General Medicine, P.C. v. Horizon/CMS Health Care Corp. ( 2012 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 12a0389n.06
Nos. 10-1315, 10-1397
FILED
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT Apr 10, 2012
LEONARD GREEN, Clerk
GENERAL MEDICINE, P.C., )
)
Plaintiff-Appellant/Cross-Appellee, )
)
v. ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR THE
HORIZON/CMS HEALTH CARE ) EASTERN DISTRICT OF MICHIGAN
CORPORATION, )
)
Defendant-Appellee, )
)
HEALTHSOUTH CORPORATION, )
)
Intervenor-Appellee/Cross-Appellant. )
Before: BATCHELDER, Chief Judge; COLE and COOK, Circuit Judges
COOK, Circuit Judge. General Medicine, P.C. (“General”), a Michigan-based medical
services provider, appeals the district court’s fraud-on-the-court finding, which set aside a five-year-
old $376-million consent judgment between General and Defendant Horizon/CMS Health Care
Corporation (“Horizon”). Intervenor HealthSouth Corporation (“HealthSouth”) cross-appeals the
district court’s adverse judgment on the timeliness of its motion for relief under Federal Rule of Civil
Procedure 60(b), and seeks an order closing the case. For the following reasons, we reverse in part,
affirm in part, and reinstate the consent judgment.
Nos. 10-1315, 10-1397
Gen. Med. v. Horizon/CMS Health Care Corp.
I.
This matter began as a contract dispute between General and Horizon in the Eastern District
of Michigan. Under the parties’ contract, General provided “medical director” services to certain
nursing homes managed by Horizon. Horizon terminated the agreement in 1996 before the end of
the contract term, and General sued. HealthSouth acquired Horizon in 1997 during the pendency
of this suit, but never became a party. In 1999, the district court stayed and administratively closed
the case to facilitate a criminal investigation of the two Horizon facilities. 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. For reasons not germane to this appeal, General believes that the sale of
Horizon to Meadowbrook constituted a fraudulent conveyance that enabled Healthsouth to shed
Horizon’s liabilities while keeping most of its assets.
The district court reopened the case in April 2003 following the conclusion of the criminal
investigation. Thereafter Meadowbrook replaced Horizon’s defense counsel and began settlement
negotiations with General. According to the parties’ representations, Meadowbrook had limited
funds (approximately $25 million) with which to settle a number of claims against Horizon,
including the case brought by 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
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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.1 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
1
The consent judgment states in pertinent part:
This matter having come before the Court on Plaintiff’s Complaint for breach
of contract, and the parties through their respective attorneys, having stipulated to the
entry of this Judgment, and the Court being more fully advised in the premises:
NOW, THEREFORE, IT IS HEREBY ORDERED AND ADJUDGED that
Defendant [HORIZON] shall pay to Plaintiff [GENERAL] the sum of [$376 million],
plus interest on the judgment from the date of entry until paid at the rate of [10%]
per annum.
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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 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. Id. at *4–6. Although the district court recognized that “corporations
do not generally present their settlement agreements to the court for approval,” id. at *4, the court
reasoned that the non-adversarial nature of the consent judgment’s damages assessment deserved
heightened scrutiny, id. 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, id. 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 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.” Id. at *6.
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After the May 2009 Order, Horizon moved for clarification and instruction, General moved
to enforce the settlement agreement via entry of a new consent judgment, and HealthSouth moved
to dismiss on the grounds that Horizon had satisfied its obligations under the settlement agreement
by paying General $300,000. 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.” Gen. Med., P.C. v. Horizon/CMS Health Care Corp., No. 96-72624, 2010 WL
726963, at *1–2 (E.D. Mich. Feb. 25, 2010) (“February 2010 Order”).
General appealed both the May 2009 and February 2010 Orders on March 9, 2010, and
HealthSouth cross-appealed. The parties report that the Alabama courts have stayed the fraudulent
conveyance action pending the outcome of these proceedings.
