United States v. John Middlebrook ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-1074
U NITED S TATES OF A MERICA,
Plaintiff-Appellee,
v.
JOHN M IDDLEBROOK,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Western Division.
No. 06 CR 50005—Philip G. Reinhard, Judge.
A RGUED D ECEMBER 12, 2008—D ECIDED JANUARY 22, 2009
Before C UDAHY, F LAUM, and W OOD , Circuit Judges.
F LAUM, Circuit Judge. A jury convicted John Middle-
brook of bankruptcy fraud, making a false declaration in
a bankruptcy proceeding, making a false oath in a bank-
ruptcy proceeding, and fraudulent concealment of prop-
erty. The district court sentenced Middlebrook to 32
months’ imprisonment. The court also imposed a restitu-
tion obligation on Middlebrook in the amount of
$1,590,190. On appeal, Middlebrook challenges the cal-
2 No. 08-1074
culation of loss under the sentencing guidelines, and he
challenges the restitution amount. He asks that we
remand the case for resentencing, and that we reduce
his restitution obligation. For the following reasons, we
affirm the district court’s sentence and its restitution order.
I. Background
Middlebrook was president and 85% owner of Federal
Telecom, a telecommunications products manufacturer
that operated out of Hebron, Illinois. Middlebrook resided
in Florida and conducted his Federal Telecom work
from home.
During his tenure at Federal Telecom, Middlebrook took
personal loans from the company. Over time, Middlebrook
repaid portions of these loans, but he also took out addi-
tional loans from the company. That debt was reflected
on Federal Telecom financial documents in various
ways, including “Shareholder Note Receivable,” “Officers/
Shareholders,” “Notes Receivable, Stockholders,” and
“Officer’s Notes.” As late as June 2001, the debt was
listed as a $1,135,502 asset on a Federal Telecom financial
statement. Middlebrook also listed that debt as a liability
on his personal financial statements, and he paid interest
on the debt to Federal Telecom. Middlebrook’s personal
financial statement as of March 31, 2001 stated he had a
net worth of $2,669,255 after taking into account his
liability for the shareholder note.
On August 24, 2001, Federal Telecom filed for Chapter 11
bankruptcy protection in the Northern District of Illinois,
Western Division. On motion of its largest creditor, the
No. 08-1074 3
bankruptcy court converted Federal Telecom’s Chapter 11
reorganization to a Chapter 7 liquidation on October 31,
2001.
On October 3, 2001, Federal Telecom filed in bankruptcy
court its original schedules of assets and liabilities and its
statement of financial affairs. Middlebrook verified these
documents under penalty of perjury. Yet neither the
schedules nor the statement of financial affairs listed any
information about the debt that Middlebrook owed to
Federal Telecom.
A bankruptcy “341 hearing” took place on October 24,
2001. Middlebrook swore at that hearing that he had
prepared the schedules of assets and liabilities and the
statement of financial affairs that were filed in the bank-
ruptcy case. At the hearing, Middlebrook was questioned
extensively about the shareholder note receivable. He
denied he owed anything to Federal Telecom. He asserted
that the receivables were, in fact, shareholder equity but
were listed as assets because they represented “deferred
income.” Middlebrook asserted that his handling of the
shareholder note receivable had been consistent with the
advice of Federal Telecom’s accountants. He further
asserted that the accountants had told him that he could
retire the loans either by repayment to Federal Telecom
or by reporting the loan amount as income on his tax
return. He indicated he would be reporting the amount of
the Federal Telecom shareholder note receivable on his
2001 income tax return, but he never did so.
Question 21 on the statement of financial affairs re-
quired Federal Telecom to “list all withdrawals or dis-
4 No. 08-1074
tributions credited or given to an insider, including
compensation in any form, bonuses, loans, stock redemp-
tions, options exercised and any other perquisite during
the one year immediately preceding the commencement
of this case.” As to Middlebrook, Federal Telecom’s
answer stated that he had received $503,866 in distribu-
tions during the twelve months preceding the bankruptcy
filing. In fact, the financial records of Federal Telecom
show that Federal Telecom distributed about $948,000
to Middlebrook during that period.
