ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Wednesday, January 5, 2011

Update on Madoff Mutual Mistake Case: NY Appellate Division Reverses

We've been following the Madoff mutual mistake case -- that is, the lawsuit (also previously mentioned here and here) by a Paul Weiss partner to unravel a divorce settlement that included a payout to his wife for the right to keep the $5.4 million (or so they thought) Madoff account.  As part of the settlement husband paid wife $2.7 million in cash, and he sued wife to modify the settlement agreement based on mutual mistake as to the value of the "account." 

The trial court had dismissed the complaint in its entirety.  Yesterday, over a two-judge dissent, the Appellate Division reversed, mainly on the reasoning that a motion to dismiss must accept the allegations of the complaint as true.  The majority wrote:

Plaintiff pleads mutual mistake with the requisite particularity (see CPLR 3016(b); Pludeman v Northern Leasing Sys., Inc., 10 NY3d 486, 491 [2008]), and the amended complaint states a cause of action for reformation based on mutual mistake (see e.g. Banker v Banker, 56 AD3d 1105 [2008]; House v Wechsler, 104 App Div 124 [1905]). Contrary to defendant's contention, mutual mistake can be based on a statement by a third party (see e.g. D'Antoni v Goff, 52 AD2d 973 [1976]; House, 104 App Div at 127). The cases cited by defendant where claims were dismissed pursuant to CPLR 3211(a)(5) did not involve mutual mistake.

The documentary evidence proffered by defendant (see CPLR 3211(a)(1)) does not utterly refute plaintiff's factual allegations or conclusively establish a defense as a matter of law (see e.g. McCully v Jersey Partners, Inc., 60 AD3d 562 [2009]). With respect to the branch of defendant's motion based upon CPLR 3211(a)(7), even though defendant submitted documents, "dismissal should not eventuate" unless she shows that a material fact alleged by plaintiff "is not a fact at all and unless it can be said that no significant dispute exists regarding it" (Guggenheimer v Ginzburg, 43 NY2d 268, 275 [1977]). Such is not the case here.

The motion court and the dissent both err in relying on the claim - which was not in defendant's affidavit - that, for several years after the parties' agreement, plaintiff could have redeemed what the parties believed to be their account for cash in excess of its supposed value as of the cut-off date selected by the parties (see e.g. Rovello v Orofino Realty Co., 40 NY2d 633, 636 [1976]). Both the motion court and the dissent also err by resolving a fact - the assumption on which the parties relied in dividing their property - in defendant's favor on a motion to 
dismiss (see Viskovich v Walsh-Fuller-Slattery, 16 AD2d 67 [1962], aff'd 13 NY2d 1100 [1963] [trial was held when the plaintiff alleged that state of facts assumed to exist at time of the parties' agreement did not, in fact, exist]).

Indeed, the dissent speculates as to plaintiff's expectations that the "Madoff account [. . .] continue its highly profitable performance" and asserts "[a]ccordingly, he alone took on the risk that he might not be able to recoup his investment" citing Reiss v Financial Performance Corp. (97 NY2d 195, 201 [2001]).

A couple of observations are in order: First, in the context of a CPLR 3211 motion, plaintiff's motivations as alleged by defendant are irrelevant because the allegations in the amended complaint must be accepted as true. Second, Reiss is a declaratory injunction action concerning a stock swap; no allegation of mutual mistake is present.

Further, even though there is an express contract between the parties, it is unclear whether it covers the current dispute; therefore, plaintiff may plead unjust enrichment (see e.g. IIG Capital LLC v Archipelago, L.L.C., 36 AD3d 401, 405 [2007]), and the amended complaint states such a cause of action (see Simonds v Simonds, 45 NY2d 233, 242 [1978]).

Finally, defendant and the dissent ignore the allegations of mutual mistake as to the actual existence of the account itself. Both defendant and the dissent attempt to foreclose plaintiff's claims by transmogrifying the claim of mutual mistake into a claim of mistake in valuation. [*3]

The dissent states: "[a]t the time of the agreement, Steven had an account in his name with [Madoff]." Untrue. Steven never had an account in his name with Madoff; on Madoff's own admission there were no accounts within which trades were made on behalf of investors.

The dissent then states, "Steven liquidated part of the account to fund his payments to Laura." Untrue. In Madoff's Ponzi scheme what appeared to Steven and Laura to be a partial liquidation of an account was simply a payment to Steven that came from funds deposited by a more recent "investor" in what the "investor" believed was his own account.

The dissent further observes, "[Steven] did not liquidate the rest of the Madoff account . . . and he continued to invest in it." Untrue. There was no account which could be liquidated, as became apparent when Madoff received $7 billion worth of "liquidation" calls from investors in 2008. Nor was Steven "investing" in an account; his further contributions went directly to pay other "investors" in the scheme.

Read the entire decision and dissent here.  There is a roundup of coverage over at Above the Law.

Simkin v. Blank, 2011 NY Slip Op 00001 (App. Div. 1st Dep't Jan. 4, 2011).

[Meredith R. Miller]

| Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Update on Madoff Mutual Mistake Case: NY Appellate Division Reverses:


Post a comment

If you do not complete your comment within 15 minutes, it will be lost. For longer comments, you may want to draft them in Word or another program and then copy them into this comment box.