Officer in corporate bankruptcy must be served

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Suppose a corporation (or LLC) files for bankruptcy, and one of the officers of the corporation is thwarting the trustee’s ability to locate assets.

The trustee and creditors are not without remedies. However, they cannot simply move the bankruptcy court to find the officer in contempt. The officer must first be served pursuant to Federal Rules of Bankruptcy Procedure 7004 and 9014.

Sheila Hamilton is an officer, and the principal equity investor, of Teknek, LLC, which filed for bankruptcy in Illinois. During proceedings to locate and value assets, Systems Division, Inc., its principal creditor, learned that many of Teknek’s records are in code.

According to Hamilton’s testimony, the key to the code is leased from Teknek Electronics, Ltd., another firm she controls. However, Hamilton has refused to provide the key.

Systems Division then asked the bankruptcy court to hold Hamilton in contempt, mailing the motion to Teknek’s attorney in Chicago. The bankruptcy court did so, ordering Hamilton to pay a fine of $1,000 per day until she supplies the key, and the district court affirmed.

Hamilton appealed, and, in a decision by Judge Frank H. Easterbrook, the Seventh Circuit vacated the order.

The court first found that Hamilton is not a party to the action, despite her relationship with Teknek.

The court acknowledged that Hamilton volunteered to be the debtor’s representative, but concluded that does not make her a party, for two reasons: first, the trustee has now assumed that function; and second, appearance as an agent does not make a person a party under the fiduciary-shield doctrine.

The court also acknowledged that Hamilton was served in Scotland with process the day before the hearing. However, that process was served pursuant to an adversary proceeding commenced by the Trustee.

The court found that service in Scotland the day before the hearing would be insufficient notice, even if the summons had been filed in connection with System Division’s contempt motion, rather than the Trustee’s adversary proceeding.

The court noted that parties to an adversary proceeding do not become parties to the core proceeding, and visa versa.

The court concluded that, because a contempt motion for acts done in a core proceeding initiates a “contested matter,” Rule 9014(b) applies. Rule 9014(b) requires that motions initiating contested matters be served as provided for in Rule 7004.

Because Hamilton resides in a foreign country, Scotland, service by mail would have been insufficient, even if service of the contempt motion had been mailed to her directly, rather than to her attorney in Chicago. Thus, service was insufficient, and the district court lacked personal jurisdiction over Hamilton.

Systems Division also argued that Ham-ilton waived any objections based on personal jurisdiction by not raising the matter at the contempt hearing, but the court disagreed.

Although the law firm that represents Teknek was at the hearing, and Teknek and Hamilton have the same attorneys, the court found that Hamilton was not represented at the hearing.

The court wrote, “Hamilton had not engaged that firm to represent her in this [matter], 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. … A person not served with process is entitled to ignore the proceeding without any risk of giving up a legal entitlement.”

In dicta, the court further suggested that, even if the firm had appeared on Hamilton’s behalf, she might not have waived any objection on jurisdictional grounds.

While the rules of Civil Procedure provide that a person who appears without imposing a jurisdictional objection forfeits the objection, the Bankruptcy Rules contain no similar provision.

Because Hamilton was neither served, nor did she appear, the court declined to decide whether she would have had to object to preserve the objection, if she had appeared, but simply vacated the finding of contempt.