Court Opinion

ID: 2655144
Source: CourtListenerOpinion
Date Created: 2014-02-28 15:33:01.850787+00
Date Added: 2024-06-11T09:11:58.598784
License: Public Domain

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
                              2
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
                               3
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
                              4
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
                                5
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
                              6
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
                               7
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.
                               8
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.
                               9
                               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
                                10
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.
                               11
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
                              12
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
                               13
(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).
                              14

                               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.