II.
As a threshold matter, HealthSouth renews its challenge to the timeliness of General’s appeal
under Federal Rule of Appellate Procedure 4(a)(1)(A). The Rule’s 30-day limit for filing appeals
in civil cases “is mandatory and jurisdictional.” Intera Corp. v. Henderson, 428 F.3d 605, 611 (6th
Cir. 2005) (internal quotations marks and citation omitted). As before, HealthSouth argues that the
May 2009 Order constituted a final judgment for purposes of appeal, and thus reasons that this court
has no jurisdiction to review General’s appeal filed nine months later, after the issuance of the
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February 2010 Order. A motions panel of this court previously denied HealthSouth’s motion to
dismiss, finding that “the appealability of the May 2009 order is inextricably intertwined with the
overall validity of the orders challenged on appeal, resolution of [which] . . . requires a merits
determination.” (Order of July 9, 2010.) Having reviewed the May 2009 and February 2010 Orders
and related proceedings, we find that General properly and timely appealed the February 2010 Order.
Under 28 U.S.C. § 1291, federal appeals courts have jurisdiction “of appeals from all final
decisions of the district courts of the United States.” A final, appealable decision “ends the litigation
on the merits and leaves nothing for the court to do but execute the judgment.” Coopers & Lybrand
v. Livesay, 437 U.S. 463, 467 (1978) (quoting Catlin v. United States, 324 U.S. 229, 233 (1945));
see also In re Saffady, 524 F.3d 799, 802 (6th Cir. 2008). Here, the May 2009 Order did not end the
litigation leaving nothing but execution, as required for a final judgment. Rather, it expressly left
the door open for further proceedings on the issue it decided, instructing the parties to consult with
the case manager to determine how to proceed after the vacatur of the consent judgment. Indicative
of the matter’s unresolved status, all three parties, including intervenor HealthSouth, filed responsive
motions to the May 2009 Order. The district court’s February 2010 Order viewed these motions as
consistent with the instructions of the May 2009 Order and granted clarification, explaining that the
prior order left the settlement agreement intact, and that the settlement agreement’s terms precluded
the entry of a new consent judgment. February 2010 Order at *1–2.
Nevertheless, HealthSouth argues the finality of the May 2009 Order because the underlying
judgment—the consent judgment it vacated—constituted a final judgment. For support, HealthSouth
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relies on this court’s decision in Mallory v. Eyrich, which deemed final and appealable a Rule 60(b)
order setting aside a Rule 68 judgment. 922 F.2d 1273, 1277 (6th Cir. 1991); see also Browder v.
Dir., Dep’t of Corr. of Ill., 434 U.S. 257, 263 n.7 (1978) (suggesting that parties may timely appeal
a Rule 60(b) order under Federal Rule of Appellate Procedure 4(a)). But Mallory does not speak to
the type of order issued in this case—a fraud-on-the-court judgment issued under the court’s inherent
powers—and it does not stand for the proposition that any Rule 60 order starts the limitations period
for filing an appeal, regardless of whether that order satisfies the Coopers finality standard. Indeed,
Mallory purported to apply the Coopers finality standard, 922 F.2d at 1276–77, and on other
occasions we have rejected claims that Rule 60 orders constitute final judgments, e.g., In re Saffady,
524 F.3d at 802; Fuller v. Quire, 916 F.2d 358, 360 (6th Cir. 1990). Cf. 12 James W. Moore et al.,
Moore’s Federal Practice § 60.68[2] (3d ed. 2011) (explaining that a grant of Rule 60 relief “is rarely
[an] appealable order,” but noting that appeal will lie if the court “enters a corrected judgment so that
there is nothing further to be decided by the district court”).
