Commodity Futures Trading Comm’n v. Walsh (N.Y., June 23, 2011), 2011 NY Slip Op 05366, is a vindication of the finality of property settlement agreements despite their apportionment of tainted money. It is similar to the Simkin case I blogged about on June 1, 2011, except that here it is the Federal Government trying to claw back Bernard L. Madoff Ponzi-scheme money rather than a burned investor-spouse.
The issue in both these big-money, high profile cases is whether contracts between spouses can be re-opened to recover stolen money, for the benefit of – it is argued — the rightful owners with a superior interest. According to the New York Times on June 24, 2011, the question has divided the domestic relations bar of New York State.
I believe the Walsh case was correctly decided based upon the critical fact that the former spouse, Janet Schaberg, was unaware of any crime and was an was an innocent recipient of her share of the marital estate. After 25 years of marriage, she divided marital assets with her husband, Stephen Walsh, who was only later charged with ripping off investors to the tune of over $550 million dollars.
The Court of Appeals explained that Schaberg is like the recipient of funds in an arm’s length business transaction. This might be, for example, an architect of someone’s home, who is paid by the homeowner with money stolen from someone else (without the architect’s knowledge). I would add that in real estate transactions, lawyers use the phrase “bona fide purchaser for value” to describe someone who cannot lose their purchase because of later-discovered defects of title that were neither known nor discoverable from a title report at the time of settlement.
Michael D. Stutman, a Manhattan divorce lawyer who co-authored a friend-of-the-court brief supporting the Government in Walsh, argued that New York’s “strong public policy of ensuring finality in divorce proceedings” is debatable, because custody and child support rulings are modifiable if circumstances change. The analogy is misplaced, in my opinion. The portion of a settlement agreement in which married couples divide assets is final. It is absolutely not modifiable based on subsequent market forces, investor acumen, or a change of heart. In contrast, the part of a marital agreement that handles custody and child support is always subject to the continuing jurisdiction of the court.
When parties divorce and sign an agreement, they need to get on with their lives. They apply their best judgment in determining a fair split of assets and debts, and they sign off on it. They are not accepting – for the rest of their lives – the risk of discovery that their former spouse was less than honest about the way a marital asset was acquired.