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Seventh Circuit Finds Appeals and Motions Groundless and an Abuse of the Court System

Tuesday, August 2, 2011
In re Golf 255, Inc., No. 10-3732, 2011 BL 191607 (7th Cir. July 22, 2011) The United States Court of Appeals for the Seventh Circuit affirmed the district court's decision, dismissing the appellants' motions and appeals. Concluding that the appellants' motions and appeals were not only groundless but also harassing and an abuse of the court system, the Seventh Circuit also granted the trustee's motion for sanctions under Rule 38 of the appellate rules. Sale of Golf Course Nick Jakich and Jay Dunlap's owned a corporation ("Golf" or "Debtor"), the principal asset of which was a golf course. In October 2006, four of the corporation's creditors, including Michael Kielty, a prior shareholder and executive of Golf, filed an involuntary petition for chapter 11 bankruptcy protection for Golf. Although, Dunlap opposed the petition, the bankruptcy court granted it and appointed Robert Eggmann as trustee of the estate ("Trustee"). Over the objections of Jakich and Dunlap, the Trustee was granted permission to sell the golf course. The court approved the sale of the golf course to a third party for $5 million, which was more than enough to pay all Debtor's creditors, other than insiders, in full, while insiders received a substantial portion of their claims. Although Jakich and Dunlap appealed the sale order, the district court dismissed the appeal as moot. Notwithstanding the fact that the Trustee and the United States Trustee for the Southern District of Illinois had investigated the charge of fraud and found no evidence to substantiate the claim, a year and a half later, in August 2008, Dunlap and Jakich requested permission to conduct discovery to establish whether the bankruptcy proceeding and sale were fraudulent and filed motions to rescind the sale and to investigate it for simple fraud allegedly committed by Kielty and "fraud on the court." The bankruptcy court denied the motions and noted that under a claim of simple fraud, a motion seeking such relief must be filed within a year after the judgment and Jakich and Dunlap's motion was clearly untimely. See Fed. R. Civ. P. 60(b)(3), (6), (c)(1), and (d)(3). After Jakich and Dunlap appealed, the district court affirmed the bankruptcy court's decision. Appellants' Assert Fraud on the Court On appeal, Jakich and Dunlap argued that Kielty had filed Golf's involuntary bankruptcy petition as part of a 'fraud on the court,' by manipulating the parties and court to force an emergency sale of the golf course on his own terms. Further, they allege that they were prohibited from conducting their own discovery or presenting any evidence to that effect. Noting that because a motion to set aside a judgment on the ground of fraud on the court has no statute of limitation, it must be narrowly construed, the Seventh Circuit explained that the term "fraud on the court" was not defined in Rule 60 or anywhere in the federal rules. However, it noted that the most widely used definition is that fraud on the court consists of acts that "defile the court," or consists of fraud perpetrated by officers of the court so that the judicial machinery is unable to perform in an impartial manner. Drobny v. Commissioner, 113 F.3d 670, 677-78 (7th Cir. 1997). Further elaborating, the Seventh Circuit noted that the kinds of fraud that could be grounds for setting aside a judgment many years later, ought to be ones that ordinarily couldn't be discovered, even with diligent inquiry, within a year, because there were no grounds for suspicion, such as jury tampering, bribery of a judge or fraudulent submissions by a lawyer for one of the parties. See Oxxford Clothes WW, Inc. v. Expeditors Int'l of Washington, Inc., supra, 127 F.3d 574, 578 (7th Cir. 1985). In examining the case at hand, the Seventh Circuit found Jakich and Dunlap's claim that Kielty committed a fraud on the court to be without merit, noting that although Kielty was a lawyer, he acted in the capacity of a creditor when he filed the involuntary petition. Further, the Seventh Circuit struck down Jakich and Dunlap's argument that Debtor was not insolvent when the involuntary petition was filed, noting that the bankruptcy judge found that the record clearly established that Debtor was insolvent. Additionally, Jakich and Dunlap asserted that Kielty and the other creditors inflated their claims in order to help persuade the bankruptcy judge to grant the involuntary petition, which in turn prohibited them from being able to remain as management during the chapter 11 proceeding, and potentially avoiding or postponing liquidation. However, the Seventh Circuit found these arguments unpersuasive and determined that the involuntary proceeding ended up being the right course of action for Debtor, for the sale of the golf course garnered more money than its estimated market value and therefore, all of Debtor's outside creditors received payment in full on their claims, and inside creditors also received a substantial payment on their claims. Nonetheless, the Seventh Circuit held that even if Kielty purposefully submitted inflated claims, increasing the chance of a liquidation, this would only constitute simple fraud and not a fraud on the court. Similarly, the U.S. Trustee, bankruptcy judge, Trustee, district judge, a mediator and others all examined the fraud allegations and determined that they were without merit. Therefore, the Seventh Circuit held that Jakich and Dunlap's motions and appeals were groundless. Seventh Circuit Affirms District Court's Decision Ultimately, the Seventh Circuit affirmed the district court's decision, denying Jakich and Dunlap's motions. Also, expressing frustration at the excessive amounts of baseless pleadings and appeals and the abuse perpetrated on the court system, the Seventh Circuit granted the Trustee's motion for sanctions under Rule 38 of the appellate rules. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. 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