Saturday, October 10, 2009

Rule 1.540 Motion For Fraud On Court Requies Showing Of Prejudice

In Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc. (4D08-4022), the Fourth District affirmed the trial court's denial of a Rule 1.540(b) motion to set aside a final judgment.  The final judgment had been entered pursuant to the Fourth District's mandate in Morgan Stanley & Co., Inc. v. Coleman (Parent) Holdings, Inc., 955 So. 2d 1124 (Fla. 4th DCA 2007).  The basis for the motion was alleged fraud on the court by the defendant.  The defendant allegedly concealed documents in discovery and had already been sanctioned by the entry of a partial default judgment before trial.  The Fourth District, as did the trial court, held the motion was properly denied because the plaintiff had failed to show any prejudice in the entry of the judgment.

The Fourth District stated:
Before trial, the trial court entered a partial default against Morgan Stanley as a sanction for discovery misconduct in responding to requests for e-mails about the transaction. Morgan Stanley kept old e-mails on certain backup tapes stored at various locations. The trial court held extensive hearings regarding Morgan Stanley’s non-compliance with discovery orders for e-mail production, as well as misrepresentations by Morgan Stanley’s in-house counsel concerning when they learned that e-mails existed on certain back-up tapes. Ultimately, the court entered a partial default against Morgan Stanley on all elements of CPH’s claim except reliance and damages. It also ordered that portions of CPH’s Amended Complaints be read into evidence and deemed established facts. Thus, CPH needed to prove only that it relied on the established misrepresentations and to prove its damages. The jury awarded CPH nearly $1.5 billion in compensatory and punitive damages.
We reversed the award solely because CPH failed to prove its damages. CPH failed to establish the actual fraud-free value of Sunbeam on the date of purchase, in accordance with settled Florida law. We further held that CPH’s failure to establish actual damage, which is an essential element of fraud, rendered the punitive damage award invalid. Because the law in our district does not allow a “second bite at the apple” to prove damages, we reversed and ordered judgment for the defendant. Morgan Stanley, 955 So. 2d at 1131. The Florida Supreme Court denied review. Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co. Inc., 973 So. 2d 1120 (Fla. Dec. 12, 2007) (Table).
On remand, the plaintiff filed a motion to set aside judgment under Florida Rule of Civil Procedure 1.540(b). 
Essentially, the trial court ruled that the alleged fraud, even if true, did not affect the outcome because it had no bearing upon CPH’s failure to prove damages by the proper legal measure. The court rejected CPH’s argument that it was not required to show prejudice because Morgan Stanley’s in-house lawyers committed a fraud on the court.
The trial court, noting a split of authority among the federal circuits, sided with the Seventh Circuit’s reasoning that prejudice is required. See Drobny v. Comm’r of Internal Revenue, 113 F.3d 670, 678 (7th Cir. 1997). There, the court stated:
We are of the opinion that the petitioners were required to demonstrate, not only that the respondent engaged in conduct that was intended to mislead the court, but – of paramount importance – that the actual conduct affected the outcome of their case. … We do not agree with the petitioner’s argument that a final judgment of the Tax Court should be subject to attack (possibly, as in this case, many years later) when the allegedly improper conduct had no effect on the outcome of the decision. The rule of finality lends stability to our legal system, and it is especially important in this litigious era when adversely affected parties seize upon almost any opportunity to prolong litigation.
The Seventh Circuit’s position is more consistent with Florida policy considerations favoring the finality of judgments and with Florida law requiring a prejudicial effect on the outcome of a case. Without doubt, the public interest in the fairness and integrity of the judicial process in an important policy concern. But, as the trial court pointed out in its order, “[a] Rule 1.540(b) motion is not the appropriate vehicle for handling attorney misconduct that does not prejudice the final judgment … Rather, such misconduct is more appropriately vindicated via criminal contempt proceedings and/or grievances filed with the Florida Bar.”


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