Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-12-07054/USCOURTS-caDC-12-07054-0/pdf.json

Parties Involved:
Hope 7 Monroe Street Limited Partnership

Riaso, LLC
Appellee

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 18, 2013 Decided February 28, 2014

No. 12-7054

IN THE MATTER OF: HOPE 7 MONROE STREET LIMITED 

PARTNERSHIP,

HOPE 7 MONROE STREET LIMITED PARTNERSHIP,

APPELLANT

v.

RIASO, LLC,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:11-cv-01455)

Donald M. Temple argued the cause and filed the briefs 

for appellant.

John C. Decker, II argued the cause and filed the brief for 

appellee.

Before: HENDERSON and BROWN, Circuit Judges, and 

GINSBURG, Senior Circuit Judge.

BROWN, Circuit Judge: Hope 7 Monroe Street Limited 

Partnership (“Hope 7” or “the partnership”) entered 

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bankruptcy in 2009. RIASO, LLC (“RIASO”) was Hope 7’s 

largest creditor. During the course of the bankruptcy 

proceedings, Hope 7 discovered information suggesting

RIASO and its agents had engaged in fraud and breached their 

fiduciary duty to Hope 7. Notwithstanding those allegations, 

the bankruptcy court approved the settlement of Hope 7’s 

fraud-based claims against RIASO, approved RIASO’s proof 

of claim against Hope 7, and directed the payment of funds 

from Hope 7’s estate to RIASO. When Hope 7 found 

additional evidence relevant to RIASO’s alleged fraud, it 

moved pursuant to Federal Rule of Civil Procedure 60(b) for 

relief from judgment and asked the court to reopen its earlier 

orders. The bankruptcy court denied Hope 7’s Rule 60(b) 

motion; Hope 7 appealed first to the district court and now to 

us. After this court requested supplemental briefing on the 

issue, RIASO argued Hope 7 lacks standing to pursue this 

appeal. We hold Hope 7 has standing to appeal two of the 

bankruptcy court’s orders, but not a third. On the merits of 

the remaining portion of the appeal, we affirm the lower 

courts’ decisions not to reopen the judgment.

I

Hope 7 owned apartment units appraised for 

approximately $3.3 million that it wanted to convert to 

condominiums. The partnership asked Musse Leakemariam

to help it obtain funds for the conversion. Leakemariam 

arranged for RIASO to lend $1.6 million to Hope 7 to

refinance the partnership’s mortgage and serve as a bridge 

loan until a permanent construction loan could be arranged. 

The permanent financing never materialized, and Hope 7 was 

unable to repay the bridge loan to RIASO.

After RIASO initiated foreclosure proceedings, Hope 7 

filed a voluntary petition for Chapter 11 bankruptcy on April 

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2, 2009. The bankruptcy court converted the case to a 

Chapter 7 action and appointed a trustee. During a 

bankruptcy hearing in August 2009, Hope 7 learned

Leakemariam was both the loan broker and the lender. In re 

Hope 7 Monroe St. Ltd. P’ship (Hope 7), No. 09-00273, 2011 

WL 2619537, at *1, *7 (Bankr. D.D.C. July 1, 2011). 

Leakemariam had formed RIASO, made up of ten trusts 

benefitting Leakemariam’s family members, about a week 

before the bridge loan was made. RIASO’s only purpose was 

to make that loan. On November 6, 2009, Hope 7, along with

Lenan and Pauline Cappel, its sole limited partners, filed a 

complaint against Leakemariam, RIASO, and Richard 

Boddie, RIASO’s attorney, in D.C. Superior Court. The 

plaintiffs alleged, inter alia, breach of fiduciary duty, fraud, 

and misrepresentation.

Meanwhile, RIASO filed a proof of claim in the 

bankruptcy court claiming Hope 7 owed it about $3 million. 

Hope 7 objected, arguing, among other grounds, RIASO and 

Leakemariam had engaged in fraudulent inducement to 

contract and had breached their fiduciary duty. The 

bankruptcy court overruled Hope 7’s objection and ordered 

the claim paid from the debtor’s estate. The trustee proposed

to sell the estate’s interest in the Superior Court action to 

Boddie as a compromise of the claims, and the bankruptcy 

court approved the sale of the claims to Boddie for $30,000. 

