New York Property Division Decision Benefits Innocent Spouses in Divorce

Prior results do not guarantee a similar outcome.

On June 23, 2011, New York's highest state court issued a ruling that could have broad implications for property division in divorce. Despite arguments to the contrary, the New York Court of Appeals decided that a woman was entitled to keep proceeds from a divorce settlement even though her ex-husband obtained the funds through fraud.

Ill-Gotten Gains May Be Retained By Divorcees without Culpable Knowledge

The case before the New York Court of Appeals dealt with the divorce of Stephen Walsh and Janet Schaberg. In 2009, Walsh and his business partner were arrested for allegedly hoodwinking investors out of some $550 million in a massive Ponzi scheme that lasted for 13 years.

When federal authorities began seeking the return of the stolen cash, they ran into a snag: a good portion of it went to Ms. Schaberg in the property division settlement pertaining to her 2007 divorce from Walsh.

A federal judge froze a number of Ms. Schaberg's accounts and issued an order preventing her from transferring valuable personal property without permission from the court. She appealed, and in a rare move, the federal appeals court asked New York's Court of Appeals to lend its opinion as to the intricacies of their state-specific divorce law.

Government lawyers had argued that the proceeds from securities fraud could not be considered part of a marital estate, and thus could not be transferred in property division. However, New York's top court disagreed, interpreting marital property broadly to include certain illegally-obtained funds.

According to a majority of judges on the New York Court of Appeals, as long as an ex-spouse had no knowledge of the fraud and gave "fair consideration" for a divorce settlement, regulators should be unable to seize "tainted assets" from the innocent spouse.

The decision was based on New York's strong public policy for "finality" in business deals; for instance, if a thief used stolen money to pay a contractor for building an addition to his home, the government could not collect tainted funds from the contractor.

The Court found property division in divorce to be similar to such business transactions, noting that undoing divorce settlements years after the fact would be cumbersome and unfair to innocent spouses who had moved on with their lives.

It was undisputed that Ms. Schaberg had no reason to know that the money in her divorce settlement was obtained illegally, and the ruling should allow her to retain her assets.

Decision Applicable To Other Divorcing Couples

The precedential value of the decision means that the assets other innocent former spouses obtained through fraud should be protected from seizure.

To explore the complications that may affect property division in your divorce, contact an experienced local attorney today.