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,

(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,

(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,

(1st Cir. 1995); see also Cadle Co. v. McKernan,

(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

, 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,

(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.,

, 48 n.5 (1st Cir. 1995) (quoting Aoude v. Mobil

Oil Corp.,

(1st Cir. 1989)). A litigant

cannot obtain postjudgment relief unless he demonstrates fraud on

the court by clear and convincing evidence. Aoude,

.

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.

(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

(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,

. 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,

. 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

18