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In re Bressman

United States Court of Appeals, Third Circuit

October 18, 2017


          Argued on March 20, 2017

         On Appeal from the United States District Court for the District of New Jersey (D.NJ.No. 2-14-cv-05314) District Judge: Honorable Kevin McNulty

          Max Folkenflik [Argued] Folkenflik & McGerity Counsel for Appellants.

          Ryan T. Jareck Cole Schotz, Michael D. Sirota [Argued] Warren A. Usatine Cole Schotz Counsel for Appellee.

          Before: AMBRO, JORDAN and ROTH, Circuit Judges



         In this appeal we are asked to decide whether Max Folkenflik, Esq., committed fraud on the court. The Bankruptcy Court determined that Folkenflik had intentionally deceived the court. As a result, the court vacated the default judgment it had previously entered in favor of Folkenflik's clients. The District Court affirmed. Finding no error, we will affirm.


         This action was commenced as an adversary complaint in a Chapter 11 bankruptcy proceeding brought by Andrew Bressman. The Plaintiffs are victims of fraudulent activities by Bressman. In the 1990's, Bressman and others had engaged in manipulation of stock prices. The Plaintiffs brought civil securities fraud and Racketeer Influenced and Corrupt Organizations Act (RICO) claims against Bressman and his co-defendants in the United States District Court for the Southern District of New York. The Plaintiffs were represented by Folkenflik. These civil actions against Bressman were stayed when Bressman filed for bankruptcy in the Bankruptcy Court for the District of New Jersey. In response, the Plaintiffs filed the adversary complaint against Bressman.

         The civil securities fraud and RICO claims continued against Bressman's co-defendants before Judge John Koeltl in the Southern District of New York. On August 13, 1998, claims against the co-defendants in one of the suits were settled for XXXXX On August 28, Folkenflik, as attorney for Plaintiffs, received the full settlement amount, minus a $75, 000 prompt payment discount. The parties' Settlement Agreement, approved by Judge Koeltl, was subject to a confidentiality order, which incorporated the following language from the parties' stipulated confidentiality agreement:

It is hereby stipulated, consented and agreed to by counsel for the parties in this action, that they will not disseminate and/or publicize the existence of or disclose the financial terms of any settlement agreement with any defendants, except as further set forth in this Stipulation and order; that this confidentiality provision does not prohibit or restrict the parties from responding to any inquiry about the documents produced or their underlying facts and circumstances by any state or federal regulatory agency, including the Securities and Exchange Commission or any self-regulatory organization ....[1]

         The adversary proceeding continued against Bressman in the Bankruptcy Court.

         Several months after the Settlement Agreement was reached and the funds received, the Plaintiffs sought a default judgment in the Bankruptcy Court against Bressman. The court ordered them to submit an affidavit detailing their damages. In March 1999, Folkenflik, as their attorney, submitted an affidavit that recounted the history of the proceedings against Bressman and his co-defendants. The affidavit indicated that the damages totaled $5, 195, 081 plus interest. Although Folkenflik's affidavit provided a comprehensive account of the underlying proceedings, it made no mention of the $ XXXXX settlement that he had obtained against Bressman's co-defendants or even of the fact of the settlement. Explicitly noting its reliance on Folkenflik's affidavit, the Bankruptcy Court entered a default judgment against Bressman for $5, 195, 081 on February 7, 2000. The Bankruptcy Court ordered Folkenflik to submit a separate application for RICO damages. In September 2002, the Plaintiffs filed an application for RICO damages and attorneys' fees. No mention was made in that application that the Plaintiffs had already been paid XXXXX on account of their losses. In July 2003, still unaware of the Settlement Agreement, the Bankruptcy Court entered a RICO judgment for treble damages, totaling $15, 585, 243. The court noted that this "amount constitute[] treble the damages found and awarded by this Court as Plaintiffs out-of-pocket losses . . .."[2]The court also awarded $910, 855.93 in attorneys' fees.[3]

         Bressman was incarcerated from 2003 until 2006 in connection with his conviction in New York state court for enterprise corruption and grand larceny. During that time and the seven years that followed, Folkenflik made no attempt to recover on the default judgment because, in his view, the likelihood of Bressman having substantial assets was remote. In 2013, however, Folkenflik learned that Bressman was going to receive a potential payment of $10 million, so Folkenflik set out to have the $15, 585, 243 judgment satisfied. He filed ex parte applications on behalf of the Plaintiffs in the Southern District of New York and in the District of New Jersey to appoint a receiver to search for and seize Bressman's assets.