On November 22, 2010, the court directed final distribution of 

the estate’s funds.

On April 12, 2011, Hope 7 filed a motion pursuant to 

Federal Rule of Civil Procedure 60(b). See FED. R. BANKR. P.

9024 (extending Federal Rule of Civil Procedure 60 to 

bankruptcy cases). Hope 7 sought to vacate all orders 

rendered in favor of RIASO, which the bankruptcy court 

understood to refer to (1) the order approving the motion to 

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sell Hope 7’s legal claims against RIASO, (2) the order 

overruling the objection to RIASO’s proof of claim, and (3) 

the order directing payment of RIASO’s claim from the 

proceeds of the sale of Hope 7’s real property. Hope 7, 2011 

WL 2619537, at *2. Hope 7 sought relief under Rules

60(b)(2), (3), and (6), claiming new evidence discovered 

between August and September 2010 demonstrated RIASO 

was a sham corporation created to conceal Leakemariam’s 

fraud and RIASO’s proof of claim was “equally fictitious.” 

J.A. 589–90. Furthermore, the partnership argued RIASO had 

committed fraud on the court by concealing facts relating to 

RIASO’s sham nature. See J.A. 594–96.

The bankruptcy court denied Hope 7’s motion for relief 

from judgment. The court found the new evidence proffered

by Hope 7 was not of such a material and controlling nature 

that it would likely change the outcome of the court’s original 

orders. Hope 7, 2011 WL 2619537, at *5–7. Focusing on its 

order approving the settlement of Hope 7’s claims, the 

bankruptcy court found the new evidence did not push the 

settlement below the range of reasonableness. Id. at *7. 

Alternatively, the court held the new evidence did not warrant 

relief pursuant to Rule 60(b)(2) because it could have been 

discovered by the exercise of due diligence prior to the 

relevant hearings. Id. With regard to Hope 7’s Rule 60(b)(3) 

motion, the bankruptcy court found Hope 7 had not shown 

RIASO fraudulently obtained approval of the settlement 

order, and, even if it had, the information RIASO allegedly 

withheld from the court would not have influenced the court’s 

judgment. Id. at *8. Finally, the bankruptcy court held Hope 

7 had not demonstrated extraordinary circumstances entitling 

it to relief pursuant to Rule 60(b)(6); the facts brought forth 

by Hope 7 did not demonstrate manifest injustice. Id. Hope 7 

appealed to the district court, which affirmed the bankruptcy 

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court’s decision on May 3, 2012. Hope 7 timely appealed to 

this court.

II

Before we reach the merits of this case, we dispose of 

two threshold challenges to our jurisdiction to decide this 

case. See S. Co. Servs., Inc. v. FERC, 416 F.3d 39, 43 (D.C. 

Cir. 2005) (“[M]ootness . . . is a threshold jurisdictional 

issue.”); Steffan v. Perry, 41 F.3d 677, 697 (D.C. Cir. 1994)

(en banc) (“Prudential standing is . . . like Article III standing, 

a jurisdictional concept.”).

A

Prior to oral argument, we ordered supplemental briefing

addressing whether Hope 7 has standing. We have 

recognized a prudential rule that limits standing to appeal 

bankruptcy court orders to a “person aggrieved.” See 

McGuirl v. White, 86 F.3d 1232, 1234–35 (D.C. Cir. 1996). 

“Persons aggrieved are those whose rights or interests are 

directly and adversely affected pecuniarily by the order or 

decree of the bankruptcy court.” Id. at 1234. Debtors 

generally lack standing because bankruptcy proceedings 

absolve the debtor of any liability to creditors and the debtor 

has no interest in the distribution of the estate’s property since 

the property has passed to the trustee. Id. An order affecting 

the size of the estate ordinarily would not diminish the 

debtor’s property, increase its liability, or otherwise 

detrimentally affect its rights. In re El San Juan Hotel, 809 

F.2d 151, 154–55 (1st Cir. 1987). But a debtor has standing 

to appeal an order where success on appeal could result in a 

surplus in the estate since any surplus would revest in the 

debtor when the bankruptcy concludes. Thus, to establish 

standing, Hope 7 must show there is a reasonable possibility a 

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surplus would result if Hope 7 were to succeed on its Rule 

60(b) motion and the bankruptcy court reexamined its orders 

in favor of RIASO. See Lunan v. Jones (In re Lunan), 523 F.

