Equal Distribution

Illegal Transactions

The court adopted the defendant's argument, which was made “without contradiction that on Sept. 1, 2004, and later, on June 27, 2006 when the parties entered into their agreement, and [] for the several years thereafter that plaintiff maintained this investment, it could have been redeemed for cash, presumably significantly in excess of its 2004 value.”

Where a party must trace the cause of action to an illegal transaction, there can be no recovery. Janke v. Janke, 47 AD2d 445 (4th Dept., 1975), aff'd, 39 N.Y2d 786 (1976). The Supreme Court's statement that the Madoff account “could have been redeemed for cash, presumably significantly in excess of its 2004 value” implicitly restructures Mr. Simkin's cause of action to necessarily trace back to not one illegal transaction, but to many. This is because, in a Ponzi swindle, fresh monies derived from later victims feed the earlier investors; the thief robs new Peters to pay old Pauls. Mr. Simkin, like all of Bernard Madoff's clients, held no existing discrete account with his own segregated funds that he could have redeemed.

The New York Law Journal (N. Walder, March 2, 2010) reported that, in In re Bernard Madoff Investment Securities, LLC, 08-01789-brl, Southern District Bankruptcy Judge Burton R. Lifland underscored precisely this point in upholding a trustee's method of adjudicating the claims of defrauded Madoff investors: “The [Madoff] books and records expose a Ponzi scheme where no securities were ever ordered, paid for or acquired. Because 'securities positions' are in fact nonexistent, the Trustee cannot discharge claims upon the false premise that customers' securities are what the account statements purport them to be.”

Nevertheless, in its dismissal of Mr. Simkin's complaint, the court in Simkin disturbingly “punished” him for not having redeemed his investment with Madoff from what is now known to have been illegal monies because his account was nonexistent. It rattles the foundations of jurisprudence that a court, fully aware of Bernard Madoff's criminal enterprise, can, in good judicial conscience, rule that a litigant exhausted his judicial remedies for failure to have sought relief from a criminal.

CPLR 3016(b): Particularity

The court further found that Mr. Simkin failed to set forth his claim of mistake “with particularity,” noting that “the circumstances must be stated in detail [pursuant to] CPLR 3016(b).”

Bernard Madoff confessed to everything. The Supreme Court was required to take judicial notice of Madoff's crimes, federal evidence of which Mr. Simkin properly annexed to his complaint. What more, beyond that which the entire world learned about Bernard Madoff and his scheme, could Mr. Simkin possibly have alleged with greater particularity? It seems Mr. Simkin was held to an impossible standard.

Indistinctive Semantics

The Supreme Court focused on Mr. Simkin's allegation that the account was “non-existent,” stating: “in the absence of a claim that, on the date of the[ir] agreement the account had no [redeemable] value the complaint fails to set forth a cause of action, either for mutual mistake or for unjust enrichment.” The court went on to say, “The claim of mistake [wa]s opaque, stating simply that the account [] did not exist.”

It is elementary that a non-existent account has no value. In practical terms, this distinction is meaningless and does not rise to the level of subtle sophistry. The court did not even offer Mr. Simkin any latitude under the rubric of inartful pleading. Instead, it exalted meaningless semantic distinctions over settled contract doctrine.

The Supreme Court noted that Mr. Simkin “liquidated a portion of his investment at the time of the agreement in [] 2006 to fund the payment of defendant's equitable entitlement ' An investor's ability to redeem an account for value, was the assumption on which the parties relied in dividing their property and in doing so they made no mistake.” However, at the time of the redemption, Mr. Simkin and the rest of the universe had no inkling of Mr. Madoff's scam. Mr. Simkin could thus not have known that the liquidated monies did not belong to him and derived from criminally diverted monies.

Although the Supreme Court acknowledged that “as one of Mr. Madoff's many victims, plaintiff has been unjustly harmed,” it concluded that “there [wa]s no evidence that defendant was unjustly enriched.” However, as in algebraic equations, whatever operation is performed on one side of the equation must be performed on the other side; if Mr. Simkin was unjustly harmed, then defendant was unjustly enriched.

