John Bartle v. United States ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 07-3122
IN RE:
JOHN W. B ARTLE,
Debtor-Appellant.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 05 CV 564—Sarah Evans Barker, Judge.
A RGUED A PRIL 10, 2008—D ECIDED M ARCH 31, 2009
Before E ASTERBROOK, Chief Judge, and R OVNER and
S YKES, Circuit Judges.
R OVNER, Circuit Judge. Debtor-appellant John W.
Bartle owes the United States millions in unpaid taxes.
In December 2004, he filed a voluntary bankruptcy
petition under Chapter 11 of the Bankruptcy Code. Two
and a half years after Bartle sought Chapter 11 protection,
the United States moved to dismiss the bankruptcy on
the ground that Bartle’s debts dwarfed his financial
resources and he realistically could not effectuate a re-
organization. The district court granted the motion with-
out conducting a hearing and subsequently denied
Bartle’s motion to alter or amend the dismissal order.
2 No. 07-3122
Bartle appeals, contending that dismissal of the bank-
ruptcy on less than twenty days’ notice and without the
opportunity to be heard requires reversal. But because
Bartle has not articulated what evidence or argument he
would have presented in opposition to the government’s
motion, we find any error to be harmless.
I.
Bartle has been in litigation with the government over
his tax obligations for ten years. The government filed
suit against Bartle in 1999 to reduce to judgment
Bartle’s liability for employment tax penalties assessed
against him as a “responsible person” pursuant to
Internal Revenue Code section 6672 for income and
FICA taxes that had been withheld from the wages of
workers employed by three different employers with
which he was associated but that had not been paid over
to the government. 26 U.S.C. § 6672; see United States v.
Sotelo, 436 U.S. 268, 98 S. Ct. 1795 (1978). The district
court subsequently entered an agreed judgment in the
amount of $1,378,420, plus interest, in the government’s
favor. When the government then sought an order
under 28 U.S.C. § 3204 establishing an installment
plan pursuant to which Bartle would satisfy that judg-
ment, the parties consented to an order obligating him
both to make regular payments toward his debt and to
submit sworn reports as to the amounts and sources of
his income. Three years into that arrangement, the gov-
ernment concluded that Bartle was not fully complying
with either obligation and asked that he be held in con-
No. 07-3122 3
tempt. At the hearing on that request, the possibility
of appointing a receiver to disentangle Bartle’s financial
affairs was discussed. The court ultimately reserved
judgment on the subject of contempt and ordered the
parties to explore a modification of the payment
plan to provide for greater court oversight of Bartle’s
financial affairs and to submit either a modified agree-
ment or a status report within thirty days. Before the
thirty days were up, Bartle filed his Chapter 11 bank-
ruptcy petition on December 23, 2004.
At the government’s request, the bankruptcy court
modified the automatic stay to allow its collection action
in the district court to proceed. The district court then
appointed Charles E. Greer as a receiver to handle
Bartle’s finances in that action. Bartle appealed that
order, which we affirmed in an unpublished decision.
United States v. Bartle, 159 Fed. Appx. 723 (7th Cir. 2005).
Meanwhile, the government had another case pending
in which it sought to foreclose federal tax liens that pursu-
ant to 26 U.S.C § 6321 had attached to the stock that
Bartle held in two different corporations: Inverness Corpo-
ration and First Health Corporation. The court in that
suit had entered summary judgment in the government’s
favor, foreclosing the tax liens against a majority of both
corporations’ stock and appointing Greer as the receiver
for both corporations. First Health turned out not to own
assets of any significant value. Inverness, on the other
hand, held membership interests in no less than fifteen
different limited liability companies. But it also had
liabilities for unreported and unpaid employment taxes
4 No. 07-3122
which, by the government’s account, totaled in excess
of $1.7 million. The government believed that the com-
pany’s assets were not sufficient to satisfy its delinquent
tax obligations.
