Commercial Litigation and Arbitration

Fraud on the Court under Rule 60(d)(3) — Elements — Possible Circuit Split as to Standard of Review — No Fraud on the Court for Failure to Advise Judge of Side Settlement When Presenting Consent Judgment for Approval

General Medicine, PC v. Horizon/CMS Health Care Corp., 2012 U.S. App. LEXIS 7186 (6th Cir. April 10, 2012):

This matter began as a contract dispute between General and Horizon in the Eastern District of Michigan.... HealthSouth acquired Horizon in 1997 during the pendency of this suit, but never became a party.... In 2001, while the case remained closed, HealthSouth sold all of Horizon's stock to Meadowbrook Healthcare Corporation ("Meadowbrook"), and Meadowbrook assumed responsibility for defending Horizon in the contract dispute with General. ***

General and Horizon entered into a settlement agreement a year later in April 2004 (R. 244, Ex. R ("Settlement Agreement")), whereby Horizon/Meadowbrook agreed: (1) to enter into a consent judgment with Horizon "in an amount to be determined prior to entry" (id. ¶ 2); (2) to pay General $300,000 (id. ¶ 6(i)); and (3) to transfer to General "any assets or property . . . awarded or returned to Horizon or Meadowbrook, as a result of any action brought by [General] against HealthSouth" (id. ¶ 6(ii)). In return, General promised not to enforce the anticipated consent judgment against Horizon or Meadowbrook beyond the $300,000 payment specified in paragraph 6(i), but the settlement agreement stipulated that it did "not releas[e] Horizon and/or Meadowbrook from liability to [General] arising out of the [l]awsuit or the [c]onsent [j]udgment." (Id. ¶¶ 4-5.)

Counsel for both General and Horizon presented a $376-million draft consent judgment to the district court on May 3, 2004, and the district court endorsed it. (R. 232.) The consent judgment ordered Horizon to pay General $376 million plus 10% annual interest. Notably, the consent judgment did not reference the parties' confidential settlement agreement, and thus did not reveal that General sought to recover all but $300,000 of the $376-million judgment from non-party HealthSouth. Shortly after entry of the consent judgment, General (now a judgment-creditor of Horizon) filed a fraudulent conveyance action against HealthSouth in Alabama. HealthSouth eventually learned of the consent judgment in the Michigan action, moved to intervene in that case, and filed a Rule 60 motion to set aside the 2004 consent judgment in October 2008.

The district court received evidence, heard oral argument, and granted HealthSouth's motion by Opinion and Order of May 21, 2009. See Gen. Med., P.C. v. Horizon/CMS Health Care Corp., No. 96-72624, 2009 U.S. Dist. LEXIS 43386, 2009 WL 1447346 (E.D. Mich. May 21, 2009) ("May 2009 Order"). The district court denied relief under Rule 60(b)(3), finding HealthSouth's claim untimely, but set aside the consent judgment pursuant to subsection (d)(3), finding that counsel for General and Horizon had committed fraud on the court. 2009 U.S. Dist. LEXIS 43386, [WL] at *4-6. Although the district court recognized that "corporations do not generally present their settlement agreements to the court for approval," 2009 U.S. Dist. LEXIS 43386, [WL]at *4, the court reasoned that the non-adversarial nature of the consent judgment's damages assessment deserved heightened scrutiny, 2009 U.S. Dist. LEXIS 43386, [WL]at *5 (citing Continental Cas. Co. v. Westerfield, 961 F. Supp. 1502, 1505 (D.N.M. 1997)), and the court held that counsel defrauded the court by failing to disclose the Horizon-friendly payment terms of the settlement agreement when they presented the consent judgment, 2009 U.S. Dist. LEXIS 43386, [WL]at *5-6. Citing a Virginia district court case that applied a constructive-fraud theory of fraud on the court, see Spence-Parker v. Md. Ins. Grp., 937 F. Supp. 551, 563 (E.D. Va. 1996) (setting aside a consent judgment as collusive), the district court stated that the parties' non-disclosure "resulted in th[e] court placing its imprimatur on a consent judgment, the primary purpose of which was to ambush a non-party, HealthSouth," and found that this conduct "impugned" the "integrity of the court and the judicial process." May 2009 Order, 2009 U.S. Dist. LEXIS 43386, [WL] at *5. Having set aside the consent judgment, the district court instructed General and Horizon to "consult each other and th[e] court's case manager to determine what further proceedings are appropriate." 2009 U.S. Dist. LEXIS 43386, [WL]at *6.***