The Dictionaries

The Supreme Court characterized Mr. Simkin's retention of the account as “improvident.” The second definition in Black's Law Dictionary defines “improvident” as “of or relating to a judgment arrived at by using misleading information or a mistaken assumption.” In 2006, Madoff's investors considered their monthly statements a secure confirmation of their holdings ' there had been no rumblings that those investors might have heeded.

Merriam-Webster defines improvident as “not foreseeing and providing for the future.” It can hardly be argued that, had Mr. Simkin been aware that Bernard Madoff had robbed him, and that he alone would be left to sustain the consequences, he would have signed the settlement agreement. Again, there was no specific merger provision. Although Mr. Simkin would have been aware that he chanced losses due to market conditions, he would not have been expected to have contemplated losses through robbery. How, then, did the Supreme Court find improvidence?

'Etzion's' Irrelevance

The Supreme Court cited Etzion v. Etzion, 62 AD3d 646 (2nd Dept. 2009), a case that brought several doctrines into focus. The first involved the question of a fraud claim and the victim's rightful/justifiable/reasonable reliance upon the misleading representation made by a party ' that a burden of due diligence rests upon a party to confirm its accuracy if possessed of the means to do so.

Next, Etzion involved the “special facts” doctrine, where one party possesses superior knowledge not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge. This situation creates a duty to disclose that information.

Finally, Etzion addresses the doctrine of “conscious ignorance, conscious negligence.” Under this doctrine, a party may not seek to void an agreement by intentionally proceeding without further investigation of his or her rights but rather by forging ahead with “conscious ignorance” or “conscious negligence.”

Significantly in Simkin, neither party had made a knowingly fraudulent representation to induce the other's execution of the agreement. Neither party had any superior knowledge of the true facts. And, finally, neither party could have discovered Bernard Madoff's criminality independently. Madoff's confession, in December 2008, stunned the U.S. Attorney and the financial world globally. The magnitude of the deception, which included the monthly production of meticulously false statements, across two decades, for each client, was unprecedented in its reach. The Securities and Exchange Commission (SEC) investigated Madoff's operations more than once and didn't catch the fraud. Therefore, it is absurd to hold that any Madoff investor could have conducted such due diligence single handedly and discovered the deception. Furthermore, it creates an untenable standard that a court could have properly taken judicial notice of Madoff's pre-arrest monthly institutional client statements without further authentication, ' la Elakaim, but it was improper for an investor to have done so. It is left to speculation as to how many trials and settlements, not necessarily confined to spousal litigation, relied upon Bernard Madoff's statements.

Conclusion

The Simkin decision is severely flawed. Mr. Simkin not only should have withstood a motion to dismiss his complaint, he should have prevailed on the merits on summary judgment. An erroneous inference from this ruling is that, barring an immediate joint liquidation of a Ponzi account where both parties face mutual exposure, the only protection in a Simkin situation is a contractual “hold harmless” clause allowing rescission or reformation.

The Court of Appeals has emphasized that “stability of contract obligations must not be undermined by judicial sympathy.” First Nat. Stores Inc. v. Yellowstone Shopping Center Inc., 21 N.Y.2d 630 (1968). That Mr. Simkin may have appeared less sympathetic, as a powerful investor driven by market disproportionate returns, does not condone perversion of settled contract doctrine and jurisprudence.

One is constrained to wonder, would the outcome have been the same had the wife retained the Madoff account and faced shouldering the $2.75 million loss herself?

Elliott Scheinberg, a member of this newsletter's Board of Editors, is an appellate attorney whose practice is limited to matrimonial law. His e-mail address is [email protected]. This article first appeared in the New York Law Journal, an ALM sister publication of this newsletter.

In last month's issue, we began a look at the decision in the case of Simkin v. Blank, 12/24/2009 NYLJ, 1, (col. 3), in which a Supreme Court judge in Manhattan dismissed a divorced man's suit to recover from his ex-wife half of what he lost by taking investments in Bernard Madoff's Ponzi scheme in their divorce settlement. The assets he retained, while giving up other valuable assets to his wife, later proved worthless when the Madoff fraud came to light.