App’x 339, 340 (6th Cir. 2013) (“The debtor . . . must show 

that such surplus is a reasonable possibility.”).

The trustee’s final report lists total claims against the 

estate of $3,893,529.31. J.A. 362–63. RIASO’s claims 

totaled $3,035,699.91, leaving non-RIASO claims of 

$857,829.40. J.A. 362–63. The sale of Hope 7’s real 

property resulted in assets of $3.2 million. J.A. 358–59. If 

Hope 7 succeeds on the merits of this appeal and obtains 

vacatur of the orders approving RIASO’s proof of claim and 

requiring proceeds be paid to RIASO, the estate would likely 

realize a surplus. The estate’s assets far exceed the value of 

non-RIASO claims.

However, the inquiry is not as simple with regard to the 

bankruptcy court’s order approving the settlement of Hope 7’s 

fraud claims against RIASO. Unfortunately, Hope 7 spent the 

bulk of its supplemental brief rehashing the merits, and did 

not at all address whether reopening the bankruptcy court’s 

settlement order would have created a surplus in the estate or 

whether the reopening of that order need not create a 

reasonable possibility of surplus because it was appealed with 

two other orders that put a sufficient amount at stake. As in 

other jurisdictional contexts, the party invoking appellate 

jurisdiction to review a bankruptcy court order has the burden 

of demonstrating prudential standing. See Spenlinhauer v. 

O’Donnell, 261 F.3d 113, 118 (1st Cir. 2001). By not 

addressing the issue, Hope 7 has completely failed to establish 

standing to challenge the settlement order. Nor is the inquiry 

so clear that we can make a determination on the issue 

without briefing. We have not been given a basis from which 

to determine the measure of damages that Hope 7 might 

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recover if it were to prevail on its fraud claims. Because 

Hope 7 has neither argued nor directed the Court to evidence 

that there is a reasonable possibility that reopening the 

bankruptcy court’s settlement order would result in a surplus 

in the estate, appellant has failed to meet its burden. See Am. 

Chemistry Council v. Dep’t of Transp., 468 F.3d 810, 818–19 

(D.C. Cir. 2006) (where court gave parties an opportunity to 

submit supplemental briefs on the issue of standing, 

petitioners “failed to meet [their] burden because they neither 

argued nor directed the Court to evidence” that would 

establish standing). Therefore, we reach the merits of Hope 

7’s appeal only insofar as it asks the court to reopen the 

bankruptcy court’s orders allowing RIASO’s proof of claim 

and requiring proceeds be paid to RIASO.

B

RIASO raises another challenge to our jurisdiction, 

arguing this appeal is moot. Under the bankruptcy code, the 

sale of property to a good faith purchaser cannot be 

overturned on appeal unless that sale was stayed pending 

appeal. 11 U.S.C. § 363(m). We have dismissed as moot 

appeals where the operation of § 363(m) has left us unable to 

fashion a remedy to address appellants’ asserted injury. See 

Allen v. Wells Fargo Bank Minn., No. 03-7152, 2004 WL 

2538492 (D.C. Cir. Nov. 9, 2004); Hicks v. Pearlstein (In re 

Magwood), 785 F.2d 1077, 1080–81 (D.C. Cir. 1986). Hope 

7 does not ask us to reopen the sale of its real property.1

 

Rather, it asks us to reopen the orders approving RIASO’s 

proof of claim and directing distribution of proceeds to satisfy 

that claim. Section 363(m) obviously has no application to 

 1 We need not consider whether § 363(m) would bar 

reconsideration of the settlement order because we have already 

determined Hope 7 lacks standing with regard to that order.

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the proof of claim order because the approval of a creditor’s 

proof of claim is not a sale of property.

To the extent RIASO argues § 363(m) prevents a court 

from reversing an order approving the distribution of funds, 

§ 363 does not support such an argument. Section 363 does 

not grant to a claimant that has received a distribution the 

same protections it gives to a good faith purchaser of the 

estate’s property. The policy underlying § 363(m) ensures the 

bankruptcy estate obtains maximum value through its sale of 

property by providing a bona fide purchaser assurances of 

finality. See In re Edwards, 962 F.2d 641, 645 (7th Cir. 