On April 21, 2005, the district court, over Bartle’s objec-
tion, withdrew the reference of Bartle’s Chapter 11
petition to the bankruptcy court. The court took this
action at the behest of the government, which pointed out
that the district court was already handling both the
judgment proceeding and the lien foreclosure pro-
ceeding (and had previously handled other suits
involving Bartle) and was well familiar with Bartle’s
financial affairs. The court also appointed Greer as the
Chapter 11 trustee. After assuming oversight of the
bankruptcy proceeding, the court granted Bartle permis-
sion to borrow up to $1.5 million to pay a portion of the
government’s tax claim. Bartle obtained a loan from
Delaware County Investors, LLC and in July 2006 con-
veyed just under $1.3 million to the Internal Revenue
Service, satisfying the judgment entered against him in
the judgment collection suit. Bartle’s debt to the lender
then became an allowed claim for a super-priority ad-
ministrative expense pursuant to the 11 U.S.C. § 364(c)(1).
Bartle and the government were able to agree on the
amounts of his remaining federal tax liabilities, and on
September 26, 2006, May 31, 2007, and June 7, 2007, the
court entered final judgments reflecting the validity and
amounts of Bartle’s outstanding liabilities to the United
States for his own unpaid federal income taxes and for
additional responsible-person penalties assessed against
him for unpaid employment taxes. R. 106, 161, 163.
No. 07-3122 5
With the amounts of Bartle’s tax-related liabilities
resolved, the government on June 11, 2007, filed a motion
seeking the dismissal of the Chapter 11 proceeding pursu-
ant to 11 U.S.C. § 1112(b). R. 164. The government pointed
out that in light of the judgments the district court had
entered, the United States had a total secured claim of
$257,256.45 and total unsecured priority claims of
$6,306,539.12 as of the petition date. Any plan of reorgani-
zation would have to provide for full payment of both
categories of claims, and the priority claims would have
to be paid within six years pursuant to the applicable
version of 11 U.S.C. § 1129(a)(9)(C). The plan would
also have to include repayment of the $1.3 million loan
Bartle had obtained from Delaware County Investors. All
told, then, the plan would have to make provision for
payments totaling approximately $7.8 million. Yet, Bartle
had few resources from which he could pay these debts.
Although a schedule of assets Bartle had filed in
February 2005 reported personal property with a pur-
ported value in excess of $3.5 million, the government
contended that the property was actually worth no
more than $64,751. Bartle also claimed a forty-four percent
stake in the stock of Inverness Corporation that he
valued at $2.7 million, but Inverness was in receivership
and because its liabilities exceeded its assets, the gov-
ernment pegged the value of Bartle’s interest in the com-
pany at zero. The only other asset that Bartle had re-
ported was a potential fee of $750,000 in connection with
a loan financing. That fee had yet to materialize, and
there was no evidence that it ever would. That left
Bartle’s income. Available monthly operating reports
6 No. 07-3122
reflected gross receipts of only $69,105.39 for 2005 and
$16,775 for the first eight months of 2006. In view of
Bartle’s relatively modest reported assets and income, the
government believed he did not have the wherewithal to
put together a viable plan to repay these debts. It saw no
point in converting the proceeding to a Chapter 7 liquida-
tion, given Bartle’s paucity of assets and the discharge
he had received in a Chapter 7 proceeding less than six
years earlier, which pursuant to the applicable version of
11 U.S.C. § 727(a)(8) would preclude a second discharge
in a successive Chapter 7 proceeding. Dismissal, in the
government’s view, was the sole appropriate course of
action for the court to take.
Ten days after the government filed its motion, on
June 21, 2007, the district court issued a brief order grant-
ing the motion. R. 167. As of this time, Bartle had not
filed a written response to the motion, and the district
court did not conduct any sort of hearing on the
motion before acting.
On July 2, 2007, Bartle filed a timely motion to alter or
amend the order of dismissal pursuant to Federal Rule
of Civil Procedure 59 and Bankruptcy Rule 9023. R. 168.