Regardless of the finality of the 2004 consent judgment, the May 2009 Order lacked finality
because it did not address its own impact on the parties’ settlement agreement—an agreement that
expressly required the entry of a consent judgment between General and Horizon. Accordingly, the
district court asked the parties to consult on further proceedings, the parties filed responsive motions,
and the district court ruled on these unresolved issues in a clarification order. Under
the circumstances, General properly appealed the February 2010 Order, and this court may review
it.
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III.
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
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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).
Applying the abuse-of-discretion standard, we will reverse only if the court “‘commits a clear
error of judgment, such as applying the incorrect legal standard, misapplying the correct legal
standard, or relying upon clearly erroneous findings of fact.’” Jones, 617 F.3d at 850 (quoting In re
Ferro Corp. Derivative Litig., 511 F.3d 611, 623 (6th Cir. 2008)). Post-judgment relief “is
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circumscribed by public policy favoring finality of judgments and termination of litigation.” See
Blue Diamond Coal Co. v. Trs. of UMWA Combined Benefit Fund, 249 F.3d 519, 524 (6th Cir.
2001); see also Superior Seafoods, Inc. v. Tyson Foods, Inc., 620 F.3d 873, 878 (8th Cir. 2010)
(distinguishing fraud on the court under the savings clause from Rule 60(b) motions and other fraud
claims, noting that “[r]elief through an independent equitable action alleging fraud on the court, then,
is a truly extraordinary form of relief”); Moore’s Federal Practice § 60.21[4][c] (emphasizing narrow
reach of fraud-on-the-court doctrine under Rule 60(d)(3), cautioning that broad application would
render meaningless the remedies and time limitations prescribed by Rule 60(b)).
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.
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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 (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 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.
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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.
Instead, the court cited with approval a Virginia case finding post-judgment relief available to cancel
a collusive consent judgment, despite the absence of deceitful intent. Id. at *5 (quoting
Spence-Parker, 937 F. Supp. at 563). At oral argument, HealthSouth conceded the absence of circuit
precedent recognizing the constructive-fraud doctrine applied in Spence-Parker. Rather, under our
fraud-on-the-court precedents, the alleged misconduct must demonstrate, at a minimum, a reckless
disregard for the truth. See, e.g., Carter, 585 F.3d at 1011–12; Demjanjuk, 10 F.3d at 348–49.
Demjanjuk defined reckless disregard in this context as referring to situations where “the actor has
. . . knowledge, or reason to know, of the facts, but does not realize or appreciate the high degree of
risk involved, although a reasonable man in his position would do so.” 10 F.3d at 349 (omission in
Demjanjuk) (quoting Restatement (Second) of Torts § 500, cmt. (a)). Viewed through the lens of
this objective standard, the record lacks support for conclusion that counsel for General and Horizon
acted 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?
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Notwithstanding this reasonable conduct, HealthSouth contends that the consent judgment’s
damages figure affirmatively misstates the true damages set forth in the parties’ separate settlement
agreement. The district court’s fraud-on-the-court judgment did not adopt this view, and the record
does not support such a finding. The draft order presented to the district court—the consent
judgment—does not speak of the parties’ settlement agreement or its terms. HealthSouth makes
much of the consent judgment’s language stating that the district court “[had been] fully advised in
the premises,” but this boilerplate language does not suggest that counsel attempted to dupe the
district court.
The settlement agreement, meanwhile, does not purport to establish Horizon’s liability for
General’s contract claims; it sets forth only General’s plans for collecting the consent judgment from
Horizon. Thus, while the settlement agreement includes Horizon’s promises to pay only $300,000
and funds returned from HealthSouth (Settlement Agreement ¶ 6(i), (ii))—in effect, General’s
covenant of limited enforcement—the settlement agreement in no way undermines the
damages amount set forth in the consent judgment. Indeed, the settlement agreement, by its
own terms, maintained Horizon’s or Meadowbrook’s liability under the consent judgment. (Id. ¶ 5.)2
HealthSouth also failed to show anything inherently dishonest about the consent judgment’s
damages figure. While HealthSouth challenges the methodology employed by General’s damages
expert and the total amount of damages, the district court’s fraud-on-the-court ruling included no
2
We note that this non-release provision prompted the Alabama Supreme Court, applying
Michigan law to the fraudulent conveyance proceedings now-stayed, to conclude that General’s
covenants of limited collection did not operate as a release of liability. Ex parte HealthSouth Corp.,
