Pearson v. Wadleigh, Starr CV-97-363-JD 09/24/98 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
In re John E. Pearson John E. Pearson
v. Civil No. 97-363-JD
Wadleigh, Starr, Peters, Dunn & Chiesa, et al.
O R D E R
John E. Pearson was the debtor in a Chapter 7 bankruptcy
proceeding that arose after the collapse of his real estate
ventures in the early 1990's. In the course of the bankruptcy
proceedings, Pearson's claims against others involved in his
failed business ventures were resolved by settlement. Pearson
appeals the bankruptcy court's denial of his motion for relief
from its approval of a compromise of claims against First New
Hampshire Bank.
Background1
John Pearson invested in real estate development during the
1980's including a condominium project in Merrimack, New
Hampshire, developed by Bradford Woods, Inc., which was owned by
1The background facts are taken from the bankruptcy court's order. In re Pearson, 210 B.R. 500 (Bankr. D.N.H. 1997) and the record filed on appeal. Pearson and members of the Tamposi family ("the Tamposis"). The
construction loan for the project was provided by First New
Hampshire Bank ("the Bank"). While the project prospered at
first, it stalled in 1989 with the general downturn in the real
estate market. The resulting financial difficulties set Pearson
and the Tamposis at odds leading to law suits filed by both
sides.
In 1990, the Bank notified Bradford Woods that it would
foreclose on the real estate. The Tamposis, according to
Pearson, negotiated a deal with the Bank without Pearson's
knowledge whereby the Tamposis' new company. Spring Pond
Development Corporation, bought Bradford Woods' condominium units
at the foreclosure sale and assigned its interest to a subsidiary
of the Bank's parent company, which then sold the units back to
Spring Pond with financing from the Bank to complete the
development. The Bank assigned Pearson's deficiency owed on the
Bradford Woods development loan to the Tamposis for collection.
Pearson alleges that the Tamposis arranged the deal in violation
of their duties of loyalty to Bradford Woods and to him.
During this time, William Gannon of the law firm of
Wadleigh, Starr, Peters & Chiesa, represented Pearson in many
matters including his business dealings and his disputes with the
Tamposis. Robert Murphy of the Wadleigh firm also represented
2 Pearson. William Tucker, another partner at the Wadleigh firm,
sat on the board of directors and loan committee of the financing
arm of the Bank that made the refinancing deal with the Tamposis.
Another attorney in the Wadleigh firm was listed as the
incorporator of the Spring Pond corporation.
The Tamposis, represented by John Rachel with the Law Office
of Daniel Sklar, and William Tucker raised a guestion of a
conflict of interest in Gannon's representation of Pearson in his
litigation against the Tamposis. In a letter dated October 23,
1990, Pearson acknowledged the potential conflicts in
representation:
Apparently Bill Tucker of your firm has been representing the Tamposis on the Bradford Woods matter and has formed Spring Pond Development Corp. which is now the vehicle they are using to dispose of the Bradford Woods property to my detriment. Further, Bob Murphy has been having an ongoing relationship representing the Tamposis' interest in connection with a zoning matter . . . in Nashua and Hollis.
In the same letter, however, Pearson urged Gannon to move ahead
with his litigation against the Tamposis as guickly as possible.
In November of 1990, the Tamposis moved to disgualify the
Wadleigh firm from representing Pearson in his suit against them
on grounds that nine members of the Wadleigh firm, including
Robert Murphy, had represented members of the Tamposi family in
their business and financial affairs involving ten different
3 entities. Robert Murphy responded on behalf of Pearson that
before the case was filed, the parties and their counsel met,
discussed the conflict issues, and agreed that the Wadleigh firm
could represent Pearson in the litigation. The court denied the
motion to disgualify counsel. In a letter dated January 11,
1991, Gannon wrote to Pearson that the Wadleigh firm could not
represent him in suits brought against him by the Tamposis
because of a conflict of interest.