         The court in New Jersey expressed skepticism that emergency ex parte relief was warranted, given Folkenflik's failure to collect for ten years. The application was denied in open court and was withdrawn the same day. In New York. Judge Ramos granted the application on September 26. 2013. On October 2, Folkenflik filed a new application in the District of New Jersey asking the court to authorize the receiver, who had been appointed by the Southern District of New York, to act in New Jersey. Contrary to Local Rule, Folkenflik did not mark on the civil cover sheet that this action was related to the unsuccessful application that he had filed in the District of New Jersey several days earlier.[4] As a result, the case was assigned to a different judge who granted the ex parte application. Searches and seizures were executed in New York and New Jersey on October 11.

         In declarations appended to Plaintiffs' ex parte applications, Folkenflik indicated that, as a result of post-judgment interest, the judgment against Bressman totaled $30, 895, 913.39. Nothing in these submissions indicated that Folkenflik had already collected $ XXXXX on behalf of the Plaintiffs. Indeed, in his brief in support of his application in the Southern District of New York, Folkenflik stated: "With post judgment interest, the Judgment's current value is $30, 895, 913.39. To date - more than ten years later - Plaintiffs have not seen a dime of this amount."[5]

         Then, on October 13, 2013, Bressman's attorney, David Wander, wrote to Folkenflik, asking if anyone had made payments on the judgment.[6] Folkenflik certified that it was not until then that he looked at the docket sheet and saw that the settlement was listed. On October 16, Folkenflik replied to Wander, stating "[t]he complete and accurate response to your specific question is no, there have not been any payments from any source regarding the Bressman Judgment."[7] Folkenflik added, in connection with this letter: "I... advised him of all of the facts I thought I was allowed to advise him of, given the public disclosure of the existence of the settlement, and that was what I was able to say, "[8] namely, that certain defendants were dismissed from one of the civil actions, "subject to a settlement agreement that was submitted to Judge Koeltl with the confidentiality 'so ordered' and the agreement sealed by the order of the Court in or about October 1998."[9] That action was then marked closed. Folkenflik certified that he was not aware of the reference to the settlement in the court docket until October 2013.[10]

         October 2013 was the first time that the Bankruptcy Court, the District Courts in New York and New Jersey, and Bressman[11] learned that Folkenflik had successfully negotiated a settlement agreement with Bressman's co-defendants. The orders granting the Plaintiffs' ex parte applications were then vacated in both courts and the seized materials were returned.

         On January 7, 2014, Judge Koeltl in the Southern District of New York held a hearing to determine whether Folkenflik was obligated to disclose the Settlement Agreement and to whom. Folkenflik argued that, absent the confidentiality order, he would have informed the Bankruptcy Court of the Settlement Agreement even though he believed it was "immaterial" and irrelevant to the underlying default judgement.[12] By oral order, the court instructed the parties to provide counsel and all involved judges with details of the Settlement Agreement.

         On January 9, 2014, a hearing was held by Judge Ramos in the Southern District of New York to determine whether Folkenflik's decision to file the ex parte application to collect on the default judgment with no mention of the Settlement Agreement constituted sanctionable misconduct. The judge noted that the validity of the default judgment against Bressman was not at issue in that hearing.[13] At the conclusion of the hearing, the court declined to impose sanctions.

         Bressman then asked the Bankruptcy Court for the District of New Jersey to reopen the proceeding related to the Plaintiffs' adversary complaint, vacate the underlying default and RICO judgments, and dismiss the Plaintiffs' complaint with prejudice on the grounds that the judgment was fraudulently obtained. On March 20, 2014, the Bankruptcy Court held a hearing. Bressman's counsel argued that "if there were ever a case to vacate a judgment based upon fraud on the Court, it's this case. There is no question that Mr. Folkenflik intentionally concealed and affirmatively misrepresented critical facts to this Court in an effort to obtain undeserved double recovery for his clients and enormous fees for himself."[14]

         Folkenflik urged that he would have informed the Bankruptcy Court of the Settlement Agreement if doing so had not been prohibited by the confidentiality order. In the alternative, Folkenflik argued that Bressman's motion was untimely. The Bankruptcy Court rejected Folkenflik's contentions. Finding that Folkenflik's conduct was intentional and was the type of egregious misconduct that constitutes fraud on the court, the Bankruptcy Court vacated the default judgment and dismissed the adversary complaint with prejudice. The District Court affirmed the Bankruptcy Court's order, and this appeal followed.