974 So. 2d 288, 296 (Ala. 2007).
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findings regarding the accuracy or reasonableness of the damages, and HealthSouth has not
suggested that improper motives affected General’s damages expert’s estimate. Ultimately, neither
the consent judgment’s damages figure nor the settlement agreement’s covenants of limited
enforcement bespeak the reckless disregard for truth necessary for fraud on the court.
2. Duty to Disclose
In addition to the absence of scienter, the district court failed to identify a duty of disclosure
violated by counsel. Spence-Parker, the only authority cited by the district court for the existence
of a duty to disclose, purported to apply a doctrine of “constructive fraud” under Virginia’s Rules
of Professional Responsibility. See 937 F. Supp. at 562 (noting that EC 7-17, Va. Code Prof’l Resp.
required “competent, adverse presentation of evidence and issues”). As noted above, HealthSouth
concedes that this standard does not govern the present appeal. HealthSouth makes passing
reference to Sixth Circuit cases acknowledging counsel’s duty of candor, but General correctly points
out that these cases concerned affirmative misrepresentations to the court and do not address
counsel’s obligations in presenting a consent judgment to the court. See Holloway v. Brush, 220
F.3d 767, 780 (6th Cir. 2000) (en banc) (criticizing a state agency for reneging on its earlier
statement to the court that it would renew child custody proceedings); Thompson v. Paasche, 950
F.2d 306, 315 n.7 (6th Cir. 1991) (recognizing that lawyers’ general duty of candor forbids
“misrepresent[ing] the law when it clearly goes against the client”); Cunningham v. Sears, Roebuck
& Co., 854 F.2d 914, 916 (6th Cir. 1988) (reporting attorney for disciplinary investigation where
attorney violated Circuit rules by concealing and misrepresenting material facts, namely his client’s
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knowledge of a witness-juror association and the district court’s bench ruling on the post-trial
motion).
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
3
As of the time of the entry of the consent judgment, the applicable Michigan Rule provided
in pertinent part:
Rule: 3.3 Candor Toward the Tribunal
(a) A lawyer shall not knowingly:
(1) make a false statement of material fact or law to a tribunal;
(2) fail to disclose a material fact to a tribunal when disclosure is necessary
to avoid assisting a criminal or fraudulent act by the client;
(3) fail to disclose to a tribunal controlling legal authority in the jurisdiction
known to the lawyer to be directly adverse to the position of the client and not
disclosed by opposing counsel; or
(4) offer evidence that the lawyer knows to be false.
If a lawyer has offered material evidence and comes to know of its falsity, the
lawyer shall take reasonable remedial measures.
Mich. R. Prof’l Conduct 3.3 (2004). Later amendments reorganized and modified the rule to
preclude attorneys from, inter alia, knowingly
(a)(1) mak[ing] a false statement of material fact or law to a tribunal or
fail[ing] to correct a false statement of material fact or law previously made
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courts have even permitted parties to insurance disputes to enter side agreements without impairing
their consent judgments. See, e.g., Alyas v. Gillard, 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).
As the district court itself recognized, “corporations do not generally present their settlement
agreements to the court for approval.” May 2009 Order at *4. Neither the district court nor
HealthSouth on appeal have identified a specific duty of candor violated by counsel’s non-disclosure,
further underscoring that counsel did not act recklessly, as contemplated by the objective Demjanjuk
standard.
to the tribunal by the lawyer;
(2) fail[ing] to disclose to a tribunal controlling legal authority in the
jurisdiction known to the lawyer to be directly adverse to the position of the
client and not disclosed by opposing counsel; or
(3) offer[ing] evidence that the lawyer knows to be false. If a lawyer has
offered material evidence and comes to know of its falsity, the lawyer shall
take reasonable remedial measures, including, if necessary, disclosure to the
tribunal[.]