In April of 1992, Pearson, represented by William Gannon,
filed a Chapter 7 bankruptcy petition. At the time of filing,
Pearson was involved in sixty-one law suits. Three suits
involving the Tamposis and the Bank (separate from the suit in
which the conflict issue arose) pertained to Pearson's guaranty
of the loan from the Bank for the Bradford Woods project and the
Tamposis' subseguent dealings with the Bank on their Spring Pond
project. One suit was removed to federal court while the other
two closely related suits remained in state court.2
In September of 1994, the trustee for the bankruptcy estate,
Victor Dahar ("the Trustee"), gave notice to all creditors that
2Ihe two state court suits were a pro se action by Pearson to enjoin the Bank, the Tamposis, and other entities involved in the Bradford Woods project financing from proceeding against him on any of the outstanding loans and the Bank's action against Pearson to recover on the loan to Bradford Woods guaranteed by Pearson.
4 he was filing an application to employ William Gannon as special
counsel to handle Pearson's litigation. In October, the Trustee
moved for authority to sell to the Bank's parent company all of
the estate's claims in Pearson's three suits with the Bank along
with all of Pearson's stock and other interests in the Bradford
Woods project. The Trustee also sought authority to sell the
estate's claims against the Tamposis and other loan guarantors.
Pearson objected, and the Trustee withdrew the motion.
On November 22, 1994, William Gannon was appointed to
represent the estate in all of Pearson's litigation, including
the Tamposi cases, except cases involving the Bank. Gannon
disclosed a conflict preventing him from representing the estate
in the Bank litigation. A hearing on the appointment was held on
November 17, 1994, at which no one objected to Gannon's appoint
ment to represent the estate in litigation other than the Bank
cases. The estate settled Pearson's claims with the Tamposis
with approval of all parties including Pearson.
Apparently believing that his conflict was resolved once the
Tamposis were removed from the litigation, Gannon filed an
application to represent the estate in the remaining litigation
with the Bank. On October 12, 1995, the Trustee filed an ex
parte motion to allow Gannon to represent the estate to settle
the Bank litigation, which the court approved. Behind the
5 scenes, Pearson was pressing Gannon to get involved in settling
the Bank litigation. The Bank advised the Trustee that it
objected to Gannon's appointment on grounds of a conflict of
interest. Gannon then withdrew his application and the court
vacated the appointment. The Trustee handled settlement
negotiations on behalf of the estate for the Bank litigation.
On March 11, 1996, the Trustee filed a motion to approve a
settlement and release of claims involving the Bank. The terms
of the settlement included a release by the Trustee and the Bank
of all individuals claiming through either of them for all claims
against the estate and the Bank and a list of affiliated entities
in consideration of a $40,000 payment by the Bank to the estate.
The settlement also allowed the Bank to file a limited withdrawal
of its proof of claim in the bankruptcy action permitting the
Bank to continue to participate as a general unsecured creditor.
Pearson, represented by Gannon, filed an "Informational Response"
to the Trustee's motion to approve settlement in which he pointed
out that the amount of the Bank's claim in the proposed settle
ment was wrong. Pearson's response concluded, "the Debtor
supports the proposed compromise and settlement, but not for the
self-serving 'reasons' articulated by First NH Bank which drafted
the motion." Neither Gannon nor Pearson attended the hearing on
the settlement proposal. The court approved the settlement on
6 March 28, 1996, with a modified approved claim for the Bank.
Almost a year later, on February 14, 1997, the Trustee filed
a notice of abandonment of all of the estate's potential claims
of conflict of interest or breach of duty of loyalty against the
Wadleigh law firm or William Gannon. The Wadleigh firm objected
asking that the Trustee complete the process of investigating the
potential claims. Pearson, represented by new counsel, moved on
March 27 for relief from the bankruptcy court's order approving
the settlement with the Bank alleging fraud on the court because
the conflicts of interest were not disclosed in court filings.
The bankruptcy court held a hearing on June 23, 1997, on
the Trustee's notice of abandonment and Pearson's motion for
relief from approval of the settlement with the Bank. The court
ruled that to the extent the settlement and release with the Bank
did not preclude litigation by Pearson such litigation was
burdensome to the estate and should be abandoned. The court
approved the notice of intended abandonment but expressly
declined to determine the scope of the release. The court found
no support in the record for Pearson's allegations of fraud based
on a failure to disclose conflicts of interest and denied
Pearson's motion for relief from approval of the settlement. The
court noted, nevertheless, that the attorneys' conduct might
constitute ethics violations. Pearson appeals the denial of his
7 motion for relief from the settlement.
