In re Tri-Cran, Inc.

• Decision Date: 17 March 1989
• Docket Number: Bankruptcy No. 85-1253-CJK,Adv. No. 88-1241.
• Parties: In re TRI-CRAN, INC., Debtor. TRI-CRAN, INC., Plaintiff, v. John FALLON, Defendant.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

98 B.R. 609 (1989)

In re TRI-CRAN, INC., Debtor.

TRI-CRAN, INC., Plaintiff, v. John FALLON, Defendant.

Bankruptcy No. 85-1253-CJK, Adv. No. 88-1241.

United States Bankruptcy Court, D. Massachusetts.

March 17, 1989.

COPYRIGHT MATERIAL OMITTED

Harold Potter, Boston, Mass., Trustee.

Charles Bennett, Boston, Mass., for defendant.

Neil Satran, Nina Parker, Boston, Mass., for debtor.

Paula Bonnell, for U.S. trustee.

MEMORANDUM OF DECISION

CAROL J. KENNER, Bankruptcy Judge.

The Trustee in Bankruptcy brought this adversary proceeding to vacate a sale in bankruptcy of the Debtor's assets to the Defendant for collusion and fraud on the court. The matter has been tried, and the parties have filed suggested findings of fact and conclusions of law. This memorandum contains my findings of fact and conclusions of law on the merits of the controversy, and on certain procedural defenses the Defendant raises. I find that the Defendant committed fraud on the court and rule that the sale should be vacated.

Procedural History of the Adversary Proceeding

On March 21, 1988, Harold W. Potter, Jr., the Debtor's Trustee in Bankruptcy, filed a Motion to Set Aside Sale. The motion sought to set aside the sale by the Debtor in Possession of its assets to John Fallon, a sale that was approved by the Court over the objections of the United States Trustee and of the Debtor's minority stockholders, Clarence A. Serpa, Jr. and Paul A. Florindo. The Trustee alleged as the basis for setting aside the sale that statements to the Court at the hearings on the objections to the sale were inaccurate and misleading, that the statements were known to be relevant to the approval of the sale, and that Fallon was not a purchaser in "good faith" and "for value."

Fallon filed a response in which he argued that the motion should be denied because it was filed late and because it failed to state a claim on which relief could be granted. Neither of these arguments has yet been disposed of. In the alternative, Fallon argued that the motion failed to set forth sufficient factual allegations to put John Fallon (or any other party) on notice of the issues in dispute. I agreed with Fallon on the latter point and ordered the Trustee to set forth his allegations more fully in an adversary complaint.

The Trustee then filed the detailed complaint that initiated this adversary proceeding. In essence, the complaint alleges that Fallon colluded with Richard Gargiulo, a stockholder of the Debtor, with Edward Gargiulo, Fallon's friend and Richard's brother and law partner, and with Neal Satran, counsel for the Debtor in Possession, to obtain Court approval of the sale at the lowest possible price and, in furtherance of this scheme, conspired to and did conceal from and misrepresent to the Court, despite direct inquiry, the personal relationship between Fallon and the Gargiulos and the less than arm's length dealings between Fallon and the Debtor.

John Fallon, the only defendant named in the complaint, filed an answer denying the existence of any collusion and asserting that he purchased the Debtor's assets in good faith, at fair market value, and in an arm's length transaction. Fallon also listed several specific defenses: the complaint fails to state a claim on which relief can be granted; the complaint is barred by the applicable statute of limitations; the complaint fails to plead fraud with sufficient particularity to satisfy Rule 9 of the Federal Rules of Civil Procedure, made applicable hereto by Bankruptcy Rule 7009; and the complaint fails to join necessary parties who are subject to process.¹ The case was tried, and the parties have submitted proposed findings of fact and conclusions of law.²

History of the Case

Before addressing the merits, it would help to explain the history of the bankruptcy case from which this adversary proceeding arises. The Debtor, a cranberry farming corporation, filed its petition under Chapter 11 of the Bankruptcy Code on November 6, 1985. On July 22, 1986, the Debtor filed a Notice of Intended Private Sale in which it gave notice of its intent to sell virtually all its assets to John Fallon, the Defendant herein, for $480,000.00. The assets being sold consisted principally of 383 acres of real estate (the "property") situated in the Towns of Rochester and Marion, Massachusetts.³ No counteroffers were timely filed, but four parties filed objections to the proposed sale: (1) the United States of America on behalf of the Farmers Home Administration (FmHA), one of the two mortgage holders on the property; (2) Antone J. Florindo and others, who jointly held the other mortgage; (3) Paul A. Florindo and Clarence A. Serpa, Jr., two of the Debtor's four stockholders;⁴ and (4) the United States Trustee. The mortgagees' objections were ultimately withdrawn and have no bearing on the present proceeding.