Intent to Share Not Articulated?

In his suit, Steven Simkin alleged that the parties intended to share their assets equally as of September 2004, the date of their separation. The Supreme Court incorrectly found it significant that the agreement did not recite this intention. No authority requires that such an intention be articulated within the body of an agreement. Moreover, the intent to equally divide their assets can be readily proved at trial with a calculator. In a marriage of over 30 years it is most improbable that the intended distribution would have been anything less than equal.

Illegal Transactions

The court adopted the defendant's argument, which was made “without contradiction that on Sept. 1, 2004, and later, on June 27, 2006 when the parties entered into their agreement, and [] for the several years thereafter that plaintiff maintained this investment, it could have been redeemed for cash, presumably significantly in excess of its 2004 value.”

Where a party must trace the cause of action to an illegal transaction, there can be no recovery. Janke v. Janke , 47 AD2d 445 (4th Dept., 1975), aff'd, 39 N.Y2d 786 (1976). The Supreme Court's statement that the Madoff account “could have been redeemed for cash, presumably significantly in excess of its 2004 value” implicitly restructures Mr. Simkin's cause of action to necessarily trace back to not one illegal transaction, but to many. This is because, in a Ponzi swindle, fresh monies derived from later victims feed the earlier investors; the thief robs new Peters to pay old Pauls. Mr. Simkin, like all of Bernard Madoff's clients, held no existing discrete account with his own segregated funds that he could have redeemed.

The New York Law Journal (N. Walder, March 2, 2010) reported that, in In re Bernard Madoff Investment Securities, LLC, 08-01789-brl, Southern District Bankruptcy Judge Burton R. Lifland underscored precisely this point in upholding a trustee's method of adjudicating the claims of defrauded Madoff investors: “The [Madoff] books and records expose a Ponzi scheme where no securities were ever ordered, paid for or acquired. Because 'securities positions' are in fact nonexistent, the Trustee cannot discharge claims upon the false premise that customers' securities are what the account statements purport them to be.”

Nevertheless, in its dismissal of Mr. Simkin's complaint, the court in Simkin disturbingly “punished” him for not having redeemed his investment with Madoff from what is now known to have been illegal monies because his account was nonexistent. It rattles the foundations of jurisprudence that a court, fully aware of Bernard Madoff's criminal enterprise, can, in good judicial conscience, rule that a litigant exhausted his judicial remedies for failure to have sought relief from a criminal.

CPLR 3016(b): Particularity

The court further found that Mr. Simkin failed to set forth his claim of mistake “with particularity,” noting that “the circumstances must be stated in detail [pursuant to] CPLR 3016(b).”

Bernard Madoff confessed to everything. The Supreme Court was required to take judicial notice of Madoff's crimes, federal evidence of which Mr. Simkin properly annexed to his complaint. What more, beyond that which the entire world learned about Bernard Madoff and his scheme, could Mr. Simkin possibly have alleged with greater particularity? It seems Mr. Simkin was held to an impossible standard.

Indistinctive Semantics

The Supreme Court focused on Mr. Simkin's allegation that the account was “non-existent,” stating: “in the absence of a claim that, on the date of the[ir] agreement the account had no [redeemable] value the complaint fails to set forth a cause of action, either for mutual mistake or for unjust enrichment.” The court went on to say, “The claim of mistake [wa]s opaque, stating simply that the account [] did not exist.”

It is elementary that a non-existent account has no value. In practical terms, this distinction is meaningless and does not rise to the level of subtle sophistry. The court did not even offer Mr. Simkin any latitude under the rubric of inartful pleading. Instead, it exalted meaningless semantic distinctions over settled contract doctrine.

The Supreme Court noted that Mr. Simkin “liquidated a portion of his investment at the time of the agreement in [] 2006 to fund the payment of defendant's equitable entitlement ' An investor's ability to redeem an account for value, was the assumption on which the parties relied in dividing their property and in doing so they made no mistake.” However, at the time of the redemption, Mr. Simkin and the rest of the universe had no inkling of Mr. Madoff's scam. Mr. Simkin could thus not have known that the liquidated monies did not belong to him and derived from criminally diverted monies.

