Jacqueline M. Sterling v. Southlake Nautilus Health ( 2019 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 18-2773
IN RE: JACQUELINE M. STERLING,
Debtor-Appellant.
____________________
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.
____________________
ARGUED APRIL 15, 2019 — DECIDED AUGUST 13, 2019
____________________
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 peo-
ple 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
1
Austgen, Kuiper & Associates, P.C., changed its name throughout
the period relevant to this case. For ease, we will refer to it as “Austgen.”
2 No. 18-2773
institute a state-court collection action in Lake County, Indi-
ana. 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 ar-
rested 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 bank-
ruptcy 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 ac-
tions 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 approxi-
mately $520 in unpaid membership fees. In February 2002, the
Lake County court entered a default judgment against Ster-
ling and in favor of Southlake.
For several years after, Austgen filed “proceedings sup-
plemental” to collect on the judgment, and Sterling
No. 18-2773 3
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 war-
rant. The officer arrested Sterling, and she spent approxi-
mately two days in jail.
The problem here was that Sterling had filed for bank-
ruptcy in the United States Bankruptcy Court for the North-
ern 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 en-
joined 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 ar-
rested and jailed.
A lack of communication caused this misunderstanding.
Southlake was a listed creditor in Sterling’s bankruptcy pro-
ceedings and, as a result, it was sent notice of the discharge.
Yet Southlake failed to notify Austgen of the discharge. Ster-
ling, 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).
4 No. 18-2773
After an unsuccessful state-court lawsuit regarding her ar-
rest,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 col-
lect on a discharged debt, and she petitioned for the defend-
ants to be held in civil contempt for violating the court’s dis-
charge order. In November 2014, the bankruptcy court held a
two-day bench trial. At the close of Sterling’s case, the defend-
ants 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 ele-
ment of knowledge was lacking—Sterling had failed to estab-
lish that Austgen knew of the discharge order when it contin-
ued proceedings against her. The bankruptcy court con-
cluded that, although Austgen could have looked up whether
Sterling had entered bankruptcy proceedings, Augsten did
2
Sterling sued Southlake, Austgen, and David Austgen in Indiana
state court, alleging malicious prosecution, abuse of process, and infliction
of emotional distress. It appears that suit was dismissed for lack of subject-
matter jurisdiction.
No. 18-2773 5
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 South-
lake 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 ini-
tially 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.” Sta-
mat v. Neary, 635 F.3d 974, 979 (7th Cir. 2011) (internal quota-
tion 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 pur-
suing 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
6 No. 18-2773
violations. “A willful violation does not require specific in-
tent” 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’ con-
tempt 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 ev-
idence 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 no-
tices, 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 no-
tices he received. Though the bankruptcy court described
Southlake as having “knowledge” without using the added
3
In re Radcliffe involved 11 U.S.C. § 362, which deals with automatic
stays, not discharge injunctions. We have, however, previously discussed
automatic stays and discharge injunctions in tandem. See Randolph v.
IMBS, Inc., 368 F.3d 726, 728 (7th Cir. 2004).
No. 18-2773 7
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 evi-
dence at trial, that Shreibak did, in fact, do so was not clearly
erroneous. See In re Chlad, 922 F.3d at 861 (noting that because
the bankruptcy court has a “ringside view” of the case, we
will not disturb its choice between “two permissible conclu-
sions” (internal quotation marks omitted)).
That leaves violative action. The bankruptcy court found
that Southlake had itself taken no action that violated the dis-
charge order. That finding might be factually correct, but it
reflects an error in legal reasoning—that Southlake is respon-
sible for only its own actions and not those of Austgen. The
district court similarly erred in this respect, concluding that
Southlake could only be held liable if it intentionally withheld
notice of the discharge order from Austgen.
We have repeatedly stated that clients are bound by their
counsel’s conduct. See, e.g., Smego v. Payne, 854 F.3d 387, 396
(7th Cir. 2017); Bakery Mach. & Fabrication, Inc. v. Traditional
Baking, Inc., 570 F.3d 845, 848 (7th Cir. 2009). This makes per-
fect sense when viewed through the lens of agency law: “the
clients are principals, the attorney is an agent, and under the
4
The district court stated that the bankruptcy court found that Sterling
had been unable to prove that anyone at Southlake handled, saw, or was
aware of Sterling’s discharge notice. This is a mischaracterization. The
bankruptcy court in fact found that Southlake had no record of how it han-
dled the notice once received.
