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In re Sterling

United States Court of Appeals, Seventh Circuit

August 13, 2019

In re: Jacqueline M. Sterling, Debtor-Appellant.

          Argued April 15, 2019

          Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 2:16-cv-00384 - Joseph S. Van Bokkelen, Judge.

          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-l(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. ยง 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 ...

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