(b) If a lawyer knows that the lawyer’s client or other person intends to engage, is
engaging, or has engaged in criminal or fraudulent conduct related to an adjudicative
proceeding involving the client, the lawyer shall take reasonable remedial measures,
including, if necessary, disclosure to the tribunal.
Mich. R. Prof’l Conduct 3.3 (2011). None of these restrictions address the non-disclosure at issue
in this appeal.
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HealthSouth faults General’s counsel for concealing and misrepresenting the consent
judgment and settlement agreement to the Alabama courts in the fraudulent conveyance action.
Assuming the truth of these allegations, this post-settlement conduct in Alabama court cannot
demonstrate that counsel defrauded the Michigan district court that entered the consent judgment.
Though we do not endorse the litigation tactics allegedly employed by General’s counsel in the
Alabama proceedings, that conduct has no bearing on whether counsel defrauded the Michigan court
with their presentation of the consent judgment.
The district court’s concern that General employed “ambush” tactics against HealthSouth
overstates the case. The consent judgment did nothing more than establish Horizon’s liability to
General, which under Alabama law enabled General to sue HealthSouth for assets fraudulently
transferred from Horizon. See Ala. Code § 8-9A-7(b); Ex parte HealthSouth Corp., 974 So. 2d 288,
293–98 (Ala. 2007). Stipulated orders generally do not have preclusive effect on third parties, see,
e.g., In re Kane, 254 F.3d 325, 329–30 (1st Cir. 2001) (collecting authority); Benoay v. Decker, 517
F. Supp. 490, 496 (E.D. Mich. 1981), aff’d 735 F.2d 1363 (6th Cir. 1984) (unpublished table
decision), and the consent judgment’s damages figure does not establish the merits of General’s
separate fraudulent conveyance action against HealthSouth, see Ala. Code §§ 8-9A-4–5 (setting forth
the substantive requirements for a fraudulent conveyance action); Thompson Props. 119 AA 370, Ltd.
v. Birmingham Hide & Tallow Co., 897 So. 2d 248, 262–63 (Ala. 2004). Cf. Ala. Code § 8-9A-
7(a)(1) (authorizing creditor remedy of “[a]voidance of the transfer to the extent necessary to satisfy
the creditor’s claim” (emphasis added)).
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To the extent that the consent judgment’s damages figure bears on the merits of the Alabama
fraudulent conveyance action, the Alabama courts will evaluate the circumstances leading to the
entry of the consent judgment in determining whether to credit the damages figure. Continental
Casualty, the New Mexico decision cited by the district court, did exactly that. As a non-issuing
court asked to enforce a consent judgment, it considered the circumstances leading to the entry of
the consent judgment, deemed them collusive, and declined to give the consent judgment preclusive
effect. Cont’l Cas., 961 F. Supp. at 1509. HealthSouth will suffer no unfair prejudice from
reinstatement of the consent judgment because it retains the ability to challenge the damages figure
in defending the Alabama fraudulent conveyance action. Cf. Mitchell, 651 F.3d at 595 (listing
inability to present a defense as an “indisputable element[]” of an independent action to set aside a
judgment under Rule 60(d)(1)).
C. Contingent Cross-Appeal: Timeliness of Relief Under Rule 60(b)
As a fall-back position, HealthSouth cross-appeals the district court’s denial of relief under
Rule 60(b)(3). HealthSouth does not contest the district court’s conclusion that the (b)(3) limitations
period had expired, but instead asserts that it presented a separate collusion claim subject to the more
lenient limitations period applicable to Rule 60’s “catchall provision,” subsection (b)(6). See Fed.