In early 2002, Middlebrook received a post-bankruptcy
transfer of $9,688 as a refund on an insurance premium
that Federal Telecom had prepaid. Rather than turning
these funds over to the bankruptcy trustee, Middlebrook
deposited them in his own account. He made this
transfer to himself despite having twice testified in bank-
ruptcy proceedings that he expected the refund to go to
Federal Telecom.
On April 15, 2003, the Chapter 7 bankruptcy trustee
filed an adversary action against Middlebrook, his wife,
and Federal Telecom. The basis for the proceeding was to
avoid fraudulent transfers and to obtain a judgment for
indebtedness. The trustee obtained a default judgment
for $1,639,368.00. That figure represented the amount of
the note ($1,135,502) and the amount of pre-bankruptcy
distributions that Middlebrook disclosed ($503,866). The
judgment did not include the roughly $445,000 of addi-
tional distributions that Middlebrook concealed by omit-
ting them from the statement of financial affairs. The
bankruptcy trustee made no recovery on the judgment.
No. 08-1074 5
Federal prosecutors subsequently brought a criminal case
against Middlebrook. They originally charged Middlebrook
with ten counts relating to bankruptcy fraud. On defen-
dant’s motion, the district court consolidated the case into
seven counts: four counts of bankruptcy fraud, two in
violation of 18 U.S.C. § 157(2) and two in violation of 18
U.S.C. § 157(3); one count of making a false declaration
in bankruptcy in violation of 18 U.S.C. § 152(3); one count
of making a false oath in bankruptcy in violation of
18 U.S.C. § 152(2); and one count of fraudulent conceal-
ment of property in violation of 18 U.S.C. § 152(7). The case
went to trial on September 10, 2007. The jury found
Middlebrook guilty on all seven counts.
The case proceeded to sentencing. The pre-sentence
report (PSR) concluded that Middlebrook’s total offense
level was 28. The base offense level was 6. Section
2B1.1(b)(8)(B) required a 2 level upward adjustment
because the offense occurred in a bankruptcy proceeding.
The PSR included another 4 level upward adjustment
under § 2B1.1(b)(2)(B) because there were 50 or more
victims (the creditors). Finally, the PSR included an
enhancement of 16 levels for the approximately $1.6
million loss (comprised of the unpaid note and the exces-
sive distributions) under § 2B1.1(b)(1)(I). Since
Middlebrook had no criminal history, his sentencing
range would be 78 to 97 months. The government recom-
mended the same loss amount in restitution. The PSR also
indicated that, at that time, Middlebrook had a negative
net worth in excess of $5 million.
Prior to Middlebrook’s December 19, 2007 sentencing,
he objected to the PSR’s sentencing and restitution recom-
6 No. 08-1074
mendations. Middlebrook argued that, for sentencing
purposes, the loss amount should not include the amount
of the shareholder note because he had not sought to
discharge the shareholder note in Federal Telecom’s
bankruptcy. He cited United States v. Mutuc, 349 F.3d 930(7th Cir. 2003) and United States v. Holland, 160 F.3d 377(7th Cir. 1998) to argue that in the Seventh Circuit “the
proper loss calculation in bankruptcy fraud cases is the
amount of the debt that the defendant sought to
discharge in bankruptcy.” Mutuc, 349 F.3d at 936.
Middlebrook argued that the proper loss amount was
more than $400,000 but less than $1 million. With that
loss amount, a 14 level enhancement would be appropri-
ate rather than the 16 level enhancement recommended
in the PSR, for an adjusted total offense level of 26. That
calculation would reduce the advisory sentencing range.
Middlebrook’s objection to the PSR also included a
request for a downward variance from the advisory
sentencing range. He sought a sentence of 24 months. He
argued that he deserved this downward variance because
his goal of reorganizing Federal Telecom through
Chapter 11 was laudable, and because he lacked a crim-
inal history and represented a low risk for recidivism.
At sentencing, the district court heard Middlebrook’s
arguments, but it decided to include the amount of the
note with the undisclosed executive compensation in
making the guideline calculations. The district court
described the amount of the note as the harm that
Middlebrook intended by his non-disclosure of the note.
