Commercial Litigation and Arbitration

Reformation Due to Mutual Mistake Requires “Exceptional Circumstances” Where Sophisticated Parties Entered Detailed, Heavily-Negotiated Agreement — No Unjust Enrichment If Written Contract

Simkin v. Blank, 2012 N.Y. LEXIS 618 (N.Y. Ct. App. April 3, 2012):

The parties, represented by counsel, spent two years negotiating a detailed 22-page settlement agreement, executed in June 2006. In August 2006, the settlement agreement was incorporated, but not merged, into the parties' final judgment of divorce.

The settlement agreement set forth a comprehensive division of marital property. ***

At the time the parties entered into the settlement, one of husband's unspecified brokerage accounts was maintained by Bernard L. Madoff Investment Securities (the Madoff account). According to husband, the parties believed the account was valued at $5.4 million as of September 1, 2004, the valuation date for marital assets. ***

As a result of the disclosure of Madoff's fraud, in February 2009 — about 21/2 years after the divorce was finalized — husband commenced this action against wife alleging two causes of action: (1) reformation of the settlement agreement predicated on a mutual mistake and (2) unjust enrichment. *** Husband alleges that the parties' intention to equally divide the marital estate was frustrated because both parties operated under the "mistake" or misconception as to the existence of a legitimate investment account with Madoff which, in fact, was revealed to be part of a fraudulent Ponzi scheme. ***

In his claim for reformation, husband requests that the court "determine the couple's true assets with respect to the Madoff account" and alter the settlement terms to reflect an equal division of the actual value of the Madoff account. The second cause of action seeks restitution from wife "in an amount to be determined at trial" based on her unjust enrichment arising from husband's payment of what the parties mistakenly believed to be wife's share of the Madoff account.***

On a motion to dismiss under CPLR 3211, the pleading is to be given a liberal construction, the allegations contained within it are assumed to be true and the plaintiff is to be afforded every favorable inference (see ABN AMRO Bank, N.V. v MBIA Inc., 17 NY3d 208, 227, 952 N.E.2d 463, 928 N.Y.S.2d 647 [2011]). At the same time, however, "allegations consisting of bare legal conclusions as well as factual claims flatly contradicted by documentary evidence are not entitled to any such consideration" (Maas v Cornell Univ., 94 NY2d 87, 91, 721 N.E.2d 966, 699 N.Y.S.2d 716 [1999] [internal quotation marks and citation omitted]). Moreover, a claim predicated on mutual mistake must be pleaded with the requisite particularity necessitated under CPLR 3016 (b).

Marital settlement agreements are judicially favored and are not to be easily set aside (see McCoy v Feinman, 99 NY2d 295, 302, 785 N.E.2d 714, 755 N.Y.S.2d 693 [2002]; Christian v Christian, 42 NY2d 63, 71-72, 365 N.E.2d 849, 396 N.Y.S.2d 817 [1977]). Nevertheless, in the proper case, an agreement may be subject to rescission or reformation based on a mutual mistake by the parties (see Matter of Gould v Board of Educ. of Sewanhaka Cent. High School Dist., 81 NY2d 446, 453, 616 N.E.2d 142, 599 N.Y.S.2d 787 [1993]; Chimart Assoc. v Paul, 66 NY2d 570, 573, 489 N.E.2d 231, 498 N.Y.S.2d 344 [1986]). Similarly, a release of claims may be avoided due to mutual mistake (see Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., 17 NY3d 269, 276, 952 N.E.2d 995, 929 N.Y.S.2d 3 [2011]). Based on these contract principles, the parties here agree that this appeal turns on whether husband's amended complaint states a claim for relief under a theory of mutual mistake.

