Vacating Settlement Agreements on Grounds of Mutual Mistake

In is not unusual for a party to attempt to vacate a settlement agreement.  In order to do so, a party must meet a significant burden of proof that the agreement came as a result of a material, mutual mistake, fraud, or other relevant facts.  A interesting illustration of the above principles came in a recent decision, Simkin v. Blank, Sup. Co. New York County (December 22, 2009).

In 2006, Mr. Simkin, a partner at Paul, Weiss, Rifkind, Wharton & Garrison and his wife negotiated a settlement agreement in their divorce action.  One of the marital assets was an account the parties opened during their marriage with Bernard L. Madoff Investment Securities LLC which was worth $5.4 million.  As part of a 2006 equitable distribution agreement, Mr. Simkin  paid Ms. Blank $2.7 million, which represented what he thought was his ex-wife’s fair share of their Madoff investments.

After Mr. Madoff’s arrest, Mr. Simkin attempted to reform the agreement, claiming it was based on a “material, mutual mistake” and resulted in a “windfall” for Ms. Blank. He argued that the agreement did not accomplish the parties’ goal of ensuring that each would keep approximately half of the marital assets.  Ms. Blank responded that as long as Mr. Simkin could have redeemed the account for the value that the parties agreed to on the cut-off date, he received what he bargained for. Noting that Mr. Simkin had liquidated part of his investment to fund his ex-wife’s equitable entitlement, the court pointed out that in 2006 and “the several years after that plaintiff maintained this investment,” the account “could have been redeemed for cash, presumably significantly in excess of its 2004 value.”  While Mr. Simkin claimed the Madoff account held no assets, he did not allege it had no value, the judge wrote.  “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,” the court found.

Justice Evans agreed with Ms. Blank holding that while Mr. Simkin’s decision to retain the Madoff account may have been “improvident,” that did not give the court an equitable basis to set the agreement aside. In dismissing Mr. Simkin’s complaint, Justice Evans wrote, “There is no evidence that defendant was unjustly enriched. In 2006, at the time of their agreement, each of the parties received the benefit of his and her bargain.”

The lesson of the above case is that clients and their divorce attorneys should be careful in fashioning settlement agreements.  Even when significant mistakes are made at the time the agreements are entered into, it is very difficult to set them aside, even in such extreme circumstances as described above.

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