The minority stockholders' objection rested on two bases: the property had been appraised for an amount considerably higher than the proposed sale price, and, most significantly, the Debtor had not disclosed the identity of the buyer, John Fallon, or his relationship to the other parties to this bankruptcy. (The objection did not state what relationship Fallon had to the Debtor or any of its affiliates, nor did it state why any relationship would constitute a ground for denying the sale.) I overruled the stockholders' objection, in part because neither they nor counsel for them appeared at the September 10, 1986, hearing on the objections. The stockholders filed a motion for reconsideration alleging that a prospective purchaser named David Grant was prepared to offer $500,000.00 for the assets being sold. I denied the motion for reconsideration because it did not explain the stockholders' failure to appear at the hearing on their objection and because Mr. Grant's counteroffer was late.

The United States Trustee's objection was initially overruled, but its motion for reconsideration was allowed. The United States Trustee stated several grounds for its objection, the most significant of which, for present purposes, were that the sale price was seriously inadequate and that the Debtor had not publicly advertised the sale of the property. I held a hearing on the objection on October 2, 1986, after which I overruled the objection and allowed the sale to go forward in an Order and Memorandum dated October 8, 1986.

The United States Trustee and stockholders Serpa and Florindo appealed to the United States District Court from my order overruling their objections and approving the sale, but neither the stockholders nor the United States Trustee obtained a stay of the order pending appeal. Consequently, the property and other assets described in the Notice of Intended Sale were sold to John Fallon.

While the appeal was pending, I ordered that a Chapter 11 Trustee be appointed; Harold J. Potter, Jr., the Plaintiff herein, was appointed Trustee, and I approved his appointment. Then on August 17, 1987, this case was converted to a case under Chapter 7 of the Bankruptcy Code, and Mr. Potter was appointed Trustee under that chapter.

On December 17, 1987, the Trustee filed a report (the "Trustee's Report") in this Court. The report set forth the results of an investigation he had undertaken into allegations by stockholders Serpa and Florindo that the Debtor's other stockholders, Richard Gargiulo and Robert H. Murphy, had engineered the sale to Fallon at a bargain price and had a side deal with Fallon such that Gargiulo and Murphy were secret partners with Fallon in the purchase and would retain control of the property. On the basis of his findings, the Trustee asked the District Court to stay its decision on the appeal from my order approving the sale and to remand the matter to the Bankruptcy Court. On January 7, 1988, the District Court (Zobel, J.) issued the following order:

Because the Trustee\'s Report on the basis of newly-discovered evidence raises substantial questions about the good faith of the purchaser and the sale, this matter is remanded to the Bankruptcy Court for further consideration of the Notice of Intended Private Sale and the Objections thereto.

The Trustee then filed in this Court the motion to set aside sale that gave rise to this adversary proceeding.

Defenses

1. Motion Filed Untimely

The first defense Fallon raises is that Rule 60(b) of the Federal Rules of Civil Procedure, made applicable to this proceeding by Bankruptcy Rule 9024, requires that motions for relief from an order, when based on newly discovered evidence or on fraud, misrepresentation or misconduct, shall be made not more than one year after the order was entered. The Trustee's complaint to set aside sale was filed more than one year after entry of the order approving the sale; therefore, Fallon concludes, the Trustee's complaint was filed late and must be dismissed.

Rule 60(b), the relevant portion of which is set forth in the margin,⁵ sets a time limit for the filing of various motions for relief from order or judgment. Where the motion is based on newly discovered evidence or on fraud or misrepresentation, the motion must be filed within one year of entry of the order or judgment from which it seeks relief; however, the rule's time limitation does not apply when the basis of the motion is fraud upon the court.

It is undisputed that the complaint was filed more than one year after entry of the order approving the sale.⁶ And the filing of an appeal from that order does not toll the running of the period within which the motion for relief must be filed. United States ex rel. Bonner v. Warden, 78 F.R.D. 344 (N.D.Ill.1978). Therefore, if the Trustee's complaint seeks to set aside the sale solely on the basis of Rule 60(b)(2) (newly discovered evidence) or Rule 60(b)(3) (fraud, misrepresentation, or misconduct), the complaint must be dismissed as untimely.

The viability of the Trustee's complaint thus depends on whether it states a cause of...