Court Opinion

ID: 3001298
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:15:07.045464+00
Date Added: 2024-06-11T11:39:07.726691
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

No. 07-1498
IN THE MATTER OF:
   TEKNEK, LLC,
                                                          Debtor.
APPEAL OF:
   SHEILA HAMILTON
                         ____________
       Appeal from the United States District Court for the
         Northern District of Illinois, Eastern Division.
          No. 06 C 3950—Joan B. Gottschall, Judge.
                         ____________
 ARGUED OCTOBER 25, 2007—DECIDED DECEMBER 28, 2007
                    ____________

 Before EASTERBROOK, Chief Judge, and RIPPLE and
KANNE, Circuit Judges.
   EASTERBROOK, Chief Judge. Teknek, LLC, is a debtor
in bankruptcy. During proceedings to locate and value
its assets, Systems Division, Inc., Teknek’s principal
creditor (holding a $3 million judgment in patent-infringe-
ment litigation), learned that many of Teknek’s records
are in code. At an examination under Fed. R. Bankr. P.
2004, Sheila Hamilton, one of Teknek’s officers (and its
principal equity investor) stated that the key to the code
had been leased from Teknek Electronics, Ltd., another
firm that Hamilton controls. According to Hamilton, the
lease was terminated a few months before Teknek’s
2                                              No. 07-1498

bankruptcy began. Hamilton conceded that she had the
key on her computer but refused to provide it.
  Keeping one’s business records in code, and then claim-
ing that any right to use the key (held by another entity
under common ownership) has expired, sounds like a
fraudulent conveyance: the transactions may well have
been structured with the intent to hinder or deceive
creditors. But the Trustee, who could have initiated an
adversary proceeding to compel Teknek Electronics to
hand over the key, has not done so. Systems Division
took matters into its own hands by asking the bank-
ruptcy court to hold Hamilton in contempt for her re-
fusal to provide the information. Bankruptcy Judge Cox
did so, ordering Hamilton to pay a fine of $1,000 per day
until she supplies the key. The district court affirmed.
   Appellate jurisdiction is intertwined with the principal
argument on Hamilton’s appeal: that she is not a party
to the bankruptcy and therefore cannot be held in con-
tempt until she has been served with process in a manner
that complies with Fed. R. Bankr. P. 9014. If Hamilton is
not a party, then she is entitled to take an immediate
appeal. See Bessette v. W.B. Conkey Co., 194 U.S. 324
(1904); cf. Perlman v. United States, 247 U.S. 7 (1918). But
if she became a party to the core proceeding before being
held in contempt, then additional service was unneces-
sary—and she cannot appeal, either, because an order
holding a party in civil contempt is not a “final decision”
under 28 U.S.C. §158(d) or §1291. See Fox v. Capital Co.,
299 U.S. 105 (1936); Doyle v. London Guarantee & Acci-
dent Co., 204 U.S. 599 (1907); Powers v. Chicago Transit
Authority, 846 F.2d 1139 (7th Cir. 1988).
  There are two reasons why Hamilton might be thought
a party, even though she is neither the debtor nor a
creditor who has filed a claim. One is that Hamilton
volunteered to be the “debtor’s representative”—which is
No. 07-1498                                             3

to say, the person who acts for the debtor at the initial
creditors’ meeting, before a trustee is appointed or the
bankruptcy court allows the management to continue to
run the business as a debtor in possession. Neither the
Bankruptcy Code nor the Federal Rules of Bankruptcy
Procedure defines the term “debtor’s representative” or
specifies the consequences of being one. Hamilton’s
lawyer used that term to refer to being an agent for
Teknek until the case could get under way. This does
not make her a party, however, for two reasons. First,
she is no longer the debtor’s representative; the Trustee
now serves that function. Second, an appearance as
an agent does not make a person a party in an individual
capacity. That’s a point of the fiduciary-shield doctrine,
on which see ISI International Inc. v. Borden Ladner
Gervais LLP, 256 F.3d 548 (7th Cir. 2001) (a person
who enters a jurisdiction only as an agent does not sub-
mit to suit in a personal capacity), and the rule that
someone who transacts as a declared agent for a known
principal does not become personally liable in contract.
See Restatement (Third) of Agency §6.01 (2006).
   The other potential reason could be that Hamilton is a
party to an adversary proceeding commenced by the
Trustee in February 2006, three months after her initial
refusal to provide the key. Hamilton was served with
process in Scotland (her home) on February 20, 2006, the
day before the bankruptcy court held its hearing on the
motion to hold her in contempt. Service in Scotland the
day before a hearing in Chicago would not supply suf-
ficient notice—and at all events the summons served on
Hamilton did not mention the contempt.
  Adversary proceedings (for example, tort actions
against a debtor, or attempts by the debtor to recover
preferential transfers) are conceptually distinct from
core matters such as locating the debtor’s existing
assets and approving plans of reorganization. Each
4                                               No. 07-1498

