Maloof v. Level Propane, Inc.

Summarized by Geoffrey Peters , Weltman, Weinberg & Reis Co., LPA
14 years 8 months ago

Citation:

(6th Circuit, Dec 31,1969)

Tag(s):

6th Circuit

Ruling:

A motion to vacate based upon a theory of fraud on the court was barred by the doctrine of finality where the court considered and rejected the theory on multiple prior occasions. In order to establish fraud on the court, it is required to show conduct (1) by an officer of the court; (2) directed to the "judicial machinery" itself; (3) which was intentionally false, willfully blind to the truth, or in reckless disregard of the truth; (4) which was a positive averment or a concealment when under a duty to disclose; and (5) which deceived the court. Appellant failed to demonstrate a fraud on the court. The circuit court also held that in order for a legal cause of action to be abandoned, the debtor must give adequate notice of their intent to abandon the causes of action. An abandonment must be made after notice and hearing pursuant to 11 U.S.C. Section 554(a) as well as notice to the United States Trustee, all creditors, indenture trustees and committees pursuant to Federal Rule of Bankruptcy Procedure 6007. In this case, debtor did not abandon the legal causes of action. The circuit court also ruled that reputation alone is not a constitutionally protected liberty or property interest. Only where the stigma of damage to a reputation is coupled with another interest, such as employment, is procedural due process protection triggered. In this case, a settlement agreement that released appellant's liability did not deprive him of any rights or property.

Procedural context:

Appeals from orders of the bankruptcy court whereby appellant sought the bankruptcy court to find that the entire bankruptcy was a fraud on the court.

Facts:

Various creditors filed involuntary bankruptcy proceedings under chapter 7 of the bankruptcy code against several related entities. These cases were subsequently consolidated and converted to proceedings under chapter 11. The sole shareholder of the debtor argued that after the bankruptcy filing, certain individuals within the management of the debtor concealed and destroyed customer records in an attempt to make the debtor appear less valuable. In addition, he argued that these individuals frustrated attempts to sell the company on the open market and ultimately delivered the company to its eventual buyer for a dramatically inadequate price. The sole shareholder initially brought these allegations in a motion to reopen an examiner's investigation and for substitute examiner. The bankruptcy court held an evidentiary hearing and found that the shareholder did not provide sufficient support for his allegations and denied the motion. The shareholder did not appeal. However, the shareholder attempted to bring these matters before the court again in several different motions including a renewed and reinstated motion to reopen examiner's report and for appointment of substitute examiner based upon newly discovered evidence,a motion to vacate the agreed upon conversion order from chapter 7 to chapter 11, and a motion to disqualify debtor's counsel. The shareholder relied upon substantially the same evidence. The court denied the motions holding that they were barred by the doctrines of laches and finality. The shareholder used other efforts to undermine the bankruptcy which are the subject of this appeal. The shareholder filed another motion to vacate the conversion order and a motion to vacate the sale order that approved the sale of the debtor as a going concern. The shareholder also filed a district court action seeking damages for injury to his corporations which was dismissed. He later filed another district court action with the same allegations but framed them as derivative claims. Debtor filed an adversary proceeding for violation of the automatic stay against the shareholder based upon the derivative suit. The shareholder filed a counterclaim, again asserting subtantially the same allegations that the entire bankruptcy was a fraud on the court. The shareholder also asserted debtor abandoned the legal causes of action. Debtor prevalied on a motion for summary judgment and a motion to dismiss the counterclaim. Shareholder appealed these matters. Debtor and the official committee of unsecured creditors filed a complaint against the shareholder and an individual involved in the management of the debtor. The bankruptcy court allowed the defense costs to be paid under the director and officer liability insurance policy. The insurance company and the individual involved in the management agreed to a settlement in which the individual, the insurance company, and the shareholder would be released from liability. The bankruptcy court approved the settlement. The shareholder appealed this issue as well.

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