Elvis Presley once said, “Truth is like the sun. You can shut it out for a time but it ain’t going away.” As we all know, the legal system in the U.S. is predicated upon truth — the decisions of the fact-finder are based on the veracity of the evidence presented. In Ehrenberg v. Roussos (In re Roussos),[1] the bankruptcy court examined allegations of fraud on the court in connection with a chapter 7 trustee’s efforts to vacate a two-decade-old
§ 363 sale order. The facts alleged in Roussos are egregious, but it is an important reminder of the broad powers of the court when fraud or dishonesty are at play.
Civil Rule 60: Relief from a Judgment or Order
Rule 60 of the Federal Rules of Civil Procedure (FRCP), made applicable in bankruptcy by Rule 9024 of the Federal Rules of Bankruptcy Procedure, governs the relief from a judgment or order.[2] Civil Rule 60(a) addresses the correction of clerical mistakes or errors, while Rule 60(b) sets forth specific grounds on which a movant may seek to set aside a final judgment or order, including excusable neglect, newly discovered evidence, fraud by an opposing party or the satisfaction of a judgment. A motion for relief under Civil Rule 60(b) must be made within a “reasonable time,” and in the case of a mistake, newly discovered evidence or fraud “no more than one year after entry of the judgment.”[3] If a movant fails to take action prior to this deadline, only limited avenues remain to obtain relief. An example is Civil Rule 60(d), which permits a court to set aside a judgment for “fraud on the court,”[4] which is not defined by the FRCP and has been described as an act that “defiles the court itself.”[5] Examples of conduct rising to the level of fraud on the court include bribery of a judge, jury tampering and fraudulent submissions by a lawyer.[6] Due to the serious nature of such conduct, no time bar exists for seeking to set aside a judgment based upon fraud on the court.[7]
Background of Roussos[8]
In the early 1980s, two brothers (hereinafter, the “Roussos brothers”) entered into a partnership with August Michaelides to purchase two apartment buildings. Unbeknownst to Mr. Michaelides, the Roussos brothers failed to include him on the title to the apartment buildings. At the time of Mr. Michaelides’ death in 1992, his widow inquired about her husband’s pro rata shares of income in the apartment buildings. Unsatisfied with the responses she received, Ms. Michaelides filed suit and obtained a judgment quieting the title in the apartment buildings, as well as awarding her both compensatory and punitive damages.
Thereafter, the Roussos brothers were alleged to have facilitated a conspiracy to transfer the apartment buildings out of Ms. Michaelides’s reach by forming two corporate entities secretly controlled by the Roussos brothers and their wives (collectively, the “entities”). The Roussos brothers filed individual chapter 11 petitions and sought to sell the apartment buildings to the entities pursuant to § 363, free and clear of Ms. Michaelides’ interest (the “sale motion”). In support of the sale motion, the Roussos brothers submitted declarations stating that the sale was an arm’s-length transaction and neither of the Roussos brothers held an interest in the entities (hereinafter, the “Roussos brothers’ declarations”). On Aug. 5, 1993, the court entered an order approving the sale of the apartment buildings free and clear of Ms. Michaelides’ interest (the “sale order”). The Roussos brothers’ chapter 11 cases were later converted to chapter 7, and they both received discharges on May 2, 1995. The bankruptcy cases were closed on June 27, 2002.
In early 2015, more than 20 years after the sale order entry, while attempting to enforce her judgment, Ms. Michaelides unearthed information regarding an arbitration proceeding, which included filings that referenced the Roussos brothers’ current ownership of the properties. The U.S. Trustee reopened the Roussos brothers’ bankruptcy cases, and a chapter 7 trustee was appointed.
On Aug. 4, 2015, the chapter 7 trustee filed a complaint seeking to, among other things, set aside the sale order for fraud on the court pursuant to Civil Rule 60(d)(3). A motion to dismiss the complaint was filed, in which certain of the defendants argued that the facts in the complaint were insufficient to support a finding of fraud on the court because the allegations related only to fraud against creditors and the complaint was not filed within a reasonable time.
The Court’s Ruling[9]
In considering the motion to dismiss, the court explained that while nothing in the Bankruptcy Code prohibits a sale of property to insiders, such sales are “fundamentally different” and are subject to “heightened scrutiny.”[10] Thus, if the Roussos brothers’ declarations were false, the court (in considering the sale motion) would not have applied the requisite heightened scrutiny required to evaluate a sale to insiders. Thus, “[t]he court’s impartial review was fatally compromised by its lack of awareness of a crucial fact — that the purported arm’s-length sale was in reality a sale to entities controlled by insiders”[11] and “the court’s lack of awareness was a direct result of the false declarations submitted by the Roussos Brothers.”[12] As the court explained, “allowing the court to remain infected by such serious fraud undermines the legitimacy of the bankruptcy sale process.”[13] The court also found that the complaint was timely since no statute of limitations exists for fraud on the court.[14]
For these reasons, the court held that “[t]he fraud alleged … was so serious as to prevent the judicial machinery from performing ‘in the usual manner its impartial task of adjudging cases that are presented for adjudication.’”[15] As a result, the court denied dismissal of this count of the complaint.
Conclusion
The Roussos case remains ongoing.[16] Whatever the outcome, the case demonstrates the importance of truthfulness, candor and disclosure in the bankruptcy process, as well as the powers of the court to take action in the absence of compliance with such requirements — even two decades later. As Elvis said, the truth “ain’t going away.”
[1] 541 B.R. 721 (Bankr. C.D. Cal. 2015).
[2] Fed. R. Bankr. P. 9024 also sets forth certain limitations to the application of Fed. R. Civ. P. 60 in bankruptcy.
[3] Fed. R. Civ. P. 60(c).
[4] Fed. R. Civ. P. 60(d).
[5] In re Golf 255 Inc., 652 F.3d 806, 809 (7th Cir. 2011).
[6] Id.
[7] See, e.g., Serzysko v. Chase Manhattan Bank, 461 F.2d 699, 702 (2d Cir. 1972).
[8] Roussos, 541 B.R. at 725-28.
[9] Id. at 728-35.
[10] Id. at 730 (quoting In re Family Christian LLC, 533 B.R. 600, 622 (Bankr. W.D. Mich. 2015)).
[11] Id.
[12] Id. at 733.
[13] Id. at 731.
[14] Id.
[15] Id. at 725 (quoting Anand v. CITIC Corp., 926 F.2d 912, 916 (9th Cir. 1991)).
[16] At the time of submission, a stipulated judgment had been entered in the case, which, among other things, voided the sale order. However, the underlying settlement agreement remains subject to challenge and implementation in this very contentious litigation.