Opinion
Bankruptcy No. 00-10804DWS, (Consolidated Administratively with Bankruptcy Nos. 00-10803 00-10805)
December 2, 2003
MEMORANDUM OPINION
Before the Court captioned is the Cross-Motion (the "Cross-Motion") filed by the Bortnick Limited Partnership ("BLP") and Gene Bortnick ("Gene") to Amend the Court's Order dated Feb. 5, 2001 (the "Order") entered in adversary case number 00-0933, captionedJohn T. Carroll III. Trustee for the Estate of MGL Corporation. Inc., Gary Francis Seitz, Trustee for the Estate of MGL Apparel Inc. and James E. O'Neill, Trustee for the Estate of Lorianna Stores, Inc. v. Unicom AP Chemical Corporation and Albert Petichenskiy ("Unicom Litigation") pursuant to Federal Rule of Civil. Procedure. 60(b). For the reasons set forth below, the Cross-Motion is denied.
The Chapter 7 trustee had filed a Motion to Approve Stipulation relating to a dispute concerning the payment of professional fees in this converted Chapter 11 case by Congress Financial Corporation, a secured creditor. BLP and Gene (together "Bortnick") filed an Objection to the Stipulation and a "Cross-Motion for a Criminal Referral Relating to the False Testimony of Daniel Coffey" (the "Referral Cross-Motion") and the instant Cross-Motion. The Referral Cross-Motion was adjudicated by Order dated October 22, 2003.
As discussed below, the Cross-Motion is mislabeled as Bortnick does not seek an amendment of the Order but rather of the Memorandum Opinion issued in connection therewith.
Rule 60(b) is made applicable in bankruptcy cases by F.R.Bankr.P. 9024. Rule 60(b) offers relief from judgment in specific circumstances, one being fraud. Fraud may justify relief from judgment in two different instances: Rule 60(b)(3) permits relief from judgement for "fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party." Fed.R.Civ.P. 60(b)(3). Moreover Rule 60(b) states that "[t]his rule does not limit the power of a court to entertain an independent action to . . . set aside a judgment for fraud upon the court." Bortnick seeks relief based on the second type of fraud — fraud on the court itself. Rule 60(b)(3) relief, which must be sought within one year of entry of the judgment from which relief is sought, is time-barred in any event since the Order was entered on February 5, 2001 and the Cross-Motion filed on May 21, 2003.
BACKGROUND
The subject of this contested matter is the Memorandum Opinion entered on February 5, 2001 (the "Opinion") resolving a motion for preliminary injunction brought by the Chapter 11 trustees of the related estates of MGL Corp., MGL Apparel and Loriana Stores (together, the "Debtors"). The Chapter 11 trustee sought to enjoin Unicom AP Chemical Corp. ("Unicom") and its principal Albert Petichenskiy from misappropriating certain MGL fabric inventory transferred, but not sold, to Unicom and to return the fabric and/or turn over the proceeds of inventory which had been sold. Gene is the principal and controlling shareholder of the Debtors, and BLP is a creditor by reason of a lease of real property to MGL. However, neither BLP nor Gene were parties to or participated in the adversary proceeding wherein the preliminary injunction was sought.
The Opinion is reported at 2001 WL 204729 (Bankr. E.D. Pa. February 5, 2001).
Bortnick does not seek relief from the provisions of the Order, but rather seeks its amendment to delete numerous findings made within the Opinion. He quotes the offending parts of the Opinion as follows:
The Trustees learned of this transaction fortuitously when, having taken possession of MGL's computers, their accountants stumbled upon a random computer file maintained by MGL. According to the testimony of Daniel Coffey, CPA ("Coffey"), his firm was employed by the Trustees to investigate MGL inventory shortages of approximately 2 million yards. MGL utilized the Peachtree system, an accounting software package, for recording its sales, receipts, etc. It contains a series of modules that prepare a general ledger, and accounts receivable, inventory and accounts payable reports. Not reflected in that system were 15 bills of lading for shipments by MGL to the DE warehouse for the benefit of Unicom. Exhibit T-2. Rather these records, evidencing transfers from December 2, 1999 to December 10, 1999 . . . aggregating 352, 910 yards of fabric, were discovered as having been scanned into and saved to a folder denominated "Lauren.tif" in the "My Documents" file on the MGL computer. Significantly not scanned into the computer were the balance of the bills of lading reflecting the MGL/Unicom transaction. Not until the Trustees took discovery of DE in this litigation did they learn of an additional 92, 097 of fabric inventory transferred from MGL to Unicom during the period December 11 to December 23, 1999. Exhibit T-1A. Thus, the amount of fabric inventory the Trustees claim was misappropriated is 451, 447 yards, not 352, 910 as alleged in the Complaint.
This folder appeared to be the repository of correspondence and other records that would support the regular accounting records but not be included therein.
Opinion at 4. In addition, he quotes from footnote 23 as follows:
Bortnick has omitted the footnotes as well as the exhibits which were included in the original Opinion. I have referenced the exhibits here as they evidence documentary support for my findings in addition to Coffey's testimony.
