Woman jailed over pursuit of debt wins partial judgment

A woman arrested for failing to pay off a health club debt she thought had been discharged nearly 10 years earlier partially won a judgment against the law firm that pursued collection on the debt.

In 2001, Austgen, Kuiper & Associates, P.C. filed a claim in Lake County Superior Court on behalf of its client, Southlake Nautilus Health & Racquet Club, Inc., alleging that member Jacqueline Sterling owed Southlake $520 in unpaid membership fees. Default judgment was entered against Sterling the next year. In the following years, she repeatedly failed to appear for hearings set on Austgen’s further attempts to collect the judgment.

Austgen sought multiple orders to show cause demanding that Sterling explain why she was not complying with the state court’s orders, and in 2010 a bench warrant was issued for her arrest. Sterling first learned of the warrant in 2011 when a police officer stopped to assist her with a flat tire that resulted in her arrest and placement 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. 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,” Circuit Judge Amy St. Eve wrote.

“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,” the panel wrote.

Sterling filed a complaint in the bankruptcy court against Southlake, Austgen, and David Austgen alleging they had violated 11 U.S.C. § 524 by seeking to collect on a discharged debt. She unsuccessfully petitioned they be held in civil contempt for violating the court’s discharge order, as the bankruptcy court ruled in favor of Southlake and Austgen. The Northern District court affirmed, but the 7th Circuit Court partially reversed and remanded its judgment as to Southlake’s liability.

The 7th Circuit first found an error in legal reasoning when the bankruptcy court concluded Southlake had taken no action that violated the discharge order. It further found the district court erred in the same respect when it concluded Southlake could only be held liable if it intentionally withheld notice of the discharge order from Austgen.

“We conclude that Austgen’s actions, imputed to Southlake, were taken despite Southlake’s knowledge of the discharge order, meeting the requirements for civil contempt,” St. Eve wrote. “The bankruptcy court erred as a legal matter by concluding otherwise.

Our conclusion here is not only consistent with our circuit precedent, it is sensible,” the panel continued. “Holding otherwise would create a loophole in the law through which creditors could avoid liability simply by remaining ignorant of their agents’ actions or by failing to notify their agents of debtors’ bankruptcy proceedings. We decline to incentivize such careless behavior.”

The 7th Circuit found no error with the finding that Austgen did not have requisite knowledge of the discharge, and therefore could not have willfully violated the discharge order and thus be held in contempt.

But in a final word of caution, the 7th Circuit noted the entire event could have been avoided had Sterling complied with Northern District of Indiana Local Bankruptcy Rule B-4002-1(a). That rule requires debtors to notify parties of relief granted in bankruptcy court.

“Like the bankruptcy court, we strongly advise debtors and their counsel to comply with this rule to avoid similar situations in the future. We leave to the bankruptcy court’s discretion whether to factor this into the damages calculation,” the panel concluded.

It thus affirmed in part, reversed in part and remanded Jacqueline M. Sterling v. Southlake Nautilus Health, 18-2773 to the bankruptcy court for further proceedings.

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