IN RE: GOLF 255, INC. (July 22, 2011)

Golf 255's creditors petitioned to have it declared bankrupt in late 2006. The bankruptcy court appointed Robert Eggmann as trustee, granted Eggmann's motion to sell the corporation's principal asset (a golf course), and ultimately approved the sale. Nick Jakich and Jay Dunlap, Golf's owners, opposed the petition and the sale, appealed from the sale order, moved to remove the trustee, and moved to dismiss the proceedings -- all to no avail. Over a year later, they continued their challenge. They asked to conduct discovery on whether the bankruptcy proceedings and sale had been fraudulent, and asked the court to rescind the sale and investigate their allegations of fraud. The bankruptcy court denied the requests. Finally, they opposed the Eggmann's request to close the case. The bankruptcy court closed the case. Judge Murphy (S.D. Ill.) affirmed. Jakich and Dunlap appeal.

In their opinion, Seventh Circuit Judges Posner and Manion and District Judge Lefkow affirmed. The Court recognized that the bankruptcy court treated the request for discovery and an investigation into fraud as a Rule 60 motion. Fraud is a basis for setting aside a judgment if the motion is filed within one year of the judgment unless there is "fraud on the court," in which case the motion can be brought at any time. The appellants insisted that a former Golf shareholder did commit fraud on the court by manipulating the proceedings and the court in forcing the sale of the golf course. The Court noted that "fraud on the court" is not defined in the rule but considered it important to define it narrowly because of its unlimited deadline. So the court asked what kind of fraud should open a judgment to collateral attack years after its entry. It answered its own question -- fraud that is unlikely to be discovered, even with diligent inquiry, for years. It cited as examples bribing a judge, tampering with a jury, or submitting forged documents. Applying that definition to the facts before it, the Court found the claim baseless. The shareholder was not acting as a lawyer during the bankruptcy proceedings, but as a creditor. If he submitted inflated claims, and encouraged others to do so as well, he would have committed fraud -- but not a fraud on the court. The Court added two remarks. First, it noted that no one who looked at the allegations of fraud, including the trustee, the bankruptcy court judge, the district court judge, and a mediator, found any merit in the allegations. Second, rescission of the bankruptcy sale would be improper unless there was a finding that the golf course buyer, a local recreation district, was complicit in the fraud and there is no evidence of that. Finally, the Court granted Eggmann’s motion for sanctions under Rule 38.