1992). These policies are not implicated by permitting a court 

of appeals to reopen an order approving the distribution of 

funds to a creditor. Furthermore, even if § 363(m) did affect 

an appellate court’s review of an order approving the 

distribution of funds, it would not preclude a collateral attack 

on that order. Cf. Schneider v. Hoyer (In re Alan Gable Oil 

Dev. Co.), No. 91-1526, 1992 WL 329419, at *3–4 (4th Cir. 

Nov. 12, 1992) (“[W]e do not agree that section 363(m) 

applies of its own force where a disgruntled bidder or creditor 

challenges a sale in bankruptcy by means of a motion for 

collateral relief rather than a direct appeal of the order 

authorizing the sale.”); In re Edwards, 962 F.2d at 643–45

(“[S]ection 363(m) merely protects the bona fide purchaser 

during the period—that is, pending appeal—in which he 

otherwise would have no protection against the rescission of a 

judicial order approving the sale, and does not address the 

scope of collateral relief.”). Thus, the bankruptcy code 

creates no barrier to our review of a proof of claim or 

distribution order.

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III

We proceed to examine the merits of Hope 7’s appeal as 

it addresses the bankruptcy court’s approval of RIASO’s 

proof of claim and distribution order. “When a court of 

appeals hears an appeal from an order of a district court that 

resolved an appeal from an order of the bankruptcy court, the 

court of appeals sits as a second court of review and applies 

the same standards as the district court.” Advantage 

HealthPlan Inc. v. Potter (In re Greater Se. Cmty. Hosp. 

Found., Inc.), 586 F.3d 1, 4 (D.C. Cir. 2009). We review a 

bankruptcy court’s legal conclusions de novo and its findings 

of fact for clear error. McGuirl, 86 F.3d at 1234. We review 

the denial of a Rule 60(b) motion for abuse of discretion. 

Murray v. Dist. of Columbia, 52 F.3d 353, 355 (D.C. Cir. 

1995). In evaluating a Rule 60(b) motion, a court must 

balance the “sanctity of final judgments and the incessant 

command of a court’s conscience that justice be done in light 

of all the facts.” Twelve John Does v. Dist. of Columbia, 841 

F.2d 1133, 1138 (D.C. Cir. 1988). The bankruptcy judge, 

“who is in the best position to discern and assess all the facts, 

is vested with a large measure of discretion in deciding 

whether to grant a Rule 60(b) motion.” Id.

A

The bulk of appellant’s argument is related to its motion 

for relief under Rule 60(b)(2). That rule permits a court to 

“relieve a party . . . from a final judgment, order, or 

proceeding for . . . newly discovered evidence that, with 

reasonable diligence, could not have been discovered in time 

to move for a new trial under Rule 59(b).” FED. R. CIV. P.

60(b). A motion under Rule 60(b)(2) must be made “within a 

reasonable time” and “no more than a year after the entry of 

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the judgment or order or the date of the proceeding.” FED. R.

CIV. P. 60(c)(1).

In its Rule 60(b) motion before the bankruptcy court, 

Hope 7 asserted it discovered new evidence regarding 

RIASO’s ownership, its financial status, and its lack of a bank 

account. J.A. 592. The “new evidence” was revealed in the 

course of discovery in the Superior Court fraud case pursued 

by the Cappels.2 Specifically, the evidence was discovered 

through the use of interrogatories and the deposition of 

Leakemariam in August and September 2010. J.A. 587–89.

The bankruptcy court held the proffered evidence does 

not constitute newly discovered evidence under Rule 60(b)(2) 

because it could have been discovered prior to the relevant 

hearings through the exercise of reasonable diligence. Hope 

7, 2011 WL 2619537, at *7. Appellant acknowledges it was 

aware of Leakemariam’s dual role as broker and lender as 

early as August 17, 2009. Hope 7 had enough knowledge of 

the purported fraud or breach of fiduciary duty to lead the 

Cappels to file a complaint on Hope 7’s behalf in D.C. 