The district court agreed with the offense level calcula-
No. 08-1074 7
tions in the PSR and determined that the offense level
was 28 and the guideline range was 78 to 97 months. But
the district court expressed a belief that the loss was not
as great a factor as it could have been:
[S]imilar sentences ought to be imposed for defen-
dants convicted of similar offenses with similar crimi-
nal histories. Financial crimes, on the other hand are
pretty diverse. And so, looking at the loss, which is
really what generates the greater amount of points
here, and try to impose a uniform sentence, it just isn’t
as great a factor as it would be in the traditional drug
sale case.
There’s a great deal of difference in the types of
financial crimes that I have seen, and I’ve seen a couple
that related to bankruptcy, and each one is different.
So, what I am saying is that that factor, that is, the
guidelines, is not a great—it’s one factor, but even in
this case, it’s not as significant as it might be in other
cases.
Given this view of the loss amount, and taking into
account Middlebrook’s lack of prior criminal record and
the district court’s belief that he was unlikely to recidivate,
the court deviated downward from the 78 month low end
of the advisory guideline range to a sentence of 32 months.
In imposing the 32 month sentence, the court stated: “I will
make this statement, that even if I calculated the guide-
lines incorrectly and even if I were to accept the position
of the defendant, that would be my same sentence. I have
felt that . . . that’s the appropriate sentence.” The court then
imposed a restitution obligation of $1,590,190. This figure
8 No. 08-1074
consisted of the ledger amount of the note ($1,135,502), the
undisclosed compensation ($445,000), and the insurance
refund ($9,688). This timely appeal followed.
II. Analysis
On appeal, Middlebrook argues that because the non-
disclosure of the shareholder note did not cause actual or
intended loss, this case should be remanded for
resentencing. He argues that the non-disclosure of the
note did not cause actual loss because the creditors
would not have recovered any additional funds had the
note been recorded on the bankruptcy schedules, because
Middlebrook did not have the means to repay any judg-
ment. He argues that there was no intended loss
because he knew he was unable to pay any of the share-
holder note to Federal Telecom, and therefore he did not
intend to deprive the bankruptcy estate of anything of
monetary value. Had the note been disclosed on the
schedules, he argues, the creditors would have been
entitled to a worthless judgment.
Middlebrook also argues that the district court’s order
of restitution was erroneous. He argues that the district
court did not base its restitution order on the actual
loss suffered by the creditors as a result of the fraud.
A. Guideline loss calculation
With regard to Middlebrook’s sentencing argument, we
note that he advances an argument on appeal that is
No. 08-1074 9
different from the argument that he presented at the
district court during sentencing. Below he argued that “the
proper loss calculation in bankruptcy fraud cases is the
amount of the debt that the defendant sought to
discharge in bankruptcy.” On appeal, he asserts that the
district court erred in including the full value of the
shareholder note in the guideline loss amount because
the non-disclosure of the note did not cause actual or
intended loss. The government contends that this argu-
ment, not having been raised below, is forfeited. Thus, the
government contends, we should review the sentencing
loss calculation for plain error.
Middlebrook responds that he preserved the argument.
He argues that below he merely presented an alternative
theory as to why the amount of the note should not be
included, but that the court and the government were
sufficiently alerted that Middlebrook was challenging the
inclusion of the shareholder note in the loss calcula-
tions based on his subjective intent. He cites United
States v. Lane, 323 F.3d 568 (7th Cir. 2003) to argue that
we have “allowed objections raised below that are
different from those raised on appeal.”
In Lane, defendant Lane argued that the district court
improperly allowed the government to present evidence
relating to Lane’s indebtedness unrelated to the debt at
issue. The government argued that Lane had waived this
issue on appeal because before the district court Lane
objected to the extrinsic act evidence on the basis that it
would portray him as a “deadbeat” and on appeal he
argued that the evidence was used to portray him as a
10 No. 08-1074
“liar.” Lane, 323 F.3d at 579. We held in that case that
Lane had adequately preserved his claim on appeal. We
noted that at trial Lane had made repeated objections to
the other debt evidence. We further noted that the gov-
ernment had agreed with the district court that Lane had
preserved his objections to the other debt evidence. We
held that the government’s distinction between a “dead-
beat” and a “liar” was de minimis and Lane’s objections
at the district court sufficiently alerted the court and the
government as to the arguments that Lane raised on
appeal. Id.This case is distinguishable from the Lane case. In Lane,
the government conceded that the issue was preserved,
and the argument that the defendant made on appeal was
basically the same as the argument he made below. By
contrast, Middlebrook’s argument on appeal is com-
pletely different from the argument he raised at sentencing
below. He advances a different theory for excluding the
promissory note from the sentencing calculation. We
conclude that Middlebrook forfeited his sentencing
argument.
