No “Mulligans” Allowed: Seventh Circuit Refuses to Set Aside Bankruptcy Court’s Order Authorizing the Sale of Debtor’s Golf Course

Sometimes in golf, as in life, one can start over.  When a golfer hits a second ball to re-do a wayward shot, the second stroke is usually known as a “mulligan” or a “do-over” and in a friendly game won’t be counted.  In In re Golf 255, Inc., mistaking the U.S. bankruptcy system for a round on the golf course, two former owners of a debtor corporation involuntarily placed into chapter 11 sought precisely that:  a “do-over.”  Their reward, however, was not the free stroke they expected.  The Seventh Circuit, which plays by the rules, rejected the former owners’ persistent efforts to seek a “do-over” with a stern rebuke and sanctions.
The Seventh Circuit’s decision in In re Golf 255 was the culmination of five years of litigation encompassing multiple appeals that embroiled three different courts.  The case started in the Bankruptcy Court of the Southern District of Illinois and wound its way through the District Court up to the Seventh Circuit.  All the while, the former owners of the debtor filed multiple objections, motions, and appeals on various grounds seeking to undo both the involuntary filing and the subsequent sale of the debtor’s principal asset, a golf course.
In October 2006, creditors filed an involuntary chapter 11 petition.  Over the objection of the former owners, the bankruptcy court granted the involuntary petition and appointed a chapter 11 trustee.  The trustee then filed a motion to sell the debtor’s golf course, to which both former owners filed multiple motions in opposition.  The bankruptcy court denied them all.  The court granted the trustee’s motion and approved the sale of the golf course to a local recreation district for $5 million.  In March 2007, the sale closed.
The owners appealed the bankruptcy court’s sale order.  Three months after the sale closed, in June 2007, the district court dismissed the appeal as moot under section 363(m) of the Bankruptcy Code on the grounds that a stay pending appeal had been denied and the sale had already closed.  This should have brought the unhappy saga to a conclusion.
The former owners, however, continued to file motions in bankruptcy court seeking to dismiss the proceedings and undo the sale.  More than two years and several attempts later, they moved the bankruptcy court to conduct a Bankruptcy Rule 2004 examination to investigate the allegedly fraudulent filing of the chapter 11 petition.  The bankruptcy judge construed their motions as motions under Federal Rule of Civil Procedure 60(b) (made applicable to bankruptcy proceedings by Bankruptcy Rule 9024) to set aside the court’s grant of the chapter 11 petition and approval of the sale of the golf course on the basis of fraud.  A Rule 60(b) motion for relief from a judgment or order based on fraud, however, must be filed within one-year of the date of the original judgment or order is entered – except when the fraud is “fraud on the court.”  The former owners claimed that their motions were based on “fraud of the court.”  The bankruptcy court did not think it had been duped and denied the motions.
In 2010, the trustee moved to close the chapter 11 case.  The former owners objected and again requested the bankruptcy court investigate their charges of fraud.  The bankrupcty court refused and entered a final decree.  The former owners then filed a motion to reconsider which also was denied by the bankruptcy court, precipitating the appeal to the district court and, ultimately, the Seventh Circuit.
On appeal, the former owners argued that a former shareholder and creditor of the debtor manipulated the involuntary filing and sale of the debtor’s golf course as part of a “fraud on the court.”  Furthermore, they argued that they were denied an opportunity to conduct discovery that would confirm their allegations or to present evidence already obtained that would establish the validity of their allegations.
The Seventh Circuit, in exploring whether or not the former shareholder had committed a “fraud on the court,” noted that the term “fraud on the court” is not defined in Rule 60 or elsewhere in the federal rules.  It also noted that courts have frequently offered up the unhelpful definition that such fraud consists of acts that “defile the court.”  In defining for itself “fraud on the court,” the Seventh Circuit looked to the fact that such motions have no deadline and, as a result, must be narrowly defined to avoid the risk that parties will invoke it frequently as a way to collaterally attack civil judgments.  The Seventh Circuit then considered what kind of fraud Rule 60(b) was meant to address; it concluded it was meant to narrowly address the kind “that ordinarily could not 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.”  It cited as an example a lawyer’s complicity in fraud through the tendering of forged documents or perjured testimony in a judicial proceeding.  Perjury by a lawyer is more difficult to detect, partly because it is less expected than perjury by a witness.  In fact, the adversary system is designed to anticipate and uncover untruthful witnesses through tools such as discovery, cross-examination and other investigatory means.  Similar tools do not exist for uncovering untruths by attorneys.  This distinction explains why simple perjury by a witness is not fraud on the court and perjury by counsel is.
Applying this definition to the case at hand, the Seventh Circuit held that the former owners’ allegations of “fraud on the court” were unfounded.  The former shareholder accused of committing the fraud, despite being an attorney, was merely acting in his capacity as a regular creditor – not an officer of the court – when he signed the petition to declare the debtor bankrupt.  Moreover, the record indicated that others who have considered the fraud allegations, including the bankruptcy trustee, the U.S. Trustee, bankruptcy judge, district judge, and mediator, all concluded that those allegations lacked merit.
Although the Seventh Circuit’s discussion of “fraud on the court” is itself interesting, equally interesting is why it even needed to address the issue at all.  The obvious resolution of the motion would have been for the Seventh Circuit to dismiss the appeal as moot under section 363(m).  In fact, many courts, including the Seventh Circuit, have held that the failure of a party to obtain a stay pending appeal moots the appeal of a sale order under section 363(m) of the Bankruptcy Code.  Moreover, some courts, including the Seventh Circuit, have extended the mootness doctrine to Rule 60(b) motions.  See, e.g., In re Vlasek, 325 F.3d 955, 962 (2003) (dismissing appeal of motion to vacate bankruptcy petition under Rule 60(b)(4) as moot under section 363(m) of the Bankruptcy Code to the extent it sought to overturn approval of sale orders where movant failed to obtain a stay pending appeal); see also In re Rare Earth Minerals, 445 F.3d 359 (4th Cir. 2006) (affirming district court’s dismissal as moot appeal of motion for rehearing on assumption and sale of lease where no stay of the sale was obtained pending appeal).  It is quite plausible that the Seventh Circuit could have likewise easily and summarily disposed of the former owners’ appeal.  But it is also quite plausible that the Seventh Circuit simply decided that enough was enough and resolved to put an end to the “unedifying saga” by disposing of the former owners’ assertions of fraud on the merits and sending them to the clubhouse once and for all.