We have explained that "[t]he mutual mistake must exist at the time the contract is entered into and must be substantial" (Gould, 81 NY2d at 453). Put differently, the mistake must be "so material that . . . it goes to the foundation of the agreement" (Da Silva v Musso, 53 NY2d 543, 552, 428 N.E.2d 382, 444 N.Y.S.2d 50 [1981] [internal quotation marks and citations omitted]; see also 27 Lord, Williston on Contracts § 70:12 [4th ed] ["The parties must have been mistaken as to a basic assumption of the contract . . . Basic assumption means the mistake must vitally affect the basis upon which the parties contract"]). Court-ordered relief is therefore reserved only for "exceptional situations" (Da Silva, 53 NY2d at 552 [internal quotation marks and citation omitted]). The premise underlying the doctrine of mutual mistake is that "the agreement as expressed, in some material respect, does not represent the meeting of the minds of the parties" (Gould, 81 NY2d at 453 [internal quotation marks and citations omitted]).


Applying these legal principles, we are of the view that the amended complaint fails to adequately state a cause of action based on mutual mistake. As an initial matter, husband's claim that the alleged mutual mistake undermined the foundation of the settlement agreement, a precondition to relief under our precedents, is belied by the terms of the agreement itself. Unlike the settlement agreement in True that expressly incorporated a "50-50" division of a stated number of stock shares, the settlement agreement here, on its face, does not mention the Madoff account, much less evince an intent to divide the account in equal or other proportionate shares (see Centro, 17 NY3d at 277 [explaining that "courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include" (internal quotation marks and citation omitted)]). To the contrary, the agreement provides that the $6,250,000 payment to wife was "in satisfaction of [her] support and marital property rights," along with her release of various claims and inheritance rights. Despite the fact that the agreement permitted husband to retain title to his "bank, brokerage and similar financial accounts" and enumerated two such accounts, his alleged $5.4 million Madoff investment account is neither identified nor valued. Given the extensive and carefully negotiated nature of the settlement agreement, we do not believe that this presents one of those "exceptional situations" (Da Silva, 53 NY2d at 552 [internal quotation marks and citation omitted]) warranting reformation or rescission of a divorce settlement after all marital assets have been distributed.

Even putting the language of the agreement aside, the core allegation underpinning husband's mutual mistake claim — that the Madoff account was "nonexistent" when the parties executed their settlement agreement in June 2006 — does not amount to a "material" mistake of fact as required by our case law. The premise of husband's argument is that the parties mistakenly believed that they had an investment account with Bernard Madoff when, in fact, no account ever existed. In husband's view, this case is no different from one in which parties are under a misimpression that they own a piece of real or personal property but later discover that they never obtained rightful ownership, such that a distribution would not have been possible at the time of the agreement. But that analogy is not apt here. Husband does not dispute that, until the Ponzi scheme began to unravel in late 2008 -- more than two years after the property division was completed -- it would have been possible for him to redeem all or part of the investment. In fact, the amended complaint contains an admission that husband was able to withdraw funds (the amount is undisclosed) from the account in 2006 to partially pay his distributive payment to wife. Given that the mutual mistake must have existed at the time the agreement was executed in 2006 (see Gould, 81 NY2d at 453), the fact that husband could no longer withdraw funds years later is not determinative.

This situation, however sympathetic, is 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. Viewed from a different perspective, had the Madoff account or other asset retained by husband substantially increased in worth after the divorce, should wife be able to claim entitlement to a portion of the enhanced value? The answer is obviously no. Consequently, we find this case analogous to the Appellate Division precedents denying a spouse's attempt to reopen a settlement agreement based on post-divorce changes in asset valuation.

Finally, husband's unjust enrichment claim likewise fails to state a cause of action. It is well settled that, "[w]here the parties executed a valid and enforceable written contract governing a particular subject matter, recovery on a theory of unjust enrichment for events arising out of that subject matter is ordinarily precluded" (IDT Corp. v Morgan Stanley Dean [**7] Witter & Co., 12 NY3d 132, 142, 907 N.E.2d 268, 879 N.Y.S.2d 355 [2009]).

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