The absence of any record of a sale to Unicom in MGL's sales journal for the year 1999 is probative of this point. Exhibit T-5. The fact that no search was made of the records (apparently unavailable) prior to January 1999, a point made by the Defendants, does not undermine this evidence since this transaction occurred in December 1999. Opinion at 14 n. 23. Other related findings are identified as examples and quoted from the Opinion at paragraphs 32-37. Bortnick asserts that these findings are based on knowingly false testimony made by Daniel Coffey ("Coffey"), an accountant hired by the Trustees. Notably all of the findings referenced but one relate to activities of MGL, the corporate entity, not Gene or BLP. The only statement challenged which mentions Gene is referenced but not quoted in paragraph 31. The Opinion stated "[t]o allow the inventory to be released to or retained by the Defendants who may be controlled by Bortnick, the very person who defrauded creditors, would be folly." Bortnick seeks to have me strike or amend all these identified portions of the Opinion based on Coffey's allegedly false testimony on the grounds that they perpetuated a fraud on the Court, relief for which is available under Fed.R.Civ.P. 60(b), and "cast an untrue and false light on Gene and the other Bortnicks." Cross-Motion at 70.
Again his quotation of the Opinion omits the Exhibit identified as support for the finding.
In the Opinion, Gene is referred to as Bortnick. In footnote, I observed that "[t]he Defendants' failure to appear to refute the substantial evidence of Bortnick's control over Unicom leads me to infer that they would be unable to do so." I concluded that Gene controlled Unicom and that Unicom and its principal (who failed to appear) had not contradicted that evidence. It was Unicorn's actions that defrauded creditors, and by reason of Gene's control over Unicom, I attributed the fraud to him.
DISCUSSION
Before determining whether there is a basis to strike or amend the Order on the grounds of fraud, a threshold question must be addressed. Does Bortnick have standing to bring a motion to amend the Order pursuant to Fed.R.Civ.P. 60(b)? Standing is generally not available for nonparties to seek relief from judgment under Rule 60(b). Dunlop v. Pan American World Airways. Inc., 672 F.2d 1044, 1052 (2d Cir. 1982). An exception to that general rule is made where the facts adequately demonstrate that the movants are "sufficiently connected and identified" with the lawsuit.Id. at 1052.
While the Third Circuit has not addressed Rule 60(b) standing for nonparties, in discussing standing of a non-party to appeal, it has indicated its approval of the Dunlop analysis. See Binker v. Commonwealth, 977 F.2d 738, 745 (3d Cir. 1992): see also In re Fine Paper Antitrust Litigation, 695 F.2d 494, 499 n. 4 (3d Cir. 1982).
In Dunlop, the Secretary of Labor brought a suit against an employer on behalf of the nonparty movants and other employees under federal employment laws. The suit then settled. Individual employees, not party to the litigation, sought to amend the settlement agreement. The Court stated:
Although Rule 60(b)(6) would not ordinarily be available to non-parties to modify final judgments, we hold that on the facts of this case appellants were sufficiently connected and identified with the Secretary's suit to entitle them to standing to invoke Rule 60(b)(6).
Id. The record included the fact that the Secretary supported the amendment to the court-ordered settlement and indeed joined in the request for relief by filing an amicus brief.
Bortnick rests on this exception to the general rule of non-standing citing three other cases where non-party standing has been found. However, these cases evidence the same close connection between the movants and the litigation found inDunlop but absent here. In Lawrence v. Wink (In re Lawrence), 293 F.3d 615 (2d Cir. 2002), a bankruptcy court conducted a § 363 sale of shares of Mechanical Technology, Inc. ("MTI") owned by the debtors (the "Lawrence Shares"). The proceeds were to be escrowed as there was a dispute between the debtors and their non-debtor affiliate Global Insurance Company over the precise number of shares owned by each. Since First Albany Companies, Inc. ("Albany") wished to buy all the shares, the Order approving the § 363 sale required the proceeds of both debtor and non-debtor shares to be placed into an escrow account even though only the Lawrence Shares were sold through the § 363 bankruptcy sale. Thus, while Global was not a party to the § 363 sale, it was directly affected by the court's order. Subsequently the sellers learned that Albany was an insider of MTI who had material but undisclosed information that affected the value of the shares. However, the adversary proceedings they then filed alleging, inter alia, securities fraud were dismissed as a collateral attack on the § 3 63 sale order, the court opining that the proper procedure would have been for both parties to file a Rule 60(b)(3) motion to set aside the sale order. The circuit court reversed, concluding that the plaintiffs' claims should be recharacterized as a Rule 60(b)(3) motion to set aside a judgment for fraud. In footnote, the court observed that the non-debtors, although non-parties to the sale proceeding, had standing to participate as parties in the Rule 60 action, citing Dunlop and the other cases below which have permitted standing when a non-party's interest is strongly affected. Id. at 627 n 11. Bortnick contends that this ruling which demonstrates that a non-party can attack an order under Rule 60(b)(3) supports his standing here. I disagree. Global was directly affected by the § 363 order in that the bankruptcy court placed restrictions on its receipt of the proceeds of sale of its property. The court acknowledged as much when it granted the initial Rule 60(b) motion modifying those restrictions. The Order at issue here involved no Bortnick interest nor placed any restriction on their rights and remedies.
