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7th Circuit defines ‘fraud on the court’

By: David Ziemer, [email protected]//July 27, 2011//

7th Circuit defines ‘fraud on the court’

By: David Ziemer, [email protected]//July 27, 2011//

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An attorney who claimed another attorney committed fraud on the court has now been sanctioned as a result of his claim.

The 7th Circuit found July 22 that attorney Steven Stanton’s allegations against attorney Michael Kielty were “obsessive, a form of harassment, unprofessional, and an abuse of the bankruptcy court.”

The case began when the creditors of Golf 255 Inc., a corporation that owned a golf course in Illinois, petitioned to have Golf declared bankrupt. The bankruptcy court ultimately approved the sale of the golf course for $5 million, enough to pay all creditors, other than insiders, their claims in full.

Almost a year and a half after the sale, the two former shareholders of Golf, represented by Stanton, unsuccessfully moved for leave to conduct discovery to establish fraud.

More than a year after that, they moved to the court to investigate fraud allegedly committed by Kielty.

Kielty had been a shareholder of Golf at one time, and had signed the petition seeking Golf’s involuntary bankruptcy.

The bankruptcy court denied the motion, and the district court affirmed. The 7th Circuit also affirmed in an opinion by Judge Richard Posner.

The court began by discussing the meaning of “fraud on the court.” The definition is important because, under Rule 60, a motion to set aside a judgment must be filed within a year after judgment, unless the fraud is “fraud on the court,” in which case it may be brought at any time. However, the term is defined neither in Rule 60, nor anywhere else in the federal rules.

The court first found that the standard definition given by most courts – acts that “defile the court” – is “vivid,” but “doesn’t advance the ball very far.”

It further found that its own definition, in Drobny v. Commissioner, 113 F.3d 670, 677-678 (7th Cir. 1997), isn’t much better: “that species of fraud which does, or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court [i.e., lawyers] so that the judicial machinery can not perform in the usual manner its impartial task of adjudging cases.”

Seeking a more useful definition, the court looked to the purpose of Rule 60: “We need to consider what kind of fraud ought to be a ground for setting aside a judgment perhaps many years after it was entered.”

Consistent with that framework, the court defined “fraud on the court” as “the kind of fraud that ordinarily couldn’t be discovered, despite diligent inquiry, within a year, and in some cases within many years — cases in which there are no grounds for suspicion and the fraud comes to light serendipitously.”

As examples, the court cited bribery of a judge, jury tampering and fraudulent submissions by a lawyer.

Distinguishing fraudulent submissions by a lawyer from perjury by a witness, the court noted that perjury can be uncovered through discovery or cross-examination, while lawyers are not subject to cross-examination.

Turning to the merits, the court found the contention that Kielty committed fraud on the court to be baseless.

Although Kielty is a lawyer, he did not function in that capacity when he petitioned for involuntary bankruptcy. Instead, he was acting as just another creditor. As such, he could not be deemed to have committed fraud on the court, whatever he did.

The specific allegation against Kielty was that he inflated the creditor’s claims to increase the likelihood of litigation. But the court found that, even if true, it would only be fraud, but not fraud on the court.

Despite the legal holding, the court continued, in order to note that the allegation has been repeatedly found to lack any merit.

Before concluding, the court imposed sanctions on Stanton pursuant to Rule 38.

Posner explained, “The motions and appeals filed … have been not only groundless but also obsessive, a form of harassment, unprofessional, and an abuse of the bankruptcy court, the district court, and this court. They give new meaning to the word pertinacity.”

Accordingly, the court directed the trustee to submit a request for damages and costs.

What the Court Held

Case: In re Golf 255, Inc., No. 10-3732

Issue: What is the definition of “fraud on the court” as used in Rule 60?

Holding: “Fraud on the court” is “the kind of fraud that ordinarily couldn’t be discovered, despite diligent inquiry, within a year, and in some cases within many years — cases in which there are no grounds for suspicion and the fraud comes to light serendipitously.”

David Ziemer can be reached at [email protected].

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