United States v. John Middlebrook

Citation: Not availableDocket: 08-1074

Court: Court of Appeals for the Seventh Circuit; January 21, 2009; Federal Appellate Court

Original Court Document: View Document

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John Middlebrook was convicted of bankruptcy fraud and related offenses, leading to a 32-month imprisonment sentence and a restitution order of $1,590,190. On appeal, he contested the loss calculation under the sentencing guidelines and the restitution amount, seeking a remand for resentencing and a reduction in restitution. 

Middlebrook, who was the president and majority owner of Federal Telecom, took personal loans from the company, which were documented in various financial records. By June 2001, the debt was recorded as a $1,135,502 asset. He acknowledged the debt in his personal financial statements, showing a net worth of $2,669,255 after accounting for the liability. 

Federal Telecom filed for Chapter 11 bankruptcy on August 24, 2001, which was later converted to Chapter 7 liquidation. Middlebrook verified bankruptcy documents that excluded his debt to Federal Telecom. During a bankruptcy hearing, he denied owing anything, claiming the receivables were shareholder equity and described them as deferred income, asserting he followed his accountants' advice regarding handling the loans. Despite stating he would report the shareholder note receivable on his tax return, he never did. The appellate court affirmed the district court's sentence and restitution order.

Federal Telecom was required to report all financial distributions to insiders, including bonuses and loans, for the year prior to its bankruptcy filing. It disclosed $503,866 received by Middlebrook, but records indicated he actually received about $948,000. Additionally, Middlebrook received a $9,688 insurance premium refund post-bankruptcy, which he deposited into his personal account rather than returning to the bankruptcy estate, contradicting his previous testimony. The Chapter 7 trustee filed an adversary action against Middlebrook and obtained a default judgment of $1,639,368, which included the disclosed distributions but not the concealed $445,000. Middlebrook faced criminal charges for bankruptcy fraud, leading to seven counts after consolidation. He was found guilty on all counts during the trial starting September 10, 2007. The pre-sentence report calculated his offense level at 28, considering adjustments for the bankruptcy context and the number of victims, with a recommended sentencing range of 78 to 97 months. Despite his objections regarding the loss calculation used for sentencing, which he argued should exclude the shareholder note, the PSR indicated a significant negative net worth exceeding $5 million prior to his sentencing on December 19, 2007.

Middlebrook contended that the appropriate loss amount for sentencing was between $400,000 and $1 million, which would warrant a 14-level enhancement instead of the 16-level enhancement suggested in the Presentence Report (PSR), resulting in a total offense level of 26 and a reduced advisory sentencing range. He also requested a downward variance to a 24-month sentence, arguing that his efforts to reorganize Federal Telecom through Chapter 11 were commendable, and that his lack of a criminal history indicated a low risk of recidivism. 

At sentencing, the district court considered Middlebrook's arguments but opted to include the undisclosed executive compensation alongside the note amount in its guideline calculations, viewing the note's amount as indicative of the harm intended by Middlebrook's non-disclosure. The court upheld the PSR's offense level calculation, establishing it at 28 with a guideline range of 78 to 97 months. However, the court noted that the loss amount was less critical than in more traditional cases, such as drug offenses, due to the diverse nature of financial crimes. 

Taking into account Middlebrook's clean criminal record and perceived low recidivism risk, the court deviated downward to impose a 32-month sentence. It stated that even with different guideline calculations, it would have rendered the same sentence. Additionally, the court ordered restitution totaling $1,590,190, comprising the note amount, undisclosed compensation, and an insurance refund. Middlebrook subsequently appealed, arguing that the non-disclosure of the shareholder note did not result in actual or intended loss, claiming creditors would not have recovered more funds with proper disclosure and asserting he never intended to deprive the bankruptcy estate of value.

Middlebrook contends that had the shareholder note been disclosed, creditors would have received a worthless judgment. He argues the district court's restitution order was incorrect because it did not reflect the actual losses incurred by creditors due to the fraud. Regarding sentencing, Middlebrook's appeal presents a different argument than the one he raised during sentencing, where he claimed the appropriate loss calculation in bankruptcy fraud cases should be based on the debt he sought to discharge. On appeal, he argues the full value of the shareholder note should not have been included in the guideline loss calculation, asserting that non-disclosure did not result in actual or intended loss. The government contends this argument is forfeited because it was not raised at the district court level and should instead be reviewed for plain error. Middlebrook argues he preserved the issue, claiming he alerted the court and government to his challenge regarding the note's inclusion based on subjective intent. The court distinguishes Middlebrook's case from United States v. Lane, noting that unlike Lane, where the government conceded preservation of the issue, Middlebrook’s appeal presents a new theory for excluding the note, indicating a forfeiture of his argument. Consequently, the court will review the sentencing loss calculation for plain error, emphasizing that appellate courts correct only egregious errors that may prejudice judicial integrity. The guidelines define 'loss' as the greater of actual or intended loss, which encompasses the value of the property involved or intended to be taken.

Actual loss refers to the reasonably foreseeable financial harm resulting from an offense, while intended loss encompasses the financial harm the offender intended to cause, regardless of whether it was possible or likely to occur. In determining intended loss, the district court must assess the defendant’s subjective intent. If intended loss exceeds actual loss, intended loss is used for sentencing calculations.

Middlebrook contends that his fraud did not result in actual loss, as he believed the shareholder note held no value, and asserts he did not intend to cause loss. He cites United States v. Berheide and United States v. Fearman to support his arguments. In Berheide, the court found no actual loss because the defendant lacked assets to repay a loan, and the intended loss was improperly calculated based on the defendant's belief about his assets. In Fearman, the court determined that the defendant's knowledge of the building's worth being zero negated any intended loss based on third-party bids.

In Middlebrook's case, the district court included the promissory note's loss amount in the sentencing calculation, concluding that he intended that loss. Evidence indicated that he believed he had the assets to repay the note and intended to conceal it from creditors. His financial statements suggested a significant net worth, and there was no indication of a material change in his financial situation before bankruptcy. The court's estimate of loss was deemed reasonable, and not constituting plain error. Additionally, the government argued that even excluding the note from loss calculations would not change the sentence, as the judge indicated he would impose the same 32-month sentence regardless of any calculation adjustments. Thus, remand for resentencing is unnecessary.

Middlebrook challenges the restitution order of $1,590,190, arguing it should be reduced to $9,688, the amount of an insurance refund check. The standard of review is abuse of discretion, as Middlebrook objected to the restitution amount during the trial. The district court's determination is valid unless it relied on inappropriate factors or failed to exercise discretion. Middlebrook contends that the values associated with the shareholder note and undisclosed distributions were worthless at the time of bankruptcy, asserting that only the $9,688 figure reflects actual harm from the bankruptcy fraud. 

The court clarified that restitution compensates victims solely for actual losses incurred, not for amounts at risk during sentencing. Although the sentencing transcript referenced 'intended loss,' the district court based its restitution order on the government's actual loss calculation, which it accepted after seeking clarification. Evidence indicated that Middlebrook had significant assets at the time of bankruptcy, allowing him to repay creditors. Consequently, the court found that creditors suffered $1,590,190 in actual harm, which was foreseeable. The court did not abuse its discretion in setting the restitution amount, leading to the affirmation of both the sentencing guidelines calculation and the restitution order.