19 N.Y.3d 46 (2012)

A marital settlement agreement will not be reformed based on mutual mistake when the alleged mistake concerns the future value of an asset rather than its existence or ownership at the time of the agreement.

Summary

Steven Simkin (husband) sued Laura Blank (wife) seeking to reform their marital settlement agreement after it was discovered that a Madoff investment account, believed to be worth $5.4 million and factored into the agreement, was fraudulent. Husband claimed mutual mistake, asserting both parties were unaware the account was a Ponzi scheme. The New York Court of Appeals reversed the Appellate Division, holding that the husband failed to state a cause of action for mutual mistake because the account had redeemable value at the time of the agreement, and the subsequent loss was akin to a post-divorce change in asset valuation, not a fundamental mistake about the asset’s existence.

Facts

The husband and wife divorced after almost 30 years of marriage. They entered into a detailed settlement agreement in 2006, which was incorporated but not merged into their divorce judgment. The agreement provided the wife with a $6,250,000 distributive payment. At the time of the agreement, the husband held an investment account with Bernard L. Madoff Investment Securities, believed to be worth $5.4 million. The husband used funds from this account to partially satisfy his payment obligation to the wife.

Procedural History

In 2009, after Madoff’s Ponzi scheme was revealed, the husband sued the wife, seeking reformation of the settlement agreement based on mutual mistake and unjust enrichment. Supreme Court dismissed the complaint. The Appellate Division reversed, reinstating the action. The Court of Appeals reversed the Appellate Division and reinstated the Supreme Court’s dismissal.

Issue(s)

Whether the husband’s amended complaint adequately states a cause of action for reformation of a marital settlement agreement based on mutual mistake, where the alleged mistake concerns the legitimacy and future value of an investment account rather than its existence or ownership at the time of the agreement.

Holding

No, because the alleged mistake regarding the Madoff account’s legitimacy and subsequent loss of value does not constitute a material mistake that undermines the foundation of the settlement agreement. The court emphasized that the account had redeemable value at the time of the agreement, and the loss was akin to a post-divorce change in asset valuation.

Court’s Reasoning

The Court of Appeals emphasized that marital settlement agreements are judicially favored and should not be easily set aside. Reformation based on mutual mistake requires that the mistake exist at the time the contract is entered into and be substantial, going to the foundation of the agreement. The Court distinguished this case from others where reformation was granted because the mistake rendered a portion of the agreement impossible to perform. The court stated that “[t]he mutual mistake must exist at the time the contract is entered into and must be substantial” (Gould, 81 NY2d at 453).

The court reasoned that the settlement agreement did not explicitly state an intention to divide the Madoff account equally or proportionally. The agreement provided the wife with a lump-sum payment “in satisfaction of her support and marital property rights.” The court also noted that the husband had previously withdrawn funds from the Madoff account to pay his distributive payment to the wife, indicating that the account had redeemable value at the time of the agreement.

The court stated that this situation 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.” The court rejected the husband’s unjust enrichment claim, citing the well-settled principle that recovery on a theory of unjust enrichment is precluded where the parties have a valid and enforceable written contract governing the subject matter.