. Like O’Brien, the facts of the pending matter seemingly call the Court to right the wrong perpetrated upon the plaintiff, one of many misguided investors who suffered losses in the millions of dollars, not as a result of market forces, but as a result of fraud. As a general rule, the boundary line for distributing marital assets is the entry of the judgment of divorce with no post judgment modification of equitable distribution including distributive awards, either as a result of an agreement or a court order. DRL§236B (9)(b) which governs modification of any prior order or judgment in a matrimonial action, only addresses modification of child support and maintenance; equitable distribution is noticeably absent. With an eye to finality in matrimonial actions, the view from the bench is that these one time property divisions are not subject to modification.

Cases based upon modification for mutual mistake often are in the nature of contract interpretation where the terms of the agreement inaccurately reflect the mutual intent of the parties. Post judgment changes in economic values, typically, do not serve as the basis for modification. The First Department in the Greenwald case, rejected a husband’s argument to modify an equitable distribution award based upon a post judgment decline in asset value of his business. The Appellate division confirmed the trial court in part relying on DRL§236B(4)(b) that restricts the Court’s timeline in valuing assets for distribution, the latest date for valuation being the date of trial.2

Notwithstanding precedent, the post judgment action pending in Manhattan Supreme Court seeks to revisit equitable distribution based upon a mistake of fact a la Madoff.3 The parties’ divorced in July 2006 after a 30-year marriage. By Stipulation of Settlement, the husband retained the Madoff investments and the wife received $ 6.6 million dollars in equitable distribution, $2.7 million dollars of which represented her half of the $5.4 million dollars of the parties’ investments with Madoff. Upon the recent discovery of Madoff’s Ponzi scheme by which he duped his investors, ex-husband argues that the investment portfolio he received in equitable distribution years prior, was based upon a mistake of fact as to its value, unjustly enriching his former wife. Generally to succeed in rescinding a contract based upon mutual mistake of fact, the party seeking recession bears a high standard of proof, as stated by the Court of Appeals in the Gould case.4

“The mistake must exist at the time the contract is entered into and must be substantial. The idea is the agreement as expressed, in some material respect, does not warrant the ‘meeting of the minds’ of the parties.”

Further the Court noted, “[plaintiff may be entitled to have a court of equity rescind a contract even where the mistake is unilateral, not mutual, if failing to do so would result in unjust enrichment of defendant]; citing Williston, Contracts.5

Recently, the Second Department, in “Hannigan” reiterated the standard to vacate a stipulation of settlement on a ground of mutual mistake: “A party must demonstrate that the mistake existed at the time the stipulation was entered into and that it was so substantial that the stipulation failed to represent a true meeting of the parties’ minds.” The ex-husband stuck with Madoff assets, seemingly has cause for rescission; but is he so different from other matrimonial litigants who have suffered unprecedented post judgment losses in their real estate and equity portfolios during the bear market of the past year?

Arguably, it was a third party’s fraud perpetrated upon the unwary investor that precipitated the subject loss in value and not the other party (ex-wife); the effect of which had a substantial impact on the value of the marital asset. A division of marital assets based upon a fraud begs for equitable relief. But will the boundary line extend to others who suffer economic loss post judgment? If federal investigations presently under way uncover negligent conduct on the part of the SEC or Fannie Mae and Freddie Mac, which also resulted in massive economic losses of value to respective investment portfolios and real estate assets, do not those matrimonial litigants who suffered such losses similarly have a basis for post judgment modification of equitable distribution of those marital assets? Will the conscience of the Court be so moved to redraw the boundary line on equitable distribution?

An indication of how ex-husband will fair on his pending claim of mistake may be gleaned from a recent decision in 2008 by the First Department in Wechsler v. Wechsler, (2008 WL 463 582, Oct., 2008), a split decision, citing “the virtue of simplicity” in rejecting post judgment tax considerations in the valuation of a marital asset for equitable distribution. Relying on an estate tax decision of the 5th Circuit in Jecke v. Commissioner (2005), the husband argued, the marital asset, a $71 million dollar portfolio, first be tax impacted for capital gains, dollar for dollar, thereby reducing its value by 42%, and then divided between the parties. The wife argued that since the portfolio was not being liquidated as of the date of trial (distribution), the dollar for dollar reduction overstated the tax burden at that time. The First Department chose to err on the side of finality and tax impacted the asset as of the date of trial refusing to look into the post judgment future to ascertain value of the marital asset. A decision consistent with precedent in rejecting modification for post judgment change in economic value. Are new boundary lines post Madoff in the matrimonial future? It’s anyone’s bet.

Nancy E. Gianakos is a matrimonial and family law practitioner, of counsel, to Albanese & Albanese, Garden,City, NY; admitted in CT (1981),NY (1993) and NJ(1992) and is a member of the NYSBA, Nassau County Matrimonial and Familly Law Committees,the American Family Law Inns of Court, the New York Association of Collaborative Professionals and serves as a contributing matrimonial focus editor for the Nassau Lawyer. For more information and articles published by Ms.Gianakos go to www.albaneselegal.com

1. O’Brien v. O’Brien, 66N.Y.2d 576, 489 N.E.2d 712 (Ct of Appeals, 1985)
2. Greenwald v. Greenwald, 164 A.D.2d 706, 565N.Y.S.2d 494 (1st Dept, 1991)
3. Newsday, February 5, 2009-“Divorce sues ex in Bid to Share Madoff Losses”; AP(New York) “Man who lost Millions” by Samuel Maull
4. Gould v. Board of Education of the Sewanhaka Central High School District et al., 81 N.Y.2d 446, 599 N.Y.S2d 787 (Ct of Appeals, 1993)
5. Sections 1541, 1542, 1557, 1559, 1578 (3d ed, 1970)