Although the Supreme Court acknowledged that “as one of Mr. Madoff's many victims, plaintiff has been unjustly harmed,” it concluded that “there [wa]s no evidence that defendant was unjustly enriched.” However, as in algebraic equations, whatever operation is performed on one side of the equation must be performed on the other side; if Mr. Simkin was unjustly harmed, then defendant was unjustly enriched.

The Dictionaries

The Supreme Court characterized Mr. Simkin's retention of the account as “improvident.” The second definition in Black's Law Dictionary defines “improvident” as “of or relating to a judgment arrived at by using misleading information or a mistaken assumption.” In 2006, Madoff's investors considered their monthly statements a secure confirmation of their holdings ' there had been no rumblings that those investors might have heeded.

Merriam-Webster defines improvident as “not foreseeing and providing for the future.” It can hardly be argued that, had Mr. Simkin been aware that Bernard Madoff had robbed him, and that he alone would be left to sustain the consequences, he would have signed the settlement agreement. Again, there was no specific merger provision. Although Mr. Simkin would have been aware that he chanced losses due to market conditions, he would not have been expected to have contemplated losses through robbery. How, then, did the Supreme Court find improvidence?

'Etzion's' Irrelevance

The Supreme Court cited Etzion v. Etzion , 62 AD3d 646 (2nd Dept. 2009), a case that brought several doctrines into focus. The first involved the question of a fraud claim and the victim's rightful/justifiable/reasonable reliance upon the misleading representation made by a party ' that a burden of due diligence rests upon a party to confirm its accuracy if possessed of the means to do so.

Next, Etzion involved the “special facts” doctrine, where one party possesses superior knowledge not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge. This situation creates a duty to disclose that information.

Finally, Etzion addresses the doctrine of “conscious ignorance, conscious negligence.” Under this doctrine, a party may not seek to void an agreement by intentionally proceeding without further investigation of his or her rights but rather by forging ahead with “conscious ignorance” or “conscious negligence.”

Significantly in Simkin, neither party had made a knowingly fraudulent representation to induce the other's execution of the agreement. Neither party had any superior knowledge of the true facts. And, finally, neither party could have discovered Bernard Madoff's criminality independently. Madoff's confession, in December 2008, stunned the U.S. Attorney and the financial world globally. The magnitude of the deception, which included the monthly production of meticulously false statements, across two decades, for each client, was unprecedented in its reach. The Securities and Exchange Commission (SEC) investigated Madoff's operations more than once and didn't catch the fraud. Therefore, it is absurd to hold that any Madoff investor could have conducted such due diligence single handedly and discovered the deception. Furthermore, it creates an untenable standard that a court could have properly taken judicial notice of Madoff's pre-arrest monthly institutional client statements without further authentication, ' la Elakaim, but it was improper for an investor to have done so. It is left to speculation as to how many trials and settlements, not necessarily confined to spousal litigation, relied upon Bernard Madoff's statements.

Conclusion

The Simkin decision is severely flawed. Mr. Simkin not only should have withstood a motion to dismiss his complaint, he should have prevailed on the merits on summary judgment. An erroneous inference from this ruling is that, barring an immediate joint liquidation of a Ponzi account where both parties face mutual exposure, the only protection in a Simkin situation is a contractual “hold harmless” clause allowing rescission or reformation.

The Court of Appeals has emphasized that “stability of contract obligations must not be undermined by judicial sympathy.” First Nat. Stores Inc. v. Yellowstone Shopping Center Inc. , 21 N.Y.2d 630 (1968). That Mr. Simkin may have appeared less sympathetic, as a powerful investor driven by market disproportionate returns, does not condone perversion of settled contract doctrine and jurisprudence.

One is constrained to wonder, would the outcome have been the same had the wife retained the Madoff account and faced shouldering the $2.75 million loss herself?

Elliott Scheinberg, a member of this newsletter's Board of Editors, is an appellate attorney whose practice is limited to matrimonial law. His e-mail address is [email protected]. This article first appeared in the New York Law Journal, an ALM sister publication of this newsletter.