In relevant part, Bartle contended that the court had
improperly granted the motion without conducting a
hearing as envisioned by section 1112(b)(2). Bartle did not
articulate what opposition he would have offered to the
government’s motion at such a hearing; he simply
argued that it was improper for the court to grant the
motion without a hearing. R. 168 at 2-3. He also asked
that the court reinstate the reference to the bankruptcy
court. R. 168 at 3-4.
No. 07-3122 7
The government opposed Bartle’s motion. R. 169. The
government noted its understanding that the court’s
summary action in granting the motion to dismiss took
place after the court’s staff had contacted Bartle’s
counsel and determined that Bartle had no objection to
the government’s motion. R. 169 at 1-2. That point aside,
the government argued that it was appropriate for the
court to dispense with a formal hearing on the motion,
which it believed would have been a “waste of time.”
R. 169 at 5.
The United States’ motion to dismiss, filed on June 11,
2007, explained in detail that Mr. Bartle would not be
able to confirm a plan of reorganization, because his
debts were too large and his assets and income were
too small. Mr. Bartle has been given an entirely ade-
quate opportunity to argue to the contrary, that he
could confirm a plan of reorganization. He has not
even attempted to make such an argument. Mr. Bartle’s
instant motion does not claim that he could confirm
a plan, or otherwise address the merits of the
United States’ motion to dismiss in any fashion. This
Court was entirely justified in granting the United
States’ motion to dismiss without a hearing, whether
or not Mr. Bartle’s counsel told this Court’s staff that
Mr. Bartle did not object to the dismissal. . . .
R. 169 at 5-6. Bartle did not file a reply to the govern-
ment’s response.
The district court denied Bartle’s motion to alter or
amend the dismissal without comment, R. 170, prompting
this appeal.
8 No. 07-3122
II.
The district court dismissed the Chapter 11 proceeding
on the authority of section 1112(b). In relevant part, the
version of that statute applicable to this proceeding 1
provides:
[O]n request of a party in interest or the United States
trustee or bankruptcy administrator, and after notice
and a hearing, the court may convert a case under
this chapter to a case under Chapter 7 of this title or
may dismiss a case under this chapter, whichever is
in the best interest of creditors and the estate, for cause
including—
***
(2) inability to effectuate a plan [of
reorganization] . . . .
A creditor qualifies as a “party in interest” entitled to
request the dismissal of a Chapter 11 proceeding for
cause. 11 U.S.C. § 1109(b). The bankruptcy code else-
where defines “after notice and a hearing” as follows:
“[A]fter notice and a hearing”, or a similar phrase—
(A) means after such notice as is appropriate in
the particular circumstances; and such opportunity
for a hearing as is appropriate in the particular
circumstances; but
1
The statute was amended in 2005, but the amended version
is generally inapplicable to bankruptcy proceedings com-
menced prior to its effective date. See P.L. 109-8 § 1501.
No. 07-3122 9
(B) authorizes an act without an actual hearing
if such notice is given properly and if—
(i) such hearing is not requested timely by a
party in interest; or
(ii) there is insufficient time for a hearing to be
commenced before such act must be done, and
the court authorizes such act.
11 U.S.C. § 102(1). Bankruptcy Rule 2002 specifically
addresses the appropriate degree of notice to which the
parties are entitled under section 1112(b). That rule pro-
vides that “the clerk, or some other person as the court
may direct, shall give the debtor, the trustee, all creditors
and indenture trustees at least twenty days’ notice by
mail of . . . in a chapter 11 reorganization case, . . . the
hearing on the dismissal of the case or the conversion of
the case to another chapter . . . .” Fed. R. Bank. P.
2002(a)(4); see also Fed. R. Bank. P. 1017(a) (“a case shall not
be dismissed . . . prior to a hearing on notice as provided
in Rule 2002”). However, Rule 9006(c) authorizes the
court to shorten the notice period:
Except as provided in paragraph (2) of this subdivi-
sion, when an act is required or allowed to be done
at or within a specified time by these rules or by a
notice given thereunder or by order of court, the
court for cause shown may in its discretion with or
without motion or notice order the period reduced.
