Post-Settlement Modification Request Prompted by Madoff Scandal

There is a fair amount of anecdotal evidence that the difficult economy of the last few years has led to a rise in requests for post-settlement modifications in Orange County, elsewhere in California and nationwide. Last week the New York Times ran a modification story with a twist: it is linked to the Bernie Madoff scandal.

Bernard Madoff’s historically huge ponzi scheme has, of course, left an extraordinary number of high-profile victims in its wake, from Hollywood stars to local charities and the New York Mets. The sheer size and duration of his fraud has guaranteed that it will make its way back into the news again and again for many years to come.

According to the Times, the basics of the Madoff-prompted modification case are these: when Steven Simpkin and his wife Laura Blank divorced in 2006 “they agreed to split their considerable wealth equally.” In dividing up their assets, valuing cash versus real property, Simpkin kept, among other things, the couple’s account with Madoff (this may partly have been a matter of convenience as, the paper notes, it was held in his name). After Madoff’s fraud was exposed – and accounts held with him became worthless – in late 2008 Simpkin filed suit demanding that his ex-wife “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.” Needless to say, Blank sees the situation differently, and the Times reports that the case is attracting considerable attention nationwide. As the paper notes, the court ruling will only, strictly speaking, impact New York’s divorce laws, “but a decision by the influential (NY Court of Appeals) could influence how judges interpret laws in other states.

One might argue that Simpkin’s investment account dropping to zero is not Brand’s problem. Presumably if the family home she got in the settlement lost value when the real estate bubble burst she could not seek to get money back from him. But, as the paper notes, the issue is not necessarily that clear cut. The Madoff account was fraudulent from Day One, though neither spouse knew that at the time. With that in mind Simpkin is demanding a modification under a doctrine known as “mutual mistake.” The idea is that since both spouses were honestly mistaken when they valued the account the settlement should be retroactively rebalanced. For her part, Blank is arguing, in effect, that enough time elapsed between the settlement and the exposure of Madoff’s fraud that the doctrine should not apply, especially since her ex-husband continued to add to his Madoff account for many months after the settlement.

From the perspective of an Orange County divorce lawyer it is undeniable that this case is worth watching closely. Divorce law is, of course, governed by states and California is different from New York in a number of key respects (notably, by being a community property state). But the potential for an important precedent remains.

The New York Times: Madoff Victim Seeks a Divorce Do-Over