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Court in High-Asset Divorce OKs Do-Over of Madoff-Asset Division

The ramifications of the Bernard Madoff Ponzi scheme are rippling through all parts of the legal system, including divorce and family law, as a recent high-asset divorce case on appeal in New York demonstrates. In this case, a couple who divorced in 2006 divided their assets through a divorce settlement agreement. Later, they found out that their largest marital asset, a Madoff investment account, was not worth the $5.6 million they believed at the time of the divorce. It was worth nothing.

At the time of Madoff's arrest in 2008, it was estimated that Bernard L. Madoff Investment Securities LLC claimed $65 billion in investments that were actually nonexistent.

As part of the 2006 agreement, the husband had retained ownership the Madoff account but paid part of its value -- $2.7 million -- to the wife. When Madoff's fraud was discovered, the husband realized that the $2.7 million he paid to his ex-wife actually represented a much larger portion of their marital assets than they had agreed she would receive.

He asked a court to overturn the 2006 agreement and return some of that money to him. The court refused, he appealed, and the appellate court agreed to revise the agreement to reflect the true value of the Madoff investment -- $0.

When Will Family Courts Agree to Change a Past Divorce Settlement Agreement?

Although this case takes place in New York, many of the same issues would apply to Georgians who invested in Madoff's Ponzi scheme or were otherwise defrauded. The law in both New York and Georgia strongly favors considering divorce settlement agreements as final. Even when major mistakes are discovered after a divorce is final, courts generally won't go back and revise them.

In high-asset divorce cases, it is common to have an expert determine the value of marital assets, such as investments, so they can be divided properly. In cases where a couple finds a mistake in that valuation after their divorce is final, courts generally have not agreed to revise the division of assets.

In this case, the husband argued that the Madoff account hadn't been mis-valued. Instead, he contended, the mistake was more fundamental. When negotiating their divorce settlement agreement, they had both assumed the account was worth $5.4 million, but it was in fact worth nothing. Therefore, he contended, they should revise the agreement to reflect the true facts.

The New York appellate court agreed that this case was different from a case in which an asset's value had been inaccurately valued. Instead, the court decided, the couple had made a mutual mistake in believing that the account existed at all.

Because the husband paid $2.7 million to his wife from an essentially imaginary account, the court found, she would be "unjustly enriched" if she kept the money.

The fact that the appellate court agreed with the husband is somewhat controversial. In fact, the two dissenting judges said that "[t]he conclusion the majority reaches, not only fails to follow precedent, but is truly 'divorced' from reality."

The wife's attorney calls the appellate court's ruling "completely erroneous" and has vowed to appeal to New York's highest court.

Source: Bloomberg, "Madoff Investor Can Sue Ex Over $2.7 Million Divorce Accord," Karen Freifeld, January 4, 2011

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