Recently the 7th Circuit Court of Appeals heard a case arising from the Chapter
11 reorganization of a golf course; although their actual
decision is about the application of a seldom-used cause of action known
as fraud on the court
Principals of a golf course tried
to reorganize but ran into trouble when disgruntled creditors presented
evidence of their managerial incompetence and convinced the Bankruptcy Court in
the Southern District of Illinois to put a Trustee in place to operate the
The principals of the course
decided not to cooperate and started a new entity with the intention of
transferring the course into it. Of course an Automatic Stay was in effect. Not only that, but their antics amounted to a series of transfers that were both fraudulent and
preferential. So when the Court found out what had happened, it enjoined the
principals from taking further action of any kind.
By then the Trustee had sold the
golf course for a profit. But the principals did not want the sale confirmed
and objected on 2 bases: fraud (ironically), and fraud on the court.
The Bankruptcy Court shot down both arguments, and the principals appealed to
the District Court, and eventually the Appellate Court.
The 7th Circuit spends several pages
defining fraud on the court and points out that there is no statute of
limitations on the action (like murder). But fraud on the court
is not formally defined in the Bankruptcy Code, the Rules, or the Rules of
Civil Procedure. Instead it’s loosely defined as fraud that defiles the
court or is committed by an officer of the court and would not
be discovered even after diligent inquiry. Examples include Attorneys
committing perjury or forgery, falsifying documents, tampering with a jury, or
bribing a judge.
Following their analysis however,
the 7th Circuit concluded that even if there had been perjury by a shareholder
that was also a lawyer, it did not rise to the level of fraud on the court
because the alleged wrongdoer was not acting in his capacity as an officer of
the court when he lied.
Since the principals of the
course had not alleged that the attorney-shareholder in question lied in his
official capacity but rather had conspired with the Trustee to inflate the
price of the course the Court of Appeals, like the District Court, that no
fraud on the court had taken place.
Hole in one.