         The District Court had jurisdiction to consider Folkenflik's appeal of the Bankruptcy Court's order under 28 U.S.C. § 158(a)(1). We have jurisdiction pursuant to 28 U.S.C. § 158(d) and 28 U.S.C. §1291.

         The Plaintiffs raise three arguments on appeal. First, they contend that Bressman's motion to vacate the default judgment was time barred. Whether the underlying motion was barred is a question of law, and as such our review is plenary.[15] Second, the Plaintiffs contend that Folkenflik's conduct does not rise to the level of egregious misconduct that constitutes intentional fraud on the court. Because the facts are not in dispute, we exercise plenary review of whether Folkenflik committed intentional fraud.[16] Finally, the Plaintiffs claim that that the sanction of dismissal with prejudice was an abuse of the Bankruptcy Court's discretion. As with other forms of equitable relief, our review of the Bankruptcy Court's decision to vacate the underlying default judgment is for abuse of discretion.[17] We review its findings of fact for clear error.[18]



         The Plaintiffs first contend that the Bankruptcy Court's grant of relief was procedurally barred because Bressman's motion was filed more than ten years after the alleged fraudulent conduct. In the alternative, the Plaintiffs assert that the action was barred by the doctrine of laches. We disagree with both contentions.

         Federal Rule of Civil Procedure 60(b) authorizes relief from a final judgment on six separate grounds.[19] Rule 60(b)(3) specifically permits a court to relieve a party from a final judgment for "fraud[, ] . . . misrepresentation, or misconduct[, ]"[20] and subsection 6 permits courts to do so for "any other reason that justifies relief."[21] As the Plaintiffs note, Rule 60 motions alleging fraud are ordinarily subject to a one-year limitations period.[22] Although they correctly recite the Rule's time bar, they do so to no avail. Rule 60 has no applicability where, as here, a party requests relief from a final judgment in response to an opponent's alleged fraud on the court. We settled this issue in Averbach v. Rival Mfg. Co., where we held that "the one year time limit in the rule, by virtue of the rule's very text, does not apply to independent actions" such as those for fraud on the court.[23] Our decision in Herring v. United States reaffirmed our holding in Averbach: "an independent action alleging fraud upon the court is completely distinct from a motion under Rule 60(b)."[24]

         This concept that the inherent power of federal courts to vacate a fraudulently obtained judgment-even years after the judgment was entered-has long been recognized by the Supreme Court.[25] Consistent with this precedent, the bankruptcy court here granted the requested relief because it found that Folkenflik committed fraud on the court. We therefore see no basis to conclude that the time limits of Rule 60 barred the court's consideration of the appellee's motion to vacate the underlying default judgment.

         The Plaintiffs' contention that the doctrine of laches counsels against vacating the underlying default judgment similarly fails. "Laches is 'a defense developed by courts of equity' to protect defendants against 'unreasonable, prejudicial delay in commencing suit.'"[26] The defense "applies in those extraordinary cases where the plaintiff unreasonably delays in filing a suit, ' and, as a result, causes 'unjust hardship' to the defendant. Its purpose is to avoid 'inequity.'"[27] The Plaintiffs bear the burden of proving that the elements of laches- "inexcusable delay in instituting suit and prejudice resulting to the respondent from such delay"-are met.[28] Arguing that Bressman unjustifiably slept on his rights for ten years, the Plaintiffs challenge the District Court's conclusion that the elements of laches are not present. However, because "[b]y its very nature the doctrine [of laches] addresses itself to the sound discretion of the trial judge[, ]... absent an abuse of discretion, we will not disturb the court's determination."[29]

         The Bankruptcy Court did not credit Folkenflik's assertion that Bressman was aware of the payment as early as 1999. On appeal, the District Court ...

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