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Case of the Mistaken (Illusory) Investment

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3 Responses

  1. dave hoffman says:

    Assuming that this ought to be analyzed under common law contract doctrine(s), which I’m not sure is true, I’d think a bit about frustration of purpose. The principal purpose of the contract was equitable distribution of the estate. That purpose was substantially frustrated by the fraud and its revelation, the non-occurance of which was I think arguably a basic assumption on which the contract was made. Hard to imagine the parties allocated the risk between them…

  2. Edward Swaine says:

    Neat question (and illustration!). Fraud and mutual mistake should be available in principle to attack the agreement. If they took the same exact form as contract law doctrine, I think fraud is the better ground. The third-party aspect wouldn’t necessarily be fatal, but Wife should argue inter alia that she relied insofar as didn’t withdraw Madoff monies.

    It is the fraud element, in any event, that separates this from a garden-variety division of assets in which one side takes cash and the other takes a really bad investment. So for mutual mistake, allocation of risk looks like a problem for Husband. They didn’t just misunderstood the amount of their mutual assets; they also divvied them up. Maybe this subordinate transaction could be viewed as one in which he pays her cash in order to obtain her half of the Madoff asset, which would make it look more like a classic mutual mistake. But it seems more realistic to say that Husband surrendered a more liquid position in order to have the investment’s upside; there were (perceived) barriers to becoming an investor with him and Husband might have preferred to avoid liquidating (perhaps he could even have done so, back then).

    Upshot: this looks to me at first blush like a case in which the parties actually allocated risk, but simply made a mutual mistake about the extent of the risk — which is a far less persuasive case for Husband.

  3. Josh says:

    I was under the impression that frustration only applies to intervening events between formation and execution. So, if we are to use contracts analysis, the question would be: when is performance rendered under a divorce decree? On another note, if we were to vitiate this contract, how causally related would the fraud have to be in future cases? What about an Enron type event – if Enron shares had been used to satisfy a divorce decree and it was later found that the share prices were fraudulently inflated, would that decree be vitiated – I wouldn’t think so.

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