In re Sterling

• Decision Date: 13 August 2019
• Docket Number: No. 18-2773,18-2773
• Parties: IN RE: Jacqueline M. STERLING, Debtor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

933 F.3d 828

IN RE: Jacqueline M. STERLING, Debtor-Appellant.

No. 18-2773

United States Court of Appeals, Seventh Circuit.

Argued April 15, 2019

Decided August 13, 2019

Samuel A. Shelist, Attorney, SHELIST & PENA, LLC, Chicago, IL, for Debtor - Appellant.

Terence M. Austgen, Elizabeth M. Bezak, Attorneys, BURKE COSTANZA & CARBERRY LLP, Merrillville, IN, Nancy J. Townsend, Attorney, BURKE, COSTANZA & CARBERRY LLP, Chicago, IL, for Defendant - Appellee SOUTHLAKE NAUTILUS HEALTH & RACQUETT CLUB, INCORPORATED.

Michael J. Jasaitis, Attorney, AUSTGEN KUIPER JASAITIS, P.C., Crown Point, IN, Philip E. Kalamaros, Attorney, HUNT SUEDHOFF KALAMAROS LLP, St. Joseph, MI, for Defendant - Appellee AUSTGEN KUIPER & ASSOCIATES, PC.

Philip E. Kalamaros, Attorney, HUNT SUEDHOFF KALAMAROS LLP, St. Joseph, MI, David M. Austgen, AUSTGEN KUIPER JASAITIS, P.C., Crown Point, IN, for Defendant - Appellee DAVID M. AUSTGEN.

Tara A. Twomey, Attorney, NATIONAL CONSUMER LAW CENTER, Boston, MA, for Amici Curiae NATIONAL ASSOCIATION OF CONSUMER BANKRUPTCY ATTORNEYS and NATIONAL CONSUMER BANKRUPTCY RIGHTS CENTER.

Before Wood, Chief Judge, and Bauer and St. Eve, Circuit Judges.

St. Eve, Circuit Judge.

Debtors’ prisons are viewed as relics of the past, long out of use and out of favor. Yet here we face a case of a jailed debtor that calls to mind the days when people were imprisoned for failing to pay their debts.

Jacqueline Sterling owed outstanding fees to Southlake Nautilus Health & Racquet Club, Inc., and Southlake had its counsel, Austgen, Kuiper & Associates, P.C. ("Austgen"),¹ institute a state-court collection action in Lake County, Indiana. A federal bankruptcy court later discharged Sterling’s debt to Southlake. Although Sterling notified Southlake of the discharge, it appears that no one notified Austgen or the state court in which the collection action was pending. Sterling failed to appear in the state-court proceedings, and the court issued a warrant for her arrest. A year later, Sterling was arrested and jailed. She was ultimately released, and Southlake and Austgen dropped pursuit of the debt.

Sterling instituted adversary proceedings in bankruptcy court against Southlake, Austgen, and David Austgen (the head of the Austgen firm). She sought to have the defendants held in contempt for continuing to collect a debt that the bankruptcy court had ordered discharged. Both the bankruptcy court and the district court ruled against Sterling. She now appeals to us, and we affirm in part and reverse in part. We conclude that Austgen’s lack of knowledge of the discharge order prevents it from being held in contempt. But as to Southlake, we conclude that it must be held liable for the actions taken by counsel on its behalf.

I. Background

Despite involving a small sum, the procedural history of this case spans nearly two decades. In July 2001, Austgen filed a claim in Lake County Superior Court on behalf of its client, Southlake, alleging that Sterling owed Southlake approximately $520 in unpaid membership fees. In February 2002, the Lake County court entered a default judgment against Sterling and in favor of Southlake.

For several years after, Austgen filed "proceedings supplemental" to collect on the judgment, and Sterling repeatedly failed to show up for hearings set by the Lake County court. Austgen sought multiple orders to show cause demanding that Sterling explain why she was not complying with the state court’s orders. Ultimately, in April 2010, the Lake County court issued a "body attachment" (i.e., a bench warrant) for Sterling.

Nearly a year later, in March 2011, as Sterling was driving, her car got a flat tire. A police officer stopped to assist her, and to both of their surprise, he discovered the outstanding warrant. The officer arrested Sterling, and she spent approximately two days in jail.

The problem here was that Sterling had filed for bankruptcy in the United States Bankruptcy Court for the Northern District of Indiana in 2009. Sterling listed Southlake as a creditor, and the bankruptcy court discharged her debt to Southlake in January 2010. The discharge order effectively enjoined Austgen from pursuing Sterling’s outstanding debt to Southlake. See 11 U.S.C. § 524(a). Austgen, therefore, should not have continued to prosecute the case in Lake County court, and by extension, Sterling should not have been arrested and jailed.