Standard of Review
On appeal, the court reviews de novo the bankruptcy court's
legal conclusions. In re I Don't Trust, 143 F.3d 1, 3 (1st Cir.
1998). The bankruptcy court's factual findings and applications
of properly construed law to fact, however, are entitled to
deference and will be set aside only if proven to be clearly
erroneous. See In re Winthrop Old Farm Nurseries, 50 F.3d 72, 73
(1st Cir. 1995); see also Cadle Co. v. McKernan, 207 B.R. 971,
974 (D. Mass. 1997) (explaining continuum of deference in mixed
guestions of law and fact).
Discussion
Pearson appeals the bankruptcy court's decision on grounds
that the court erred in not granting his motion for relief
pursuant to Federal Rule of Civil Procedure 6 0 (b) (3) for fraud on
the court. Pearson alleges that the Wadleigh firm, the Trustee,
and the Bank perpetrated a fraud on the bankruptcy court by
failing to inform the court that the Wadleigh firm had
represented all parties involved in Pearson's litigation with the
Bank. In addition, Pearson argues that the settlement with the
Bank impermissibly released his potential claims against the Wadleigh firm and Gannon for representation under a conflict
without prior disclosure to the bankruptcy court.
A. Conflicts of Interest
Rule 6 0 (b) permits the court to relieve a party from a final
order or judgment on grounds of fraud on the court.3 Simon v.
3Rule 60(b) provides as follows:
Mistakes; Inadvertence; Excusable Neglect; Newly Discovered Evidence; Fraud, Etc. On motion and upon such terms as are just, the court may relieve a party or a party's legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party; (4) the judgment is void; (5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer eguitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment. The motion shall be made within a reasonable time, and for reasons (1), (2), and (3) not more than one year after the judgment, order, or proceeding was entered or taken. A motion under this subdivision (b) does not affect the finality of a judgment or suspend its operation. This rule does not limit the power of a court to entertain an independent action to relieve a party from a judgment, order, or proceeding, or to grant relief to a defendant not actually personally notified as provided in Title 28 U.S.C., § 1655, or to set aside a judgment for fraud upon the court. Writs of coram nobis, coram vobis, audita guerela, and bills of review and bills in the Navon, 116 F.3d 1, 6 (1st Cir. 1997). Fraud on the court is an
"'unconscionable scheme calculated to interfere with the judicial
system's ability impartially to adjudicate a matter' involving an
officer of the court." Geo. P. Reintjes Co. v. Riley Stoker
Corp., 71 F.3d 44, 48 n.5 (1st Cir. 1995) (quoting Aoude v. Mobil
Oil Corp., 892 F.2d 1115, 1118 (1st Cir. 1989)). A litigant
cannot obtain postjudgment relief unless he demonstrates fraud on
the court by clear and convincing evidence. Aoude, 892 F.2d at
1118 .
Pearson argues that the long history of the Wadleigh firm's
participation with and representation of various sides of the
Pearson-Tamposi-Bank dealings created conflicts of interest that
prevented independent representation of the parties involved. In
support of his fraud theory, Pearson relies on the "particularly
rigorous conflict-of-interest restraints upon the employment of
professional persons in a bankruptcy case" imposed by 11 U.S.C.A
§ 327(a) and the bankruptcy court's "affirmative duty to exercise
vigilance in avoiding impermissible conflicts of interest on the
part of court-appointed professionals." Rome v. Braunstein, 19
nature of a bill of review, are abolished, and the procedure for obtaining any relief from a judgment shall be by motion as prescribed in these rules or by an independent action.
10 F.3d 54,57, 59 (1st Cir. 1994). Pearson contends that the
appellees' failure to disclose their conflicts of interest to the
bankruptcy court in the context of the proposed settlement of the
Bank litigation perpetrated a fraud upon the court by undermining
the bankruptcy court's ability to impartially judge the proposed
settlement.
The facts of record do not support Pearson's theory. The
bankruptcy court vacated Gannon's appointment to serve as counsel
for the estate in litigation with the Bank before the negotia
tions began that resulted in the settlement that Pearson seeks to
overturn. The Trustee, not court-appointed counsel, represented
the estate in the Bank litigation. Thus, Gannon was not a court-
appointed counsel in the settlement with the Bank, and the Rome
standard for scrutiny of conflicts in court-appointed counsel is
inapplicable to establish fraud on the court in this context.
