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$3M default case reopened based on fraud allegations

Nick Hurston//July 17, 2023

$3M default case reopened based on fraud allegations

Nick Hurston//July 17, 2023//

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A circuit court has reopened a case more than a year after granting default judgment for $3 million because the defendants alleged that the plaintiff — now deceased — committed fraud on the court to procure the judgment.

Despite their willful default, the defendants’ bankruptcy attorney offered a potential saving grace: Virginia allows a defendant to re-open a default judgment within two years by alleging that the plaintiff testified untruthfully to secure it.

The plaintiff, however, argued that it should have been filed as an independent action, and that it was untimely, barred by laches and facially defective.

Judge David A. Oblon of the Fairfax County Circuit Court disagreed.

“Because Virginia Code § 8.01-428(A)(i) extends a two-year statute of limitations for setting aside default judgments based on intrinsic fraud, Plaintiff’s claims that Defendants’ motions are untimely due to Rule 1:1 or laches are wrong,” the judge wrote. “Similarly, his argument that Defendants procedurally needed to file an independent action to challenge the default judgment as mandated under paragraph D of the statute is incorrect. The present case properly falls under paragraph A, which does not require an independent action.”

The opinion is Chung v. Kim, et al. (VLW 023-8-038).

Weon Kim of McClean represents the defendants.

“The plaintiff testified that my clients neither made payments nor had an intention to repay a loan, but we can prove that several payments were made,” Kim told Virginia Lawyers Weekly.

Knowing default

In early 2022, Jae W. Chung sued Chungsu Kim, Sunmi Cho and others for fraud in the inducement and fraudulent conveyance regarding a loan he gave them for more than $3 million.

The defendants admitted they were served with Chung’s lawsuit but chose not to respond, explaining that they didn’t understand the consequences and didn’t believe Chung could obtain judgment. Chung quickly moved for default.

Chung affirmed in an affidavit that he loaned the money, which hadn’t been repaid, and that at least $228,000 of the loan was used to purchase Cho’s property.

In its June 2022 final order, the court awarded compensatory damages and punitive damages totaling more than $3 million to Chung for fraudulent inducement against Kim and for fraudulent conveyance against both defendants.

Despite aggressive efforts, Chung was unable to collect on the judgment before he passed away within the year.

In May 2023, the defendants moved to reopen and to vacate the default judgment under Virginia Code § 8.01-428(A). They complained that Chung secured his default judgment through an affidavit filled with false information.

Chung’s estate administrator objected to the motions.

Intrinsic fraud

Although circuit courts typically lose jurisdiction to vacate or modify final judgments 21 days after entry under Supreme Court Rule 1:1, an exception applies under § 8.01-428(A) if the debtor can prove “fraud on the court” or a “void judgment,” Oblon explained.

The judge noted that the “fraud” exception carried a two-year statute of limitations, while a “void judgment” had no limitation period, “which is unsurprising because void judgments are void and can be challenged anytime.”

However, Oblon pointed out that courts treat the term “fraud on the court” differently if the fraud is intrinsic or extrinsic.

Intrinsic fraud involves judgments procured by perjury, forged documents or other incidents of trial related to issues material to the judgment. Such judgments are voidable before they become final.

Void and subject to attack anytime, extrinsic fraud involves “conduct which prevents a fair submission of the controversy to the court,” such as bribery of a judge or juror, fabrication of evidence by an attorney, or preventing a witness or party from appearing.

“Thus, under this bright line principle, false statements by a party in an affidavit are intrinsic fraud, making it voidable, and thus subject only to direct attack before the judgment is final or, under Rule 1:1 within 21 days afterwards,” Oblon wrote.

Further, “the term ‘fraud on the court’ as used in Virginia Code § 8.01-428(A)(i) for default judgments means ‘intrinsic fraud,’” the judge said, noting that the statute separates it from the extrinsic “void judgment” and applies a different statute of limitations.

“This explains the statutory need to grant a two-year extension to the otherwise 21-day challenge limit to ‘fraud on the court’ (intrinsic fraud) while leaving alone the indefinite deadline to challenge a ‘void judgment’ (extrinsic fraud),” Oblon wrote.

Independent action

Chung’s estate argued that Kim and Cho shouldn’t have filed their motions within the defaulted case, but rather as an independent action under § 8.01-428(D).

Oblon disagreed, finding that section (D) doesn’t interfere with (A).

“That section of the statute permits a collateral challenge to a judgment because of fraud upon the court without any deadline,” he wrote. “However, as the intrinsic-extrinsic bright line rule makes clear, it applies only to extrinsic fraud upon the court for cases other than setting aside default judgments. Unlike in paragraph A of the statute, paragraph D requires one seeking to set aside a judgment based on extrinsic fraud to do so in the form of an independent action.”

While it is “arguably a harsh, rigid result in the present case,” Oblon said there was logic behind the statute.

“By permitting a defendant to wait up to two years to challenge a default judgment, the law creates an incentive for a plaintiff to not only notify a defendant of a lawsuit, but to encourage a response,” the judge said. “It may be expedient for a plaintiff to file a lawsuit, hope for no response, and then rush to the courthouse on the 21st day seeking a default judgment. However, making default judgments second-tier judgments, worth much less than a judgment on the merits, the legislature subtly encourages plaintiffs to slow down and to really try to get the defendant to participate.”

Here, the defendants raised issues of intrinsic fraud within the two-year statute of limitations so their motions were timely, not barred by laches and didn’t require them to file an independent action, the judge said, granting Cho’s and Kim’s motion to reopen.

EDITORS’ NOTE: An earlier version of this article incorrectly stated that the Fairfax County Court vacated the default judgment, rather than reopen the case to determine whether it was obtained fraudulently. Virginia Lawyers Weekly regrets the error.

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