R. Civ. P. 60(b)(3) (authorizing post-judgment relief for fraud, misrepresentation, or misconduct by
an adversary), (b)(6) (permitting remedy for “any other reason that justifies relief”), (c)(1) (providing
one-year limitations period for (b)(3) claims and a “reasonable time” limitations period for (b)(6)
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Nos. 10-1315, 10-1397
Gen. Med. v. Horizon/CMS Health Care Corp.
claims). HealthSouth argues that its claim qualifies under (b)(6) because subsection (b)(3) does not
expressly apply to claims of collusion.
We question how the allegations underpinning HealthSouth’s purported collusion claim
differ from those underlying its fraud-on-the-court claim. HealthSouth itself repeatedly characterizes
the actions of General’s and Horizon’s counsel in subsection (b)(3) terms: fraud, misrepresentation,
and misconduct. (See HealthSouth Br. at 2 (referring to the parties’ “egregious fraud”), 33
(“misrepresentations”), 39–54 (describing opposing counsel’s failure to diseclose as misconduct).)
We “adhere[] to the view that courts should apply Rule 60(b)(6) only in exceptional or extraordinary
circumstances which are not addressed by the first five numbered clauses of the Rule.” Hopper v.
Euclid Manor Nursing Home, Inc., 867 F.2d 291, 294 (6th Cir. 1989); see also East Brooks Books,
Inc. v. City of Memphis, 633 F.3d 459, 465 (6th Cir. 2011). In short, a party cannot escape the time
limitations applicable to certain Rule 60 provisions by dressing its claim in subsection (b)(6) clothes.
See Hopper, 867 F.2d at 294 (“[D]istrict courts may employ subsection (b)(6) as a means to achieve
substantial justice when ‘something more’ than one of the grounds contained in Rule 60(b)’s first
five clauses is present.”); Lyle v. Brazil, 168 F.3d 490 (6th Cir. 1998) (unpublished table decision)
(citing Ackermann v. United States, 340 U.S. 193, 198 (1950)). Accepting HealthSouth’s own
characterization of the alleged misconduct, its claim fits under the auspices of subsection (b)(3), and
HealthSouth has not shown extraordinary circumstances qualifying its claim for (b)(6) treatment.
We therefore agree with the district court that HealthSouth cannot bypass subsection (b)(3)’s
one-year limitations period under the guise of a (b)(6) claim.
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Nos. 10-1315, 10-1397
Gen. Med. v. Horizon/CMS Health Care Corp.
In any event, HealthSouth has not shown that it filed its motion within a “reasonable time,”
as required for a 60(b)(6) claim. See Fed. R. Civ. P. 60(c)(1). HealthSouth filed its Rule 60 motion
in the Michigan proceedings in October 2008, more than four years after entry of the consent
judgment. HealthSouth blames General for the delay, claiming that General actively concealed the
terms of the consent judgment and settlement agreement in the Alabama proceedings. But the record
reflects that General notified HealthSouth of the consent judgment in its November 2004
interrogatory responses for the Alabama proceedings (R. 236, Ex. 16 at 2–4), and HealthSouth does
not dispute that it had access to the settlement agreement in January 2006 when it filed a motion for
summary judgment in the Alabama proceedings (see HealthSouth Br. at 51 (asserting that General
concealed the settlement agreement for a year after instituting the Alabama proceedings); General
Reply Br. at 48). HealthSouth offers no explanation why, given such notice of General’s and
Horizon’s agreement, it waited nearly two years to file its Rule 60 motion in the Michigan
proceedings. Though courts permit longer delays in other cases, the reasonableness of the delay
“depends on the facts of a given case including the length and circumstances of the delay, the
prejudice to the opposing party by reason of the delay, and the circumstances compelling equitable
relief.” See Olle v. Henry & Wright Corp., 910 F.2d 357, 365 (6th Cir. 1990) (citing cases deeming
two-year delay reasonable). Assessing these factors, HealthSouth filed too late. See Blachy v.