In addition, as the bankruptcy court found, Pearson was
aware of the Wadleigh firm's various representations and
potential conflicts beginning in 1990, long before the settlement
with the Bank in 1996. Despite his knowledge, Pearson neither
ended his relationship with Gannon and the Wadleigh firm, nor
informed the bankruptcy court of any possible conflicts. Gannon
notified the court of conflicts in his representation of the
estate with respect to litigation involving the Bank before he
11 was appointed to represent the estate in litigation with the
Tamposis. Pearson did not object to Gannon's appointment nor has
he moved to set aside the Tamposi settlement on grounds of fraud
on the court based on Gannon's allegedly undisclosed conflicts of
interest.
Instead, following settlement of the Tamposi litigation,
Pearson urged Gannon to participate in the estate's efforts to
settle with the Bank. It was the Bank, not Pearson, who objected
to Gannon's appointment as counsel for the estate in that
litigation and, as the bankruptcy court found, the Bank "made
sure that the facts of possible conflict were spread upon the
record" of the court. Thus, even if Pearson were able to
demonstrate a fraud on the court based on nondisclosure of
various possible conflicts of interest, he seems to have been a
participant, not a victim, in that course of conduct.
To the extent Gannon and the Wadleigh firm may have
represented Pearson or others under a conflict of interest,
Pearson has not shown that such conflicts undermined the
integrity of the bankruptcy court's decision to approve the
settlement of the Bank litigation.4 Thus, based on the record
4Pearson's efforts to show that Gannon, Tucker, and the Wadleigh firm violated the New Hampshire Rules of Professional Conduct do not advance his cause here. To overturn a court order based on fraud on the court, Pearson must show fraud that undermined the judicial process, not simply malfeasance or
12 submitted for appeal, Pearson has not presented any evidence of
fraud on the court based on nondisclosure of possible conflicts
of interest in the settlement of the Bank litigation, and
consequently has not met his burden to demonstrate fraud by clear
and convincing evidence.
B. Failure to Disclose the Sale of an Asset of the Estate
Pearson also argues that fraud on the court occurred through
the release in the settlement with the Bank. Pearson contends
that the bankruptcy estate included as an asset his potential
claims against Gannon, Tucker, and the Wadleigh firm based on
their alleged conflicts of interest during his litigation with
the Tamposis and the Bank. He posits that the settlement with
the Bank improperly "sold" his claims against the Wadleigh firm
and others because the Bank has asserted that any claims against
the Wadleigh firm are barred by the release signed as part of the
unethical conduct by attorneys in events that did not influence the court's ability to adjudicate the disputed issue fairly. The possibility of ethical violations that Pearson suggests is a matter that would have been more properly referred to the New Hampshire Supreme Court Committee on Professional Conduct. But see N.H. Rules Prof. Conduct § 1.10 (providing six year limita tions period for disciplinary actions subject to certain discovery and tolling provisions).
13 settlement with the Bank.5 Pearson alleges that Gannon and
Wadleigh intentionally misled the court to believe, when it
approved the settlement, that no release of claims against them
was included in the settlement when the Bank, Gannon, and the
Wadleigh firm intended to release those claims. Conseguently,
Pearson argues, the appellees "sold" his conflict-of-interest
claims without disclosure to the court in violation of 11
U.S.C.A. § 541(a)(1) and perpetrated a fraud on the court by
concealing their true intent.6
To constitute fraud on the court in this context, the
appellees must have perpetrated their "unconscionable scheme" to
undermine the impartiality of court proceedings "sentiently" or
with "corrupt intent." Aoude, 892 F.2d at 1119. In other words,
the appellees must have known of Pearson's alleged claims against
Gannon, Tucker, and the Wadleigh firm; intended the release in
the settlement to bar such claims; and intentionally withheld
material information from the court in order to gain approval of
51he release included the Bank's attorneys.
6Pearson is not challenging the scope or effect of the actual release signed in order to preserve a possible cause of action against Gannon, the Wadleigh firm, or others. To the contrary, Pearson argues that the appellees intended the release to cover his claims against them but intentionally withheld that information in order to mislead the court about the scope of the release and the "sale" of an undisclosed asset.