Thus, we review the sentencing loss calculation for
plain error. See United States v. Jaimes-Jaimes, 406 F.3d 845,
847 (7th Cir. 2005). It is well established that “the plain
error standard allows appellate courts to correct only
particularly egregious errors for the purpose of preventing
a miscarriage of justice.” United States v. Conley, 291
F.3d 464, 470 (7th Cir. 2002) (citing Lieberman v. Washington,
128 F.3d 1085, 1095 (7th Cir. 1997)). Even if there has been
plain error, we will not reverse unless the error “seriously
No. 08-1074 11
affects the fairness, integrity, or public reputation of
judicial proceedings.” United States v. Cusimano, 148 F.3d
824, 828 (7th Cir. 1998).
In terms of the merits of Middlebrook’s argument,
Application Note 3(A) to Guideline 2B1.1(b)(1) states
that “loss” is the “greater of actual loss or intended loss.”
We have described the term “loss” as used in the guide-
lines to be “the value of the property ‘taken, damaged, or
destroyed,’ i.e., the actual loss . . . or the property the
defendant intended to take” (the “intended loss”). United
States v. Johnson, 16 F.3d 166, 170 (7th Cir. 1994). “Actual
loss” is the reasonably foreseeable pecuniary harm that
resulted from the offense. Application Note 3(A)(i) to
USSG § 2B1.1. “Intended loss” is “the pecuniary harm
that was intended to result from the offense” and it
includes “intended pecuniary harm that would have been
impossible or unlikely to occur.” Application Note 3(A)(ii)
to USSG § 2B1.1. In determining the intended loss
amount, the district court must consider the defendant’s
subjective intent. Johnson, 16 F.3d at 172. When the in-
tended loss exceeds the actual loss, the district court uses
the intended loss in calculating the defendant’s sen-
tence. Id. at 170.
Middlebrook argues that his fraud caused no actual loss
because the shareholder note had no value, and that he did
not intend to cause any loss because he knew the share-
holder note did not have any value. He relies heavily on
United States v. Berheide, 421 F.3d 538 (7th Cir. 2005) and
United States v. Fearman, 297 F.3d 660 (7th Cir. 2002). In
Berheide, the defendant obtained a $550,000 loan from a
12 No. 08-1074
bank, but soon thereafter was unable to pay back the
loan. The remaining balance was $521,000. He induced
the bank to delay its collection efforts by fraudulently
granting the bank a secured interest in property he did not
own. The district court found a loss of $521,000, the
amount of the outstanding loan at the time of the fraudu-
lent security interest. On appeal, we reversed. We held
that the defendant had no actual loss because he did not
have any assets to pay back the loan. We also held that
the district court improperly calculated intended loss
because the defendant did not believe that his assets were
of a value anywhere near $521,000. Berheide, 421 F.3d
at 540-42.
In Fearman, a similar fraud case, the district court held
that the actual loss was zero, but that there was an in-
tended loss based on the amount that a third party mort-
gagee was planning to bid for a building. We held that
the true measure of intended loss was in the mind of
the defendant, and that there was no basis to conclude
that the defendant thought the value of the building
was more than zero, let alone the amount that the mort-
gagee intended to bid. Because the defendant knew the
building was worthless, the amount the mortgagee
would have offered for the building was not the appro-
priate amount of loss. Fearman, 297 F.3d at 661-62.
In this case, the district court included the loss amount
from the promissory note in the sentencing calculation
because it found that Middlebrook intended that loss.
There was ample evidence for the district court to con-
clude that Middlebrook believed that he had the assets to
No. 08-1074 13
pay back the value of the note, and he intended to cause
loss to the creditors by concealing the note from them.