Bortnick's citation to Rupert v. Krautheimer (In re Rupert), 210 B.R. 37 (Bankr. S.D.N.Y. 1997), is curious since it does not involve a question of standing, In this case, the Rule 60(b) movant was the debtor challenging an order of the bankruptcy court which granted summary judgment to his creditor in a dischargeability action. Thus, the debtor was a party. The Court's comment about theDunlop's court's application of Rule 60(b) to non-parties was merely to illustrate the potential breadth of this relief.
Indeed they filed a Rule 60(b) motion to amend the Order relating to that escrow that generated an amended sale order.
In Eyak Native Village v. Exxon Corp., 25 F.3d 773, 777 (9th Cir. 1994), certain environmental organizations had filed actions in state court against Exxon Corp. in connection with the Alaska oil spill. Exxon removed the suits to federal court, contending that the suits were a collateral attack on a prior consent decree between the government and Exxon. The plaintiffs' effort to remand the actions to state court were rejected, the court construing the plaintiff's lawsuit as an attack on the consent decree in the nature of a motion or independent action provided for under Rule 60(b). Using Rule 60(b) as a shield, not a sword, the plaintiffs claimed they lacked standing because they were not party to the consent decree. The court disagreed, noting that Rule 60(b) relief may be provided to a party or its legal representative. The citizens whom plaintiffs represented were more than in privity with the government that secured the consent decree; they were identical. As such, Rule 60(b) standing was not foreclosed. In Southerland v. Irons, 628 F.2d 978, 980 (6th Cir. 1980), the non-party to the litigation, Michigan Department of Social Services ("MDSS") had paid the medical expenses of the injured plaintiff and held a lien on the proceeds of the action as a result of its right to subrogation. In a court-approved settlement of the litigation, the contingent fee attorney Wolk represented that he would pay MDSS from his recovery but failed to do so. MDSS sued Wolk who contended that as a non-party it had no standing. The Court disagreed. While there is no discussion of its conclusion that a non-party may sue for fraud, it is clear that this is yet another example of a non-party's rights being directly affected by the underlying litigation. In this case, the court' s approval of the settlement funds which were subject to MDSS's lien was based on Wolk's agreement to pay.
In short, all of the cases cited by Bortnick merely evidence the limited use of Rule 60(b) by non-parties as articulated inDunlop. The facts of these cases present a far different scenario than here where the Cross-Motion does not assert any substantial legal or financial impact arising from the relief granted by the Order. Neither BLP nor Gene was a party or participated in any way in the adversary proceeding. While Gene was the principal of MGL, he does not claim to have standing based on his relationship to the debtors or participation in the bankruptcy proceedings. BLP and Gene do not seek to regain rights to bring claims that will not otherwise be heard. Rather the only articulated ground for requesting relief is concern for the reputation of Gene and other Bortnick family members. Obviously, Bortnick cannot bring a suit for relief to third parties and no injury to the reputation of BLP is alleged. Thus, the only interest advanced is Gene's reputation. On that ground, Bortnick seeks to have large portions of the Opinion deleted that but for one statement, do not even mention Gene. Even assuming that the referenced statement "casts a false light" on Gene, there is simply no support to be found in any of the cases that have allowed non-parties to bring Rule 60(b) motions to confer standing on this basis. The impact of a judicial opinion on a non-party's reputation is not the substantial affected interest identified byDunlop as the predicate to confer standing to invoke Rule 60(b). Indeed the consequence of allowing strangers to litigation to bring motions to strike portions of opinions that they believe reflect adversely upon them would be dangerous one, burdening the Court with collateral litigation.
Indeed while their counsel has attended the vast majority of MGL hearings, he was notably absent during the hearings that led to the Order and Opinion.
For him to do so could be construed as an admission that one or more of the debtors was merely his alter-ego, which could be support for many of the statements he wishes to have removed from the order.
Applying the Dunlop test, I conclude that neither BLP nor Gene are "sufficiently connected and identified" with the adversary proceeding in which the Order was entered to warrant standing to bring a Rule 60(b) motion to amend it. Accordingly, I need not address whether Rule 60(b) would allow the Opinion to be amended based on the allegations that Coffey's statements have been a fraud on the Court.
An Order consistent with this Memorandum Opinion shall be entered.
ORDER
AND NOW, this 2nd day of December 2003, upon consideration of the Cross-Motion (the "Cross-Motion") filed by the Bortnick Limited Partnership and Gene Bortnick to Amend the Court's Order dated Feb. 5, 2001 entered in adversary case number 00-0933, pursuant to Federal Rule of Civil. Procedure 60(b), after notice and hearing, and for the reasons stated in the accompanying Memorandum Opinion;
It is hereby ORDERED and DECREED that the Cross-Motion is DENIED.