Superior Court on November 6, 2009, and to object to 

RIASO’s proof of claim on February 16, 2010.

Hope 7’s timely pursuit of discovery after August 17, 

2009 would arguably have uncovered the new evidence prior 

to the relevant hearing—the bankruptcy court’s consideration 

of Hope 7’s objection to RIASO’s proof of claim on May 25, 

2010. Cf. Dronsejko v. Thornton, 632 F.3d 658, 672 (10th 

Cir. 2011) (“[I]t is [movants’] burden to establish that they 

 2 Although Hope 7’s claims had been settled, the Cappels were able 

to pursue their claims against RIASO in their individual capacities 

as junior lienholders of a mortgage on Hope 7’s property and

guarantors of the RIASO loan.

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were entitled to relief under Rule 60(b) . . . .”). Hope 7 argues 

it could not have sought discovery in the Superior Court 

action because its claim belonged to the debtor estate, which 

was controlled by the trustee. But Hope 7 does not explain 

why it could not have pursued discovery in the bankruptcy 

court pursuant to Federal Rule of Bankruptcy Procedure 2004. 

See FED R. BANKR. P. 2004 (“On motion of any party in 

interest, the court may order the examination of any entity.”). 

Bankruptcy Rule 2004 allows for a broad scope of discovery, 

permitting “examination of an entity” related to “any matter 

which may affect the administration of the debtor’s estate.” 

FED R. BANKR. P. 2004(b). Rule 2004 examinations have 

been characterized as “fishing expeditions” because of the 

broad scope of inquiry the rule permits. Buckner v. Okla. Tax 

Comm’n (In re Buckner), No. EO-00-073, 2001 WL 992063, 

at *4 (B.A.P. 10th Cir. Aug. 30, 2001). Bankruptcy courts 

have permitted Rule 2004 examinations relating to the 

validity of a proof of claim. See, e.g., Bank of Am., N.A. v. 

Lashinsky (In re Ahl), Nos. CV-11-2282-PHX-GMS, 02:11-

BK-08539-SSC, 2012 WL 1599834, at *3 n.3 (D. Ariz. May 

7, 2012) (“[A] party in interest can move for Rule 2004 

discovery from a creditor prior to filing an objection to that 

creditor’s proof of claim.”); In re Albright, No. 11-20457-

WCH, 2013 WL 6076696, at *3–4 (Bankr. D. Mass. Nov. 19, 

2013) (court had ordered claimants to appear to be examined 

by debtor after debtor filed objection to their proofs of claim);

In re DeShetler, 453 B.R. 295, 306 (Bankr. S.D. Ohio 2011) 

(“A 2004 examination may be used by the [U.S. trustee] to 

investigate proofs of claim filed in bankruptcy cases provided 

that the examination is otherwise appropriate under Rule 

2004.”).

There is nothing in the record to suggest Hope 7 ever 

sought discovery, or that relevant evidence could not have 

been discovered, prior to the bankruptcy court’s hearing and 

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original orders. The bankruptcy court did not abuse its 

discretion in concluding Hope 7 failed to exercise reasonable 

diligence to depose Leakemariam or to otherwise discover 

evidence of the alleged fraud in the nine months between the 

revelation of Leakemariam’s dual role and the pertinent 

hearing.

B

Hope 7 alternatively seeks relief under Rule 60(b)(3), a 

provision permitting a court to “relieve a party . . . from a 

final judgment, order, or proceeding for . . . fraud (whether 

previously called intrinsic or extrinsic), misrepresentation, or 

misconduct by an opposing party.” FED. R. CIV. P. 60(b). A 

litigant seeking relief under Rule 60(b)(3) must prove the 

fraud, misrepresentation, or misconduct by clear and 

convincing evidence. See Shepherd v. Am. Broad. Cos., 62 

F.3d 1469, 1477 (D.C. Cir. 1995). In addition to 

demonstrating misconduct, the movant must show the 

misconduct was prejudicial, foreclosing the “full and fair 

preparation or presentation of its case.” Summers v. Howard 

Univ., 374 F.3d 1188, 1193 (D.C. Cir. 2004); see also 

Stridiron v. Stridiron, 698 F.2d 204, 207 (3d Cir. 1983) (“To

prevail, the movant must establish that the adverse party 

engaged in fraud or other misconduct, and that this conduct 

prevented the moving party from fully and fairly presenting 

his case.”). It is unclear exactly what conduct Hope 7 thinks

entitles it to relief under Rule 60(b)(3).