Fed. R. Bankr. P. 9006(c)(1). (Rule 2002(a)(4) is not one
of the notice provisions exempted from this provision. See
Rule 9006(c)(2); In re Mandalay Shores Co-op. Housing
Ass’n, Inc., 63 Bankr. R. 842, 852 (N.D. Ill. 1986).)
10 No. 07-3122
Collectively, these provisions envision a hearing on a
party’s request to convert or dismiss a Chapter 11 pro-
ceeding, conducted on twenty days’ notice to the parties;
but neither the notice nor the hearing requirement is
rigid. The court may, in the exercise of its discretion,
shorten the notice period pursuant to Rule 9006(c). A
hearing is of course not required when no one demands
it. See Morlan v. Universal Guar. Life Ins. Co., 298 F.3d 609,
618 (7th Cir. 2002) (“the Bankruptcy Code is explicit in
defining ‘after notice and a hearing’ as ‘authorizing
an act without an actual hearing if such notice is given
properly’ and no interested party requests a hearing”)
(quoting § 102(1)(B)). And even if an interested party
does demand a hearing, when the parties have otherwise
placed the relevant facts before the court, or the court
by virtue of having presided over the case is already
familiar with those facts, a formal, evidentiary hearing on
the motion to dismiss or convert the bankruptcy is not
necessary. See Elmwood Dev. Co. v. Gen. Elec. Pension Trust
(In re Elmwood Dev. Co.), 964 F.2d 508, 512 & n.12 (5th Cir.
1992); Sullivan Cent. Plaza I, Ltd. v. Bancboston Real Estate
Capital Corp. (In re Sullivan Cent. Plaza I, Ltd.), 935 F.2d 723,
727 (5th Cir. 1991); Indust. Ins. Servs., Inc. v. Zick (In re Zick),
931 F.2d 1124, 1129 (6th Cir. 1991); Buffington v. First Serv.
Corp., 672 F.2d 687, 690 (8th Cir. 1982) (per curiam); A.
Illum Hansen, Inc. v. Tiana Queen Motel, Inc. (In re Tiana
Queen Motel, Inc.), 749 F.2d 146, 150 (2d Cir. 1984). The
parties are entitled to an opportunity to be heard, not to
a particular type of hearing.
We may assume that Bartle was, at the least, deprived
of an adequate opportunity to respond to the govern-
No. 07-3122 11
ment’s motion to dismiss the case. Bartle did receive a
copy of the government’s motion. But the motion was not
scheduled for a hearing before the court, and given the
provisions of Rule 2002(a)(4), he was entitled to assume
that he had at least twenty days to file a written
response to the motion, if not to confront the motion in
person before the court. If it was the court’s intent to
rule on the motion without conducting any sort of
hearing and within a time period shorter than the one
specified by Rule 2002(a)(4), then Bartle deserved to be
apprised of the court’s intent so that he could file a
written response and, if he believed that a hearing was
necessary, to make the case for such a hearing.
We shall do no more than assume that Bartle was
deprived of adequate notice, however, because it
appears possible that the court dispensed with a hearing
and granted the motion without awaiting a written re-
sponse from Bartle after its staff was apprised by
Bartle’s counsel that Bartle did not oppose the motion. That
was the government’s understanding, which it set forth
in its memorandum below opposing Bartle’s motion to
alter or amend. Bartle never responded to the govern-
ment’s representation below; for that matter, his appel-
late briefs are largely silent on this subject, suggesting
only that Bartle would not have filed the motion to alter
or amend if he had indeed assented to dismissal. Reply
Br. 5. At oral argument, Bartle’s counsel advised us that
he is not aware of any telephonic contact with the
court’s staff about the motion, which amounts to some-
thing less than a full denial of the government’s represen-
tation. In any case, the district court never described the
12 No. 07-3122
motion as unopposed in either its order granting the
motion or its order denying Bartle’s motion to alter or
amend. So we shall give Bartle the benefit of the doubt
and assume that he was erroneously deprived of an
adequate opportunity to respond to the motion in the
first instance.