A lack of communication caused this misunderstanding. Southlake was a listed creditor in Sterling’s bankruptcy proceedings and, as a result, it was sent notice of the discharge. Yet Southlake failed to notify Austgen of the discharge. Sterling, for her part, failed to notify either the Lake County court or Austgen that the debt at issue had been discharged, despite a local bankruptcy rule requiring her to do so. See N.D. Ind. L.B.R. B-4002-1(a).

After an unsuccessful state-court lawsuit regarding her arrest,² Sterling filed a complaint in the bankruptcy court against Southlake, Austgen, and David Austgen. She alleged that the defendants violated 11 U.S.C. § 524 by seeking to collect on a discharged debt, and she petitioned for the defendants to be held in civil contempt for violating the court’s discharge order. In November 2014, the bankruptcy court held a two-day bench trial. At the close of Sterling’s case, the defendants moved for judgment on partial findings. Fed. R. Civ. P. 52(c) ; Fed. R. Bankr. P. 7052. The bankruptcy court granted the motion as to David Austgen and dismissed him from the case. That ruling is not at issue here. But the court deferred ruling on Southlake’s and Austgen’s motions until the close of evidence and submission of written memoranda in support of the motions. The parties complied, and the bankruptcy court later ruled in favor of Southlake and Austgen.

To hold the defendants in contempt for violating 11 U.S.C. § 524(a), the bankruptcy court noted, Sterling had to establish that the defendants "had knowledge of the granting of her discharge ... and, despite that knowledge, undertook actions which wilfully violated the post-discharge injunction." The bankruptcy court ruled in favor of Austgen because the element of knowledge was lacking—Sterling had failed to establish that Austgen knew of the discharge order when it continued proceedings against her. The bankruptcy court concluded that, although Austgen could have looked up whether Sterling had entered bankruptcy proceedings, Augsten did not have an affirmative duty to inquire about Sterling’s status. Instead, the court said, Sterling should have notified Austgen of the discharge.

As for Southlake, the bankruptcy court found that Southlake had received notice of the discharge order and had knowledge of it. But the court determined that Southlake did not willfully violate the discharge order because, beyond initially referring Sterling’s case for collection proceedings in 2001, there was no evidence that Southlake was aware of the status of its case against Sterling or that it directed Austgen to take any particular action in the case.

The district court affirmed the judgment of the bankruptcy court. Sterling appeals.

II. Discussion

We review the bankruptcy court’s civil contempt ruling for an abuse of discretion. In re Taylor , 793 F.3d 814, 818 (7th Cir. 2015). We will reverse a contempt decision only if it is based upon an error of law, which we review de novo , or of fact, which we review for clear error. Id. ; see also In re Chlad , 922 F.3d 856, 861 (7th Cir. 2019). "If the bankruptcy court’s account of the evidence is plausible in light of the record viewed in its entirety, we will not reverse its factual findings even if we would have weighed the evidence differently." Stamat v. Neary , 635 F.3d 974, 979 (7th Cir. 2011) (internal quotation marks omitted). We review the district court’s judgment de novo . Lardas v. Grcic , 847 F.3d 561, 569 (7th Cir. 2017).

When a party violates a bankruptcy court’s order by pursuing a discharged debt, the debtor can ask that the court hold that party in contempt. Randolph v. IMBS, Inc. , 368 F.3d 726, 728 (7th Cir. 2004). But the debtor can do so only for willful violations. "A willful violation does not require specific intent" to violate the court’s order. In re Radcliffe , 563 F.3d 627, 631 (7th Cir. 2009).³ A willful violation does, however, require that the offending party both violated the court’s order and had "actual knowledge that a bankruptcy is under way or has ended in a discharge." Randolph , 368 F.3d at 728. Sterling, as the debtor, had the burden of proving the defendants’ contempt by clear and convincing evidence. See Lightspeed Media Corp. v. Smith , 830 F.3d 500, 508 (7th Cir. 2016).

A. Southlake

We first address whether Southlake committed a willful violation, requiring both actual knowledge of the discharge order and an action violating it. Here, the bankruptcy court found that Southlake had knowledge that Sterling’s debt to it had been discharged. It based this finding on several facts: (1) notice was sent to Southlake via the Bankruptcy Noticing Center through first-class mail; (2) Southlake provided no evidence that the notice was not received and thus Sterling was entitled to the presumption that it was received; and (3) at the relevant time, Southlake’s mail, including bankruptcy notices, would have been taken to the office of Martin Shreibak, Southlake’s corporate officer. The bankruptcy court drew the reasonable inference that Shreibak read the bankruptcy notices he received. Though the bankruptcy court described Southlake as having "knowledge" without using the added adjective "actual," its findings demonstrate actual knowledge.⁴

We see no reason to disturb the bankruptcy court’s finding of Southlake’s knowledge. It is possible, as Southlake argues, that Shreibak never actually received or read the notice. But the bankruptcy court’s contrary inference, based on the evidence at trial, that Shreibak did, in fact, do so was not clearly erroneous. See In re Chlad , 922...