Fraud on the court is often alleged but almost never proven. Never proven, that is, until Bankruptcy Judge Martin Glenn of New York tagged a lawyer for about $47,000 as a result of filing fictitious schedules for a chapter 7 debtor.

A couple were married for less than 18 months before they separated. Their “very contentious” divorce was still ongoing, Judge Glenn said in his first opinion on December 12. [Emphasis in original.] The former wife filed a chapter 7 petition about five years after separation.

In her schedules, the former wife-debtor listed assets including interests in three corporations allegedly valued at $50 million. The debtor’s Schedule A/B claimed that total personal property was worth $150 million. “Not bad for a chapter 7 debtor,” Judge Glenn said.

The debtor did not list her former husband as a creditor and did not give him notice of the chapter 7 filing. The former husband learned about the bankruptcy much later in the divorce proceedings.

Having located the debtor’s schedules, the husband found serious misrepresentations. Contrary to the debtor’s claimed interest in the three corporations, the divorce court had decided that the corporations had been owned by the husband before marriage and were his separate property.

The husband notified the debtor’s lawyer about the misrepresentations, but the lawyer took no action to correct the filings. Significantly, the debtor’s bankruptcy lawyer had also been her matrimonial counsel and thus would have known about the rulings by the divorce court.

The chapter 7 trustee evidently was not taken in by the schedules, because he filed a report of no assets.

The husband retained counsel, who filed an adversary proceeding against the debtor and her lawyer. Among other things, the complaint alleged fraud on the court and violations of Section 487 of the New York Judiciary Law, which allows treble damages for deceiving the court. In a video status conference, the debtor’s lawyer admitted that he had been served with the complaint and also admitted that he had not filed an answer.

In his first opinion, Judge Glenn granted the husband’s motion for a default judgment against the lawyer for fraud on the court. He dismissed the state law claim, ruling that it only applies to proceedings in state court.

Judge Glenn found that the allegations in the complaint, taken as true following the defendant’s default, satisfied all the requirements for fraud on the court. He described the elements of the claim as requiring “(1) a misrepresentation to the court by the defendant; (2) a description of the impact the misrepresentation had on proceedings before the court; (3) a lack of an opportunity to discover the misrepresentation and either bring it to the court’s attention or bring an appropriate corrective proceeding; and (4) the benefit the defendant derived from the misrepresentation.”

Because it’s fraud, the allegations must be made with particularity under Rule 9(b).

Among other things, Judge Glenn said that the debtor’s “Schedules misrepresent a substantial portion of [the husband’s] specifically identified separate property as property of the estate.” Later, he conducted an inquest to determine the amount of the husband’s damages and wrote a second opinion on April 8.

“Compensable damages for fraud on the court may include reimbursement for attorneys’ fees, Judge Glenn said in the second opinion. To determine the amount, he undertook a lodestar analysis and decided that the firm’s rates were “reasonable.” However, he could not tell from the time records exactly how much time was spent on fraud on the court and how much was devoted to the state law claim that failed.

Judge Glenn decided that a 50% reduction was appropriate given the failure to apportion. He granted the husband a judgment for about $47,000 and found no reason to delay entry of final judgment.