Butcher, 129 F. App’x 173, 179 (6th Cir. 2005) (finding that a three-year delay did not satisfy the
Rule’s “reasonable time” limitation); Suttles v. City of Chattanooga, Tenn., 886 F.2d 1316 (6th Cir.
1989) (unpublished table decision) (same, two-and-a-half-year delay).
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Gen. Med. v. Horizon/CMS Health Care Corp.
IV.
For the foregoing reasons, we REVERSE the district court’s fraud-on-the-court judgment,
AFFIRM the Rule 60(b) judgment, and REINSTATE the May 3, 2004 consent judgment.
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Nos. 10-1315, 10-1397
Gen. Med. v. Horizon/CMS Health Care Corp.
ALICE M. BATCHELDER, Chief Judge, dissenting. I concur in section III.C of the
majority opinion affirming the district court’s Rule 60(b) order, but I respectfully dissent from the
majority’s decision to reverse the district court’s fraud-on-the-court ruling. The record contains
evidence indicating that, at the least, counsel acted in reckless disregard for the truth and that they
had a duty to disclose to the court the information that was in the settlement agreement. Reviewing
the district court’s determination for abuse of discretion with such evidence in the record, I do not
have a “definite and firm conviction that the court below committed a clear error in judgment in the
conclusion it reached.” Paschal v. Flagstar Bank, 295 F.3d 565, 576–77 (6th Cir. 2002).
First, although the district court did not make explicit findings regarding counsels’ intent, the
record supports the district court’s conclusion that counsel, on some level, intended to deceive the
court. The majority places significant weight on counsels’ choice to bring the settlement agreement
to the judge’s chambers, concluding that they must not have had any intent to deceive if they were
willing to show it to the court upon its request. However, it is just as reasonable to draw the
conclusion that the parties knowingly concealed information they knew the judge would consider
material. They brought the settlement agreement with them because they knew the judge might ask
to see it, but they obviously preferred that he execute the consent judgment without knowledge of
the settlement agreement’s collection-limitation. Where there are two reasonable interpretations of
a single act, we cannot say that the district court’s conclusion based on one of the interpretations was
a clear error in judgment. United States v. Aguwa, 123 F.3d 418, 423 (6th Cir. 1997) (“[I]nasmuch
as other interpretation[s] might be reasonable, we cannot conclude that the district court committed
clear error.”).
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The majority also believes that counsel lacked any deceptive intent because the consent
judgment and the settlement agreement were neither false nor deceptive. This conclusion, however,
requires a reading of the documents in isolation. When the settlement agreement and consent
judgment are read together (something counsel deprived the district court of the opportunity to do),
it is clear that the consent judgment takes on a different meaning. In isolation, the consent judgment
says that Horizon will pay $376 million to General Medicine. Indeed, this is what the court believed
the consent judgment meant. However, when read in light of the settlement agreement, the consent
judgment takes on a completely different meaning: Horizon will pay only $300,000—a mere 0.08%
of the judgment—and a third party will pay the remaining 99.92%. Because the court read only the
consent judgment, it believed that Horizon would be obligated to pay the full amount of the
judgment to General Medicine. From the entire record, it is evident that counsel acted with reckless
disregard for the truth when they gave the court the consent judgment without the settlement
agreement, indicating at best that they failed to “appreciate the high degree of risk” that the district
court would believe the consent judgment meant one thing when it in fact meant another. Demjanjuk
v. Petrovsky, 10 F.3d 338, 349 (6th Cir. 1993).