The note was listed as an asset in the Federal Telecom
financial statement provided to a bank two months before
the bankruptcy filing. Further, Middlebrook’s personal
financial statement as of March 31, 2001 stated that he
had a net worth of $2,669,255 after taking into account his
liability for the shareholder note. And Middlebrook’s
written objection to the PSR gave reason to believe that
as of the filing of the Federal Telecom bankruptcy about
five months later, his financial situation had not
materially changed. The district court was “only required
to make a ‘reasonable estimate of the loss.’ ” United States
v. Radziszewski, 474 F.3d 480, 486 (7th Cir. 2007) (quoting
Application Note 3(C) to USSG § 2B1.1). The district
court’s decision to include the value of the promissory
note in its calculation as intended loss seems reasonable.
It certainly does not amount to plain error.
The government also argues that even if the district
court agreed with Middlebrook’s argument to exclude the
note from the loss calculations, the sentence still would
have been 32 months. The offense level would have gone
from 28 to 26, and this would have reduced the guide-
line range to 63-78 months. The district court judge
stated that he would have imposed the 32 month sentence
as a downward deviation even if his calculation was off.
This argument also has merit. We need not remand for
resentencing.
14 No. 08-1074
B. Restitution
Middlebrook next challenges the restitution order. In
terms of the standard of review, an abuse of discretion
standard is appropriate when the appellant raised an
objection to the restitution amount at the trial court. See
United States v. McIntosh, 198 F.3d 995, 1002-03 (7th Cir.
2000). When no objection is raised, the standard is “plain
error.” Id. In setting the restitution, the district court
noted that Middlebrook challenged the amount of restitu-
tion. Based on this objection, we review the restitution
order for abuse of discretion. We “will disturb a restitu-
tion order only if the district court relied upon inappro-
priate factors when it exercised its discretion or failed
to use any discretion at all.” United States v. Havens, 424
F.3d 535, 538 (7th Cir. 2005).
Middlebrook argues that restitution should be reduced
from $1,590,190 to $9,688, the amount of the insurance
refund check. He states that in this case, “the district court
made no assessment of actual loss” related to the share-
holder note or the distributions at issue. Middlebrook
continues that the values of the shareholder note and the
undisclosed distributions do not represent actual loss
because they were worthless at the time of the
bankruptcy filing, as he did not have adequate assets to
repay those moneys to the corporation’s creditors. There-
fore, he claims, the $9,688 figure represents the only
harm actually caused by the bankruptcy fraud.
We recognize that “[u]nlike a determination of the
amount of loss for sentencing purposes, which can
include the amount that the defendant placed at risk, a
No. 08-1074 15
restitution order compensates a victim only for losses it
has incurred.” United States v. Swanson, 394 F.3d 520, 527
(7th Cir. 2005) (internal citations omitted). Accordingly,
“an order of restitution that exceeds the victim’s actual
losses or damages is an illegal sentence.” United States v.
Webber, 536 F.3d 584 (7th Cir. 2008) (quoting United
States v. Wolf, 90 F.3d 191, 194 n.2 (7th Cir. 1996)).
We acknowledge that the sentencing transcript reveals
that the district court only referred to Middlebrook’s
“intended loss” when it calculated the sentencing guide-
lines range. Yet, the court did not rely on or even
reference that earlier calculation when determining
restitution. Rather, the record reflects that the court
adopted what appears to be the government’s actual loss
calculation in setting restitution. In determining restitu-
tion, the court asked the government for clarification as
to the proper amount; the government explained how it
calculated “the loss”; and the court accepted that calcula-
tion as the basis for its restitution order.
We cannot hold that the court abused its discretion
in adopting the government’s proposed restitution
figure. As we noted above, contrary to Middlebrook’s
assertions the record reflects that Middlebrook had signifi-
cant assets around the time of the bankruptcy filing. The
district court had ample evidence to conclude that
Middlebrook was able to repay Federal Telecom’s
creditors for the shareholder note and the undisclosed
distributions. Thus, the creditors actually suffered
$1,590,190 in pecuniary harm resulting from the offenses
of conviction, and this harm was reasonably foreseeable.
16 No. 08-1074
The court did not rely on inappropriate factors in
setting the restitution amount. Far from an abuse of
discretion, the court’s restitution order seems proper.
III. Conclusion
Accordingly, we A FFIRM the calculation of loss for
the sentencing guidelines, and we A FFIRM the restitution
order.
1-22-09