But this error could be harmless. Bankruptcy Rule 9005
provides that Federal Rule of Civil Procedure 61 applies
to bankruptcy proceedings. Rule 61 instructs us to dis-
regard any error that did not affect a party’s substantial
rights. So if, as we assume, Bartle was deprived of notice
and the opportunity to be heard on the motion to
dismiss, that alone does not demand reversal. Bartle’s
substantial rights must have been affected by the error,
and that is true only if he had a response to the govern-
ment’s motion that might have altered the court’s deci-
sion. See CERAbio LLC v. Wright Med. Tech., Inc., 410 F.3d
981, 994 (7th Cir. 2005); Loeb Indus., Inc. v. Sumitomo Corp.,
306 F.3d 469, 479-80 (7th Cir. 2002).
We do not overlook the observation of In re Boomgarden
that “[i]n bankruptcy proceedings, both debtors and
creditors have a constitutional right to be heard on
their claims, and the denial of that right to them is the
denial of due process which is never harmless error.” 780
F.2d 657, 661 (7th Cir. 1985) (internal marks and citations
omitted). Boomgarden was referring to a total denial of the
opportunity to be heard. See id. at 660-62; Mandalay
Shores, 63 Bankr. R. at 852. But a complete denial of the
opportunity to be heard is not what occurred here. If
nothing else, Bartle had the opportunity to be heard via
No. 07-3122 13
his motion to alter or amend. See Blaney v. West, 209
F.3d 1027, 1032 (7th Cir. 2000); Loctite Corp. v. Fel-Pro, Inc.,
667 F.2d 577, 583 (7th Cir. 1981) (per curiam). That oppor-
tunity, of which Bartle availed himself, gave him the
chance to alert the court to any ground on which he
would have opposed the government’s motion to
dismiss had he been granted a hearing on the motion
and/or the opportunity to file a written memorandum
in opposition to the motion.
Despite that opportunity, Bartle did not indicate to
the district court what argument or evidence he would
have presented in opposition to the government’s mo-
tion. Even in his briefing to this court he has not done so.
Instead, he has characterized his appeal as presenting a
purely procedural argument. But procedures do not
exist for their own sake; they exist to protect the par-
ties’ rights. We cannot say that Bartle’s substantial rights
were affected by an erroneous deprivation of an opportu-
nity to be heard on the government’s motion to dismiss
when he has not set forth what he would have brought to
the court’s attention in opposition to that motion. It would
be inconsistent with Rule 9005 and Rule 61 to reverse
without such showing.
The decision to dismiss a Chapter 11 proceeding pursu-
ant to section 1112(b) is one committed to the court’s
discretion. In re Woodstock Assocs., 19 F.3d 312, 316 (7th
Cir. 1994); Fruehauf v. Jartran, Inc. (In re Jartran, Inc.), 886
F.2d 859, 868 (7th Cir. 1989). Dismissal is appropriate if
it is unreasonable to expect that a reorganization plan can
be confirmed. Woodstock Assocs., 19 F.3d at 316. The record
14 No. 07-3122
in this case together with Bartle’s lengthy litigation
history with the government amply support the notion
that a viable reorganization was unlikely in view of
Bartle’s extensive liabilities and limited assets. Bartle has
given us no reason to believe that he had a potentially
meritorious basis on which to oppose the govern-
ment’s motion to dismiss and that the deprivation of the
opportunity to be heard on the motion prejudiced him.
III.
Even if Bartle was, as we assume, denied a reasonable
opportunity to be heard on the government’s motion to
dismiss the Chapter 11 proceeding, he has made no
effort to demonstrate that his substantial rights were
affected by the error. We therefore A FFIRM the district
court’s decision to grant the government’s motion and
dismiss the proceeding.
3-31-09