adversary proceeding operates with its own list of parties;
persons who must be notified in an adversary proceeding
do not receive notice of events in the core proceeding, and
the reverse. Parties to an adversary proceeding may elect
to become parties to the core proceeding, see Fed. R.
Bankr. P. 2002, 3001, 3007, 9010(a), but this is not
automatic. For the purpose of appellate jurisdiction we
treat adversary proceedings as if they were separate
suits. See, e.g., In re Stoecker, 5 F.3d 1022, 1027 (7th Cir.
1993); cf. In re Morse Electric Co., 805 F.2d 262 (7th Cir.
1986). This implies that status as a party to an ad-
versary proceeding does not make one a party to the
core proceeding. It follows that Hamilton is entitled to
appeal under §§ 158(d) and 1291, and this all but con-
cludes the appeal on the merits as well.
  A motion to hold someone in contempt of court on
account of acts done or omitted in a core proceeding
initiates a “contested matter” in the bankruptcy. Bank-
ruptcy Rule 9014(b) provides that a motion initiating
a contested matter “shall be served in the manner pro-
vided for service of a summons and complaint by Rule
7004.” That rule in turn requires personal service. When
service must occur in a foreign nation, Fed. R. Civ. P. 4(f),
incorporated by Rule 7004(a), governs. International
treaties and conventions, such as the Hague Convention
on Service Abroad of Judicial and Extrajudicial Docu-
ments, must be followed; service by mail is not allowed.
Instead of serving Hamilton personally in Scotland,
however, Systems Division mailed a copy of the motion
to Hamilton’s lawyer in Chicago. Mailing a document to
an attorney does not satisfy the requirement of personal
service on a putative litigant. See, e.g., Murphy Brothers,
Inc. v. Michetti Pipe Stringing, Inc., 526 U.S. 344 (1999).
  Systems Division does not contend that it complied
with Rules 9014 and 7004. Instead it contends, and the
district court held, that Hamilton voluntarily submitted
No. 07-1498                                              5

to the court’s jurisdiction when she did not raise the lack
of service at the contempt hearing before the bank-
ruptcy judge. The subject was first raised in a motion to
set aside the judgment of contempt, and that is too late,
the district judge concluded.
  The problem with this understanding is that Hamilton
could not have forfeited any issue at the hearing, because
she had not been served and was not represented by
counsel there. True, the law firm that appeared on be-
half of Teknek represents Hamilton in many matters.
But Hamilton had not engaged that firm to represent
her in this one, and it did not enter an appearance on
her behalf. It represented Teknek alone at the hearing.
Someone who has never been served with process does not
forfeit any issue by failing to appear; there is no need to
appear until service has been accomplished. A person not
served with process is entitled to ignore the proceeding
without any risk of giving up a legal entitlement.
  A person not properly served who does appear, without
alerting the court to the problem and imposing the de-
fense that personal jurisdiction is missing, forfeits that
defense. See Fed. R. Civ. P. 12(h)(1), applied to adversary
proceedings by Fed. R. Bankr. P. 7012(b). The Bankruptcy
Rules do not have a parallel provision for contested
matters, so perhaps there is no similar forfeiture doc-
trine if an unserved person omits this defense from an
answer; we need not decide. There is assuredly no re-
quirement in the Bankruptcy Rules that a person who
has never been served with process appear or be deemed
to have submitted herself to the court’s jurisdiction.
  Hamilton was not served with process and did not
appear by counsel at the hearing; she therefore is not a
party. The bankruptcy judge lacked authority to hold her
in contempt of court. Systems Division has proposed to
withdraw its claim in the bankruptcy and apparently
6                                              No. 07-1498

does not plan to proceed with a second motion to hold
Hamilton in contempt. But the Trustee may choose to
take over the matter, and it is within the power of the
United States Attorney to initiate proceedings in crim-
inal contempt. Nothing in this opinion implies that
Hamilton is entitled to get away with what appears to
be a scheme to stiff Teknek’s creditors by shuffling a vital
asset (the key to the code used in Teknek’s books) from
one firm to another within an affiliated group under
Hamilton’s control. All we hold today is that Hamilton
is entitled to personal service that complies with Rule
7004, and then to an opportunity for a hearing, before
she may be held in civil contempt of court.
                                 VACATED AND REMANDED

A true Copy:
      Teste:

                       ________________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit

                  USCA-02-C-0072—12-28-07