Wednesday, April 18, 2012

Bernie Madoff fallout continues

Some divorcing spouses who owned investments controlled by Bernie Madoff that collapsed once the record breaking Ponzi scheme came to light experienced a second injury: the sudden realization that their divorce settlement was worthless.

Take the case of Steven Simkin v. Laura Blank, New York residents, formerly married for 30 years.  As part of their separation and divorce, negotiated from 2002 until 2006, Husband agreed to pay Wife $6,250,000 plus an apartment, a car, personal items and other accounts.  Husband received a home, cars, personal items, his retirement accounts, less $368,000 to equalize his retirement accounts with Wife and his investment accounts.  One of Husband's investment accounts was maintained by Bernie L. Madoff Investment Securities which the parties believed was worth $5.4 million in 2004.

In 2008, Madoff's Ponzi scheme collapsed and Husband realized his Madoff account had no value.  He also realized he had given up money, an apartment and other accounts to Wife in exchange for this Madoff account.  Husband sued Wife, claiming that the original settlement agreement was based on a mistake (the value of the Madoff account) and that Wife was unjustly enriched.  Unsurprisingly, Wife opposed Husband's suit, apparently satisfied that things were as they should be.

The New York trial court agreed with Wife.  Husband appealed.  The Appellate Court agreed with Husband.  Wife appealed.  New York's highest Court took the case and agreed with Wife.  Thus, their agreement stands.  You can read the full opinion here.

The Court recognized that it is not uncommon for an asset to shift in value --- sometimes after a divorce it can be worth much more or much less than the amount it was valued in divorce.  I can think of examples in my own practice.  In one case, a husband wanted to keep the shore house and "bought out" wife's share.  Soon after the divorce, the shore real estate market took a nose dive, and husband ended up selling the house for much less than it had been valued in the divorce.  In another case, one spouse bought out the other's interest in a business, only to see the business value greatly increase after the divorce.

Divorce takes a snapshot of a moment in time and values and divides assets (and debts) as of a certain day.  Those values can change, days, months or even years after a divorce.  In the past few years, we have seen the value of investments, real estate and even gold, rapidly change.

Divorcing spouses can learn a lesson from the Madoff cases, even if you do not have millions upon millions of dollars to divide.  Be careful about how you value assets.  With investments, if you have 100 shares of XYZ stock worth $100 per share for a total value of $1,000, you may want to consider giving your spouse half of the shares, rather than the monetary value of half that day ($500).  That way you both take the risk, and the reward.  Unfortunately, no uniform rule exists as to what would be the best course of action.  Each case must be considered carefully and individually.

In the meantime, Bernie Madoff sits in jail until the end of his life with the weight of his Ponzi scheme, and all of the lives he affected, weighing him down.

1 comment:

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