14 the settlement with an undisclosed "sale" of an asset.
Pearson did not list any claims against Gannon or the
Wadleigh firm as assets of his estate. The proposed settlement
submitted to the bankruptcy court for approval included a release
signed by the Trustee and the attorney for the Bank. After the
settlement with the Bank had been approved by the court, Pearson
apparently served a writ on the Wadleigh firm alleging causes of
action arising from their multiple representations in his
dealings with the Tamposis and the Bank. An attorney at the
Wadleigh firm notified the Trustee of the pending suit.
The Trustee moved to abandon as burdensome any cause of
action that Pearson might have had against the Wadleigh firm.
The Wadleigh firm objected to the proposed abandonment of the
claims asking that the Trustee further investigate the validity
and value of the potential claims.
In its order dated June 26, 1997, approving the Trustee's
proposed abandonment of Pearson's potential claims against Gannon
and the Wadleigh firm, the bankruptcy court explicitly declined
to determine whether or not the settlement and release with the
Bank barred Pearson from pursuing any potential claims against
Gannon or the Wadleigh firm. The bankruptcy court further held
in its order denying relief from the settlement:
I can not find from this record that Mr. Gannon and the
15 Wadleigh Law Firm had any inkling, notice or any reason whatsoever to believe that Mr. Pearson on March 28, 1996 [the date of the settlement with the Bank] had some sort of claim against them that was being released by virtue of the boilerplate general release language included in the trustee's settlement with the Bank, and that they were allowing that to happen without appraising the Court of the ramifications.
In re Pearson, 210 B.R. at 503. Thus, the bankruptcy court found
that based on the circumstances presented on the record and the
language in the release, neither Gannon nor the Wadleigh firm
intended the release to bar Pearson's claims against them and
intentionally withheld their plan from the court.
Pearson argues that the bankruptcy court's finding is
clearly erroneous. He interprets the court's statement to mean
that neither Gannon nor the Wadleigh firm had an "inkling" at the
time of the settlement that Pearson might have claims against
them based on their conflicts of interest in representation. He
contends that based on the record of Gannon's and the Wadleigh
firm's participation and representations during his dealings with
the Tamposis and the Bank, they certainly knew that Pearson could
have a cause of action against them. Thus, Pearson reasons, the
court's finding that they had "no inkling" is "impossible."
Pearson misunderstands the court's finding. The court found
that Gannon and the Wadleigh firm did not intend the boilerplate
language of the release in the settlement to bar Pearson's claims
16 against them. The court did not find, as Pearson has inter
preted, that Gannon and Wadleigh did not know Pearson might have
claims against them. Thus, Pearson's arguments miss their mark.
In addition, the record shows that the Trustee, who signed
the release in the settlement, apparently believed that Pearson's
claims against the Wadleigh firm survived the release, since he
filed a motion to abandon the claims. The Wadleigh firm and
Gannon, who did not sign the release, did not suggest in their
response to the Trustee's proposed abandonment that they believed
the claims were barred by the release -- instead they asked that
the validity of the claims be determined. The Bank alone
suggested that the release might bar some claims the Trustee
sought to abandon but only those against the Bank's former
counsel -- not Pearson's claims based on conflicts in his
representation. Nevertheless, the efficacy of the release with
respect to any of Pearson's alleged claims has yet to be
determined so that none of his alleged claims can be deemed
"sold" as part of the settlement with the Bank. Thus, the record
supports the bankruptcy court's factual conclusions.
As Pearson has not shown that the bankruptcy court's
findings were clearly erroneous, he cannot show that the Wadleigh
firm and Gannon perpetrated a fraud on the court by selling an
undisclosed claim through the settlement with the Bank.
17 Conclusion
For the foregoing reasons, the decision of the bankruptcy
court is affirmed.
SO ORDERED.
Joseph A. DiClerico, Jr. District Judge
September 24, 1998
cc: Daniel A. Laufer, Esguire Victor W. Dahar Jr., Esguire Geraldine B. Karonis, Esguire Bruce A Harwood, Esguire J. Michael Deasy, Esguire George Vannah, U.S. Bankruptcy Court