By Opinion and Order of February 25, 2010, the district court held that the settlement agreement between General and Horizon remained in effect, but resolved that the settlement agreement's severance clause precluded entry of another consent judgment. Applying the remaining terms of the settlement agreement, the district court concluded that Horizon's payment of $300,000 to General satisfied its obligations under the settlement agreement, and thus "no further action is required." ***

A. Standard of Review

We generally review district court rulings on Rule 60 motions for post-judgment relief for abuse of discretion. E.g., Jones v. Ill. Cent. R.R. Co., 617 F.3d 843, 850 (6th Cir. 2010); United States v. Pauley, 321 F.3d 578, 581 (6th Cir. 2003). General contends that we should review the district court's fraud-on-the-court ruling de novo because the district court exercised its inherent powers under Rule 60's "savings clause," section (d), instead of the post-judgment remedies identified in section (b). For support, General cites the Third Circuit's decision in Herring v. United States, which reviewed de novo a district court's 12(b)(6) dismissal of an independent fraud-on-the-court action instituted under Rule 60's savings clause. See 424 F.3d 384, 389-90 (3d Cir. 2005). But Herring conflicts with this Circuit's only panel decision reviewing a fraud-on-the-court ruling under Rule 60(d)(3), as well as this Circuit's cases reviewing other decisions rendered under the Rule's savings clause, all of which apply the abuse-of-discretion standard. Maloof v. Level Propane, Inc., 429 F. App'x 462, 467 (6th Cir. 2011) (fraud-on-the-court finding under Rule 60(d)(3)); Mitchell v. Rees, 651 F.3d 593, 595 (6th Cir. 2011) (independent action under Rule 60(d)(1)); Barrett v. Sec'y of Health & Human Servs., 840 F.2d 1259, 1263 (6th Cir. 1987) (independent action under Rule's prior savings clause in section (b)).

The procedural posture of this case and our Circuit's cases reviewing other forms of post-judgment relief persuade us to follow Maloof and apply the abuse-of-discretion standard. Unlike Herring, which considered a district court's 12(b)(6) dismissal of an independent action, the instant case concerns an intervening party's post-judgment motion to set aside a four-year-old consent judgment, which the district court decided after receiving evidence and hearing argument. Sixth Circuit law permits the district court to treat such motions, procedurally, as either an independent action or a post-judgment motion, so long as the classification does not prejudice the adverse party. Mitchell, 651 F.3d at 595 (citing Bankers Mortg. Co. v. United States, 423 F.2d 73, 81 n.7 (5th Cir. 1970); 11 Wright, Miller & Kane, Federal Practice & Procedure § 2868 n.30, at 405 (1995)). We find the district court's treatment of HealthSouth's filing as a post-judgment motion appropriate under the circumstances.

We also find instructive that this Circuit reviews sanctions rulings deriving from district courts' "inherent powers" under the abuse-of-discretion standard. E.g., Metz v. Unizan Bank, 655 F.3d 485, 489 (6th Cir. 2011); BDT Prods., Inc. v. Lexmark Int'l, Inc., 602 F.3d 742, 751 (6th Cir. 2010). Because Rule 60's savings clause refers to a court's existing powers, the "inherent powers" cases seem particularly apt. See Fed. R. Civ. P. 60(d) ("This rule does not limit a court's power to . . . (3) set aside a judgment for fraud on the court."); see also Mitchell, 651 F.3d at 595 (noting that the savings clause speaks to district courts' longstanding ability to hear independent equitable actions challenging a judgment). ***

