17 N.Y.3d 162 (2011)
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Proceeds of fraud can constitute marital property under New York Domestic Relations Law § 236, and an innocent spouse who receives such property in good faith and for fair consideration should prevail over the claims of the defrauded parties.
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Summary
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The case addresses whether assets derived from fraud can be considered marital property in a divorce proceeding and whether a spouse gives “fair consideration” under New York Debtor and Creditor Law when relinquishing a claim to such assets in a settlement agreement. The Court of Appeals held that the proceeds of fraud can be considered marital property and that the determination of whether “fair consideration” was paid requires examination of various factors beyond the marital property itself, including the relinquishment of other rights. The Court emphasized the importance of finality in divorce proceedings and protecting innocent spouses.
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Facts
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Janet Schaberg and Stephen Walsh divorced after a 25-year marriage. As part of their settlement agreement, Schaberg received ownership of certain properties and funds, while Walsh agreed to pay her a distributive award. Subsequently, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) alleged that Walsh had engaged in a large-scale fraud and sought disgorgement of ill-gotten gains, naming Schaberg as a relief defendant. The Agencies argued that the assets Schaberg received were derived from Walsh’s fraudulent activities and sought to freeze her assets. Schaberg asserted she acquired the assets in good faith and for fair consideration as part of the divorce settlement.
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Procedural History
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The District Court granted preliminary injunctions freezing Schaberg’s assets. The Second Circuit recognized the power of federal district courts to order disgorgement from a relief defendant who (1) is in possession of ill-gotten funds and (2) lacks a legitimate claim to those funds. The Second Circuit then certified two questions to the New York Court of Appeals regarding New York law pertinent to the appeal to determine whether Schaberg had a legitimate claim to the funds, thus precluding disgorgement from her.
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Issue(s)
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1. Whether “marital property” within the meaning of New York Domestic Relations Law § 236 includes the proceeds of fraud?
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2. Whether a spouse’s determination that they paid “fair consideration” according to the terms of New York Debtor and Creditor Law § 272 is precluded, as a matter of law, where part or all of the marital estate consists of the proceeds of fraud?
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Holding
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1. Yes, because the statute expansively defines marital property to encompass “all property acquired” by either spouse during the course of the marriage and there is a presumption that “all property, unless clearly separate, is deemed marital property.
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2. No, because a court needs to look beyond the tangible marital property at issue because New York recognizes other forms of legitimate consideration, including nonmonetary consideration.
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Court’s Reasoning
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The Court reasoned that Domestic Relations Law § 236 broadly defines marital property as “all property acquired” during the marriage, and the term