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In re Taylor

United States Court of Appeals, Seventh Circuit

July 20, 2015

IN RE: CHARLES EDWARD TAYLOR, II, Debtor-Appellant

Argued April 13, 2015

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:13-CV-7743. -- Edmond E. Chang, Judge.

In the Matter of: CHARLES E. TAYLOR, II, Debtor - Appellant: Terence G. Banich, Shaw Gussis Fishman Glantz Wolfson & Towbin LLC, Chicago, IL.

For PATRICIA CAIARELLI, next of friend MADELINE GAUTHIER, next of friend CHARLES A. KIMBROUGH, Appellee: Madeline Gauthier, Gauthier & Associates, Belleville, WA.

For Charles A. Kimbrough, Madeline Gauthier, Appellees: Madeline Gauthier, Gauthier & Associates, Belleville, WA; Kimberly A. Jansen, Hinshaw & Culbertson Llp, Chicago, IL.

Before WOOD, Chief Judge, ROVNER, Circuit Judge, and SPRINGMANN, District Judge.[*]

OPINION

Springmann, District Judge.

In 2005, the brother of Debtor-Appellant Charles Edward Taylor, II, died in a boating accident. Patricia Caiarelli, the decedent's ex-spouse and guardian of their minor child, sought a declaration in Washington state court that the child was entitled to assets of the decedent's estate that were distributed to Taylor. The state court entered judgment against Taylor for over $1.4 million. The decedent's estate, which was named judgment creditor, assigned the judgment to Caiarelli. Taylor responded by seeking a declaration in probate court that the assignment was void. Prior to a resolution, however, Taylor filed for bankruptcy under Chapter 11. It's fair to say that, at this point, things get complicated.

Three days after the bankruptcy filing, the probate judge sent a letter to Caiarelli and Taylor (and their attorneys) acknowledging the bankruptcy filing and the resulting automatic stay of Taylor's lawsuit. The letter listed several matters the court planned to address once the case resumed. As to the assignment, the judge opined that although " [the] assignment may be properly" effectuated, " [i]t appears ... that several steps were skipped at the time of assignment." See R. 70-1, Judge Rogers Letter (April 26, 2012) at 263. The probate judge confirmed that the letter is " not an Order." Id. at 262.

Notwithstanding the letter, Caiarelli initiated an adversary proceeding in the bankruptcy court, objecting to a discharge of the judgment under 11 U.S.C. § 523(a). Taylor moved to dismiss the objection, arguing that Caiarelli lacked standing to enforce the judgment. To address standing, Caiarelli--represented by her attorneys, Madeline Gauthier and Charles Kimbrough--returned to probate court and filed a motion to ratify the assignment. But the plan backfired. Taylor submitted to the bankruptcy court both the letter and the motion to ratify as proof that Caiarelli lacked standing. While noting that the letter provided no definitive answer as to the validity of the assignment, the bankruptcy court dismissed the adversary proceeding and found that, as an evidentiary matter, Caiarelli failed to establish standing. See R. 70-2, Dismissal Order Hr'g Tr. (Mar. 19, 2013) at 145-46. Upon dismissal, the judgment was discharged, and Taylor's creditors were enjoined from collecting on the judgment by operation of 11 U.S.C. § 524(a)(2) and the bankruptcy plan of reorganization.

Despite the dismissal order, Caiarelli returned to probate court and pressed forward with her motion to ratify. After conducting a hearing, the probate court granted the motion, finding that the assignment " met all the requirements of both law and local probate court custom" and that " [a]ll concerns regarding the Assignment raised by [the letter] have been addressed." See R. 70-1, Ratification Order, In re Taylor, No. 06-4-02116-6 (Apr. 2, 2013) at 41-42. The probate court concluded that the assignment " is valid, and has been valid since its original signing." Id. at 42.

Taylor responded again, this time by seeking a civil contempt order in the bankruptcy court. Taylor alleged that Caiarelli and her attorneys violated both the statutory discharge and plan injunctions by returning to the probate court. The bankruptcy court granted Taylor's motion and entered a civil contempt order against Caiarelli and her attorneys, holding that they violated the injunctions by prosecuting and obtaining the ratification order for the purpose of collecting on the discharged judgment; and that the ratification order constituted an impermissible collateral attack, rendering it void ab initio.[1] The bankruptcy court then issued a damages order and judgment for $165,662.36 in attorney's fees, to be paid jointly and severally by Caiarelli and her attorneys.

Caiarelli, Gauthier and Kimbrough (collectively, the Appellees in this Court) appealed all three orders--the contempt order, the damages order, and the judgment--to the United States District Court. The Appellees raised three issues: (1) whether, as a matter of law, the ratification order violated the statutory discharge injunction and/or the plan injunction; (2) whether the bankruptcy court abused its discretion by entering the civil contempt order; and (3) whether the bankruptcy court abused its discretion by ordering $165,662.36 in attorney's fees.

While the appeal was pending, Taylor notified the district court that he reached a settlement with Gauthier and Kimbrough's legal malpractice insurance carrier. Under the purported settlement, Taylor would receive $140,000 in satisfaction for the judgment, and in turn, Taylor would file a satisfaction and release of the judgment, along with a motion to vacate all three orders ...


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