B. Fraud on the Court

Fraud on the court refers to "the most egregious conduct involving a corruption of the judicial process itself." 11 Charles Alan Wright et al., Federal Practice & Procedure § 2870 (West 2011) (collecting cases). Treatises speak of such flagrant abuses as bribing a judge, employing counsel to exert improper influence on the court, and jury tampering. Id. § 2870; Moore's Federal Practice § 60.21[4][a]. Although not doctrinally limited to such criminal acts, courts recognize the extraordinary nature of the remedy and cautioned against expansive use of the doctrine. In Demjanjuk v. Petrovsky, we observed that

[f]raud upon the court should . . . embrace only that species of fraud which does or attempts to, subvert the integrity of the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery cannot perform in the usual manner its impartial task of adjudging cases that are presented for adjudication, and relief should be denied in the absence of such conduct.

10 F.3d 338, 352-53 (6th Cir. 1993) (quoting Moore's Federal Practice § 60.33, omission in Demjanjuk) (setting aside an extradition order for fraud on the court because government attorneys failed to disclose exculpatory evidence in violation of the duty recognized in Brady v. Maryland, 373 U.S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963)). Accordingly, cases require a party seeking to show fraud on the court to present clear and convincing evidence of the following elements: "1) [conduct] on the part of an officer of the court; that 2) is directed to the judicial machinery itself; 3) is intentionally false, willfully blind to the truth, or is in reckless disregard of the truth; 4) is a positive averment or a concealment when one is under a duty to disclose; and 5) deceives the court." Johnson v. Bell, 605 F.3d 333, 339 (6th Cir. 2010); (quoting Carter v. Anderson, 585 F.3d 1007, 1011-12 (6th Cir. 2009)). "In practice, this means that even fairly despicable conduct will not qualify as fraud on the court." Moore's Federal Practice § 60.21[4][c] (collecting cases for the proposition that perjury and non-disclosure by a single litigant did not rise to the level of fraud on the court).

The district court in this case cited Demjanjuk and the above factors, without detailing findings to support them, focusing instead on the non-adversarial nature of the consent judgment and counsel's non-disclosure of the terms of the settlement agreement as "distort[ing] . . . the judicial process." May 2009 Order, 2009 U.S. Dist. LEXIS 43386, [WL] at *5-6. Because the district court misapplied the above standard and HealthSouth has not shown the requisite clear and convincing evidence of the third and fourth factors for fraud on the court — scienter and violation of a duty to disclose — we determine that the district court abused its discretion and reverse.

1. Scienter

With regard to the scienter element, the district court conspicuously failed to find the attorneys' conduct intentionally false, wilfully blind to the truth, or in reckless disregard for the truth. ***

Counsel for General and Horizon both appeared in person and jointly presented the district judge with a proposed consent judgment. Though the confidential settlement agreement went undiscussed, counsel brought a copy of it to chambers in case the judge asked to see it. Such behavior belies HealthSouth's claim that counsel intended to deceive the court; if they had such ill intentions, why appear in person and bring the settlement agreement with them? ***

2. Duty to Disclose

In addition to the absence of scienter, the district court failed to identify a duty of disclosure violated by counsel. ***

Given the opportunity to supplement the district court's reasoning, HealthSouth presents no authority--under the Federal Rules of Civil Procedure, the Michigan Rules of Professional Conduct, or this Circuit's case law--for the proposition that counsel must disclose the terms of a confidential settlement agreement prior to seeking entry of a consent judgment. We note that the Michigan Rules' general duty of candor does not require such disclosure, 3 and Michigan courts have even permitted parties to insurance disputes to enter side agreements without impairing their consent judgments. See, e.g., Alyas v. Gillard, 180 Mich. App. 154, 446 N.W.2d 610, 613-14 (Mich. Ct. App. 1989) (explaining that a covenant to collect only from insurance proceeds did not release the insured from liability under the consent judgment, and thus did not relieve the insurance company from liability to the insured); Action Auto Stores, Inc. v. United Capitol Ins. Co., 845 F. Supp. 417, 420-21 (W.D. Mich. 1993) (same). ***

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