To the extent Hope 7 alleges the new evidence

“exposes . . . that the entire loan scheme . . . was designed to 

fraudulently exploit the Debtor,” Appellant’s Br. at 45, 

appellant misunderstands Rule 60(b)(3)’s purpose. Courts 

have distinguished between “fraud or misstatements that are 

committed during the course of a commercial transaction 

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(such as a false statement about the quality of goods being 

sold), and fraud or misstatements perpetrated in the course of 

litigation (such as perjury of a witness or the introduction of a 

false document into evidence).” Roger Edwards, LLC v. 

Fiddes & Son Ltd., 427 F.3d 129, 134 (1st Cir. 2005). The 

former type of fraud “is the subject-matter of litigation.” Id. 

By contrast, Rule 60(b)(3) is concerned with “fraud 

perpetrated in the course of litigation.” Id. Thus, Hope 7 

cannot rest a motion for relief under Rule 60(b)(3) on 

allegations that RIASO or Leakemariam committed fraud or 

misconduct in making the underlying loan.

If Hope 7 alleges RIASO committed misconduct by 

failing to disclose information about its ownership, appellant

still has not shown entitlement to relief under Rule 60(b)(3). 

It is true that “failure to disclose or produce materials 

requested in discovery can constitute ‘misconduct’ within the 

purview of Rule 60(b)(3),” Summers, 374 F.3d at 1193, but 

Hope 7 has not demonstrated RIASO had any independent 

obligation to disclose the information absent a discovery 

request.

Finally, insofar as Hope 7 argues RIASO committed 

fraud in the course of litigation by filing a proof of claim 

when RIASO was a “sham” corporation, Hope 7 has not 

provided clear and convincing evidence RIASO was indeed a 

sham corporation not permitted to file a proof of claim. Even 

if RIASO were a sham corporation, we doubt this would give 

rise to relief under Rule 60(b)(3). Hope 7 had notice of facts 

that should have led to discovery of the alleged fraud, and 

RIASO did not conceal any information it had an obligation 

to reveal. Hope 7 can hardly argue RIASO’s fraud prevented 

it from fully and fairly presenting its case. Thus, we conclude 

the bankruptcy court did not abuse its discretion in denying 

Hope 7’s motion for relief under Rule 60(b)(3).

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C

Finally, appellant seeks relief under Rule 60(b)(6), which 

permits a court to “relieve a party . . . from a final judgment, 

order, or proceeding for . . . any other reason that justifies 

relief.” FED. R. CIV. P. 60(b). As appellant concedes, its 

request for Rule 60(b)(6) relief is premised on nothing more 

than the arguments supporting relief under Rule 60(b)(2) or 

(3)—the new evidence and alleged fraud. In Liljeberg v. 

Health Services Acquisition Corp., 486 U.S. 847 (1988), the 

Supreme Court held “Rule 60(b)(6) . . . grants federal courts 

broad authority to relieve a party from a final judgment ‘upon 

such terms as are just,’ provided that the motion . . . is not 

premised on one of the grounds for relief enumerated in

clauses (b)(1) through (b)(5).” Id. at 863 (emphasis added);

see also Salazar, 633 F.3d at 1120–21. Hope 7 cannot use 

Rule 60(b)(6) to circumvent the “reasonable diligence” 

requirement of Rule 60(b)(2) or the various limitations of 

Rule 60(b)(3). Because appellant’s Rule 60(b)(6) argument 

rests on no independent grounds, the bankruptcy court 

correctly denied relief under that provision.

***

Hope 7 has not demonstrated it has standing to challenge 

the bankruptcy court’s settlement order or, with regard to the 

remaining claims, that the bankruptcy court abused its 

discretion in denying the Rule 60(b) motion for relief. The 

district court did not err in affirming the bankruptcy court’s 

decision. Therefore, the appeal is dismissed in part and the 

order of the district court is affirmed in part.

So ordered.

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