The majority also reasons that counsel could not have been deceptive because there is nothing
dishonest about the $376 million figure. This conclusion, however, misses the critical point. It is
immaterial whether the figure is an accurate representation of damages because counsels’ deception
does not lie in the substance of the consent judgment but rather in their representation of the
judgment to the court. By failing to disclose the substance of the settlement agreement, or any other
indication that the consent judgment was limited, counsel led the court to believe that the consent
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judgment was something it was not—a fairly negotiated figure. Protected by the settlement
agreement, Horizon knew it would never be obligated to pay the judgment figure, and, therefore, it
had no interest in negotiating that amount. Indeed, General Medicine admits that it refused to
negotiate the judgment figure, a fact the majority completely ignores. Had counsel made the district
court aware of the settlement agreement’s collection limitation, the court would at least have had the
opportunity to determine whether—prior to approving the judgment—the parties had engaged in
arm’s length negotiations in reaching that figure. And even if the amount of damages accounted for
in the judgment is accurate, counsel still misrepresented the nature of the consent judgment to the
court.
Finally, the majority concludes that counsel were not dishonest because Horizon is still “on
the hook” for the remaining amount of the settlement agreement. This conclusion requires ignoring
the plain language of the settlement agreement, which expressly states, “Gen[eral] agrees and
covenants that it[] will not enforce, execute against, or attempt to collect in any fashion from
Horizon and/or Meadowbrook as a result of or under the consent judgment beyond the amounts
identified in paragraph 6(i) below [providing for the $300,000 payment].” The majority reasons that
Horizon is still on the hook because the settlement agreement goes on to require Horizon to return
any assets it receives as a result of the Alabama action. This clause, however, is not at all dependent
on the amount of the consent judgment. The parties intended Horizon to be on the hook for only two
things: the $300,000 payment and the return of any and all assets it receives from the Alabama
action. The latter obligation requires Horizon to return all assets it may receive from the Alabama
action, even if the value of those assets exceeds $376 million. They never intended Horizon to pay
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Nos. 10-1315, 10-1397
Gen. Med. v. Horizon/CMS Health Care Corp.
“in any fashion . . . as a result of or under the consent judgment” more than $300,000. Any other
reading is inconsistent with the express language of the settlement agreement.
Second, I cannot agree with the majority’s conclusion that counsel did not have a duty to
disclose. The majority’s conclusion that counsel did not breach a duty to the court because attorneys
do not have a duty to disclose settlement agreements is in my view much too narrow a concept of
counsels’ duties. It is not the settlement agreement generally that counsel had a duty to disclose, but
rather its specific limitation on the collection of the judgment—a material fact that would have
affected the court’s adjudication of the issue. Indeed, the district court stated that had it known about
the limitation, it would have more thoroughly scrutinized the judgment figure because it would have
suspected that the figure was not negotiated at arm’s length, a suspicion that would have been
confirmed. The majority’s discussion of counsels’ duties fails to recognize this Court’s explicit
statement in Demjanjuk that “[a]s an officer of the court, every attorney has a duty to be completely
honest in conducting litigation.” 10 F.3d at 352. Counsel led the court to believe that Horizon
would be responsible for paying $376 million, but counsel knew this was not the case. Counsel
allowed the court to believe that the judgment figure fairly represented the interests of both parties,
but counsel knew that, in reality, the parties did not negotiate the figure and General simply wanted
a large judgment so that it could qualify as a creditor in the Alabama action. By withholding this
information from the court, counsel breached their duties to be completely honest in conducting
litigation. This is even more true in light of the consent judgment’s inclusion of the language “and
the court being more fully advised in the premises.” The majority dismisses this language as
boilerplate; but because this phrase is so common in consent judgments, it only further indicates that
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Nos. 10-1315, 10-1397
Gen. Med. v. Horizon/CMS Health Care Corp.
counsel allowed the court to believe that this was a typical consent judgment between two parties
who had fairly negotiated the damages figure, when in fact it was not.
In this case, where counsel failed to disclose specific elements of a settlement agreement that
radically changed the meaning and effect of a consent judgment presented to the court, the district
court was within its discretion to find that counsel violated their duties to be completely honest with
the court, regardless of whether there is a specific duty to disclose a settlement agreement.
I respectfully dissent.
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