The Ponzi schemes that came to light during the depths of the financial crisis have spawned various lawsuits seeking to claw back money from divorce agreements.
Now, in one case, a court has said: Hands off.
On Thursday, New York’s highest court ruled that a woman could keep proceeds from a divorce agreement, even if those proceeds were the ill-gotten gains of a financial fraud perpetrated by her former husband.
The decision is a blow to the federal government, which is seeking to force the woman to disgorge what it says are millions of dollars in stolen money.
“Ex-spouses have a reasonable expectation that, once their marriage has been dissolved and their property divided, they will be free to move on with their lives,” said Judge Victoria A. Graffeo, writing for the New York State Court of Appeals.
The federal appeals court in Manhattan, which had asked the New York State court for guidance on the case, is now expected to prevent the federal government from seizing the woman’s assets.
Thursday’s ruling could also affect other divorce cases, like some involving victims of Bernard L. Madoff’s huge Ponzi scheme.
The New York State Court of Appeals is hearing a case brought by a man seeking to rescind his divorce settlement with his ex-wife because a large chunk of the marital proceeds were in a Madoff account.
The husband, Steven Simkin, kept much of his money with Mr. Madoff after the divorce; his wife, Laura Blank, received cash. After losing the bulk of his assets in the Madoff fraud, Mr. Simkin now wants to rewrite their divorce agreement.
In Massachusetts, a Madoff victim has also sued his ex-wife to revise their separation pact. A family court judge dismissed the lawsuit this month, and the plaintiff’s lawyer has appealed.
Thursday’s ruling in New York involves Janet Schaberg, 55 years old, the former wife of Stephen Walsh, a former executive at WG Trading, a commodities firm in Greenwich, Conn.
In February 2009, federal authorities arrested Mr. Walsh and his business partner, Paul Greenwood, on charges that they had defrauded investors of more than $550 million in a 13-year Ponzi scheme.
Mr. Greenwood pleaded guilty last year; Mr. Walsh is fighting the case.
Although the government did not accuse Ms. Schaberg of having any knowledge or participation in the scheme, lawyers at the Securities and Exchange Commission and the Commodity Futures Trading Commission went after her money, saying that much of it was ill-gotten proceeds from her former husband’s fraud.
In August 2009, a federal judge agreed with the government, freezing most of Ms. Schaberg’s assets, including $7.6 million in cash.
Ms. Schaberg, who divorced Mr. Walsh in 2007 after 25 years of marriage, appealed the judge’s order.
Her lawyer, Steven Kessler, argued that once she and Mr. Walsh had divided their marital property and signed a divorce settlement agreement, the government could not force her to disgorge what were her rightful proceeds.
In an unusual request, the federal appeals court asked New York state’s highest court for guidance on the divorce-law issues instead of a ruling.
The case, Judge Graffeo wrote, raised “difficult policy questions” that required the court to weigh the competing interests of returning stolen property to its rightful owners against the innocent former spouse of the defrauder.
In ruling for Ms. Schaberg, the court made an analogy between Ms. Schaberg and her divorce settlement proceeds and any person who unknowingly receives tainted money in a business transaction. For instance, the government could not seize stolen money from an architect whom a thief had paid to build his home.
The court said its decision to protect Ms. Schaberg, an innocent recipient of stolen funds, over the victims of the Ponzi scheme, was “rooted in New York’s concern for finality in business transactions.”
The decision emphasized that fraud victims could try to reclaim their stolen money if the former spouse was aware or participated in the crime.
Representatives for the S.E.C. and C.F.T.C. declined to comment.
New York divorce lawyers are divided on the decision. Michael D. Stutman, a divorce lawyer in Manhattan, is uninvolved in the Schaberg case, but along with three other lawyers, he submitted a brief that sided with the government.
“We disagree with the decision because someone in possession of stolen property should not be able to claim an ownership interest superior to the rightful owner,” Mr. Stutman said.
“Here, however, largely because she received ‘title’ to the ill-gotten gains through the divorce, she trumps the claims of people from whom the money was stolen,” he said.
Mr. Stutman also questioned the court’s emphasis on what it called New York’s “strong public policy of ensuring finality in divorce proceedings.”
He said other facets of divorce law — the amount of child and spousal support, as well as child-custody issues — are all subject to change based on newly discovered facts.
“Why is finality all of a sudden so sacred that you’re depriving victims of a fraud from access to their assets?” he asked.
Richard Emery, a lawyer for Ms. Blank, who is battling with her former husband in the New York case involving the Madoff fraud, applauded the ruling, calling it ”the right result for families and society.”
“The appeals court embraced the plight of a spouse who relies on the right to move on with her life after divorce,” Mr. Emery said. “This consideration trumps the interest of even the federal government.”
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