During the pendency of bankruptcy proceedings for plaintiff Stan Lee Media Inc. (SLMI), the court approved a settlement agreement with defendant Conan Sales Co. (CSC) transferring all of the stock of Conan Properties Inc. (a wholly owned subsidiary of CSC) back to CSC. The settlement arose from a stock purchase deal between the parties in which SLMI purchased all of the stock in Conan Properties and, in return, CSC received SLMI stock subject to certain price protection guarantees. The Stock Purchase Agreement gave CSC the right to foreclose on the intellectual property rights related to the "Conan the Barbarian" character in the event of a default, which CSC sought to exercise when SLMI filed for bankruptcy protection. The settlement, negotiated by the committee of SLMI’s unsecured creditors and CSC, provided that CSC would pay $275,000 to SLMI, in exchange for a transfer of all of the Conan Properties shares and related contract rights. Defendant Junko Kobayashi, plaintiff’s controller at the time, executed the settlement agreement and the bankruptcy court, on motion by counsel for the committee, issued an order approving the settlement.
More than a decade later, however, SLMI sued various parties involved in the settlement, including defendant Arthur Lieberman, company co-founder Stan Lee’s personal lawyer, former executive officers, including Kobayashi, and CSC, seeking, among other things, to invalidate the transfer and regain the intellectual property rights in Conan, as well as for an accounting for profits related to use of the intellectual property, including profits from the Conan The Barbarian 3D movie. Plaintiff requested relief from the bankruptcy court order, arguing that defendants secured the approval by failing to disclose key facts to the court and that these facts, including that the company’s shareholders were not given notice of the proposed settlement, that defendant Kobayashi did not have authority to execute the settlement agreement, and that defendant Lieberman had an undisclosed conflict of interest and adversely influenced the settlement, rendered the order void.
Construing plaintiff’s request as one for relief from a judgment under Federal Rule of Civil Procedure 60(b)(4), which "voids" a judgment only in rare instances – when a judgment is premised either on certain jurisdictional error or on a violation of due process that deprives a party of notice or opportunity to be heard – the court concluded that plaintiff had failed to provide any evidence establishing that the order was void on due process grounds. The court also rejected plaintiff’s argument that the alleged failure to disclose certain key facts to the court constituted fraud on the court sufficient to void the order under Federal Rule 60(b)(3).
Noting that plaintiff had no standing to assert claims on behalf of its shareholders and no evidence existed that the shareholders themselves would have had standing to contest the settlement, the court rejected plaintiff’s argument that the order approving the settlement must be void because no notice of the settlement was given to the company’s 1800 shareholders. None of the cases upon which plaintiff relied established that either the Bankruptcy Code or the procedural rules governing bankruptcy proceedings required that the companies’ shareholders be given notice of the proposed settlement.
The court likewise rejected plaintiff’s argument that the settlement and subsequent approval were adversely influenced by defendant Lieberman, who owned an interest in both SLMI and CSC. Lieberman readily and regularly disclosed his interests during the negotiation of the original stock purchase agreement and again when issues arose between SLMI and CSC. The creditors’ committee negotiated the settlement that the bankruptcy court approved and plaintiff made no showing that Lieberman provided any services to SLMI or the committee, or in any way influenced the negotiations. The court also noted the absence of any authority for voiding an order based on an allegation of adverse domination.
Plaintiff also argued that the approval order should be voided because SLMI did not have a CEO at the time the settlement was negotiated and that defendant Kobayashi, the company controller, only worked part time and did not have the authority to approve the settlement without separate board authorization. The court disagreed, noting that companies in bankruptcy are often unable to compensate their management and employees for full-time service and that plaintiff had provided no authority to support its contention that proceedings involving companies in this position may subsequently be set aside. In addition, plaintiff’s own submissions in the bankruptcy proceedings established that defendant Kobayashi did, in fact, have the authority to approve the settlement.
The court also held that plaintiff had failed to meet its heavy burden of establishing that defendants secured the approval of the settlement through fraud on the court – clear and convincing evidence of the existence of an unconscionable plan or scheme designed to improperly influence the court. Noting that nondisclosure generally does not rise to the level of fraud, the court concluded that plaintiff had offered no evidence showing that counsel for the creditor’s committee, who negotiated the settlement and requested court approval, acted other than in the best interests of the committee or that he somehow participated in defendants’ allegedly fraudulent scheme. In addition, even assuming, as plaintiff had argued, that counsel for the committee had likewise been duped by defendants, this does not provide a basis for finding fraud on the court. The court concluded: “[i]n short, while SLMI claims that Defendants committed a fraud on the court, what SLMI is really alleging is fraud on a party, which is not a basis for relief under Rule 60(d)(3).”