Simkin v. Blank - 2012 NY Slip Op 2413, 19 N.Y.3d 46, 945 N.Y.S.2d 222, 968 N.E.2d 459

Rule:

The mutual mistake must exist at the time the contract is entered into and must be substantial. Put differently, the mistake must be so material that it goes to the foundation of the agreement. The premise underlying the doctrine of mutual mistake is that the agreement as expressed, in some material respect, does not represent the meeting of the minds of the parties. 

Facts:

Plaintiff Steven Simkin and defendant Laura Blank married in 1973 and have two children. Husband was a partner at a New York law firm and wife, also an attorney, was employed by a university. After almost 30 years of marriage, the parties separated in 2002 and stipulated in 2004 that the cut-off date for determining the value of marital assets would be September 1, 2004. The couple, represented by counsel, spent two years negotiating a detailed 22-page settlement agreement, executed in June 2006. In August 2006, the settlement agreement was incorporated, but not merged, into the parties' final judgment of divorce. The settlement agreement set forth a comprehensive division of marital property. The agreement also contained a number of mutual releases between the parties. Each party waived any interest in the other's law license and released or discharged any debts or further claims against the other. Although the agreement acknowledged that the property division was "fair and reasonable," it did not state that the parties intended an equal distribution or other designated percentage division of the marital estate. The only provision that explicitly contemplated an equal division was the reference to equalizing the values of the parties' retirement accounts. At the time the parties entered into the settlement, one of Simkin’s unspecified brokerage accounts was maintained by Bernard L. Madoff Investment Securities (the Madoff account). According to Simkin, the parties believed the account was valued at $5.4 million as of September 1, 2004, the valuation date for marital assets. Simkin withdrew funds from this account to pay a portion of his distributive payment owed wife in 2006, and continued to invest in the account subsequent to the divorce. In December 2008, Bernard Madoff's colossal Ponzi scheme was publicly exposed and Madoff later pleaded guilty to federal securities fraud and related offenses. As a result of the disclosure of Madoff's fraud, in February 2009--about 2 1/2 years after the divorce was finalized—Simkin commenced this action against Blank alleging two causes of action: (1) reformation of the settlement agreement predicated on a mutual mistake and (2) unjust enrichment. He alleged that the parties' intention to equally divide the marital estate was frustrated because both parties operated under the "mistake" or misconception as to the existence of a legitimate investment account with Madoff which, in fact, was revealed to be part of a fraudulent Ponzi scheme. Blank filed a motion to dismiss on failure to state a cause of action, which was granted. It was however reversed and the action was reinstated.

Issue:

Did Simkin provide a cause of action based on mutual mistake?

Answer:

No.

Conclusion:

As an initial matter, Simkin’s claim that the alleged mutual mistake undermined the foundation of the settlement agreement, a precondition to relief under precedents, was belied by the terms of the agreement itself. The settlement agreement here, on its face, did not mention the Madoff account, much less evince an intent to divide the account in equal or other proportionate shares. To the contrary, the agreement provided that the $6,250,000 payment to Blank was "in satisfaction of [her] support and marital property rights," along with her release of various claims and inheritance rights. Despite the fact that the agreement permitted Simkin to retain title to his "bank, brokerage and similar financial accounts" and enumerated two such accounts, his alleged $5.4 million Madoff investment account was neither identified nor valued. Given the extensive and carefully negotiated nature of the settlement agreement, this presented one of those "exceptional situations" warranting reformation or rescission of a divorce settlement after all marital assets have been distributed. Even putting the language of the agreement aside, the core allegation underpinning husband's mutual mistake claim--that the Madoff account was "nonexistent" when the parties executed their settlement agreement in June 2006--did not amount to a "material" mistake of fact as required by case law. The premise of Simkin’s argument was that the parties mistakenly believed that they had an investment account with Bernard Madoff when, in fact, no account ever existed. In Simkin’s view, this case was no different from one in which parties are under a misimpression that they own a piece of real or personal property but later discover that they never obtained rightful ownership, such that a distribution would not have been possible at the time of the agreement. But that analogy was not apt here. Simkin does not dispute that, until the Ponzi scheme began to unravel in late 2008--more than two years after the property division was completed--it would have been possible for him to redeem all or part of the investment. In fact, the amended complaint contained an admission that Simkin was able to withdraw funds (the amount is undisclosed) from the account in 2006 to partially pay his distributive payment to Blank. Given that the mutual mistake must have existed at the time the agreement was executed in 2006, the fact that husband could no longer withdraw funds years later was not determinative. This situation, however sympathetic, was 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 was obviously no.