8 No. 18-2773
law of agency the principal is bound by his chosen agent’s
deeds.” Bakery Mach. & Fabrication, 570 F.3d at 848 (quoting
United States v. 7108 West Grand Avenue, 15 F.3d 632, 634 (7th
Cir. 1994)); see also Irwin v. Dep’t of Veterans Affairs, 498 U.S. 89,
91 (1990) (“Under our system of representative litigation,
‘each party is deemed bound by the acts of his lawyer-agent
… .’”) (quoting Link v. Wabash R. Co., 370 U.S. 626, 634 (1962)).
Though the parties have not made clear whether they believe
Indiana law or federal common law applies here, this propo-
sition also holds true under Indiana law. See Kmart Corp. v.
Englebright, 719 N.E.2d 1249, 1255 (Ind. Ct. App. 1999) (“The
long standing rule in Indiana is that … acts or omissions of
the attorney are attributable to the client. … Moreover, it is
well settled that an attorney, by virtue of the representation,
becomes a powerful agent with a great deal of authority.” (ci-
tations omitted)).
Southlake resists the application of agency liability. It ar-
gues that it cannot be liable for Austgen’s conduct because
Austgen did not have the requisite knowledge to be held in
contempt (discussed further below). It is true that, in its usual
application, agency law holds a principal liable for the com-
pleted torts of its agent. See Meyer v. Holley, 537 U.S. 280, 285
(2003) (“It is well established that traditional vicarious liabil-
ity rules ordinarily make principals … vicariously liable for
acts of their agents … in the scope of their authority or em-
ployment.”). But agency law also operates to impute an
agent’s conduct to a principal, even if that conduct did not,
standing alone, constitute a tort. As the Restatement (Third)
of Agency explains: “If an agent’s action within the scope of
the agent’s actual authority harms a third party, … the prin-
cipal is subject to liability if the same conduct on the part of
the principal would have subjected the principal to tort
No. 18-2773 9
liability.” § 7.04 cmt. b (2006). Bankruptcy courts both in and
out of our circuit have applied this principle in the same or
similar contexts. See, e.g., In re Kramer, No. 04-02900, 2005 WL
579721, at *4 (Bankr. N.D. Iowa Feb. 23, 2005) (concluding that
a debtor acted in contempt of a bankruptcy court’s automatic
stay where it had knowledge of the stay, and counsel’s ac-
tions, imputed to it, violated the stay); see also In re Gallo, No.
05-92345, 2007 WL 2463321, at *2 (Bankr. C.D. Ill. Aug. 29,
2007) (concluding that a party acted through his counsel
when counsel’s actions were in the scope of his authority, ap-
plying Florida law), aff’d, 573 F.3d 433 (7th Cir. 2009).
Applying these agency principles to the case at hand, it is
undisputed that Austgen was Southlake’s legal counsel and
that Southlake directed Austgen to collect Sterling’s debt. Act-
ing within that scope, Austgen continued proceedings against
Sterling. Austgen’s actions were a direct violation of the dis-
charge order. 11 U.S.C. § 524(a)(2). We conclude that
Austgen’s actions, imputed to Southlake, were taken despite
Southlake’s knowledge of the discharge order, meeting the re-
quirements for civil contempt. The bankruptcy court erred as
a legal matter by concluding otherwise.5
Southlake argues that it had no knowledge of what actions
Austgen was taking on its behalf. It may be true that South-
lake did not follow what steps Austgen was taking (an ap-
proach we consider to be ill-advised, especially after receiving
notice of a discharge). But this is not a case where counsel
committed a wrongful act outside of the scope of its authority.
5
Because we decide this issue on agency grounds, we need not ad-
dress Amici Curiae’s argument that Southlake had an affirmative duty to
dismiss its case against Sterling.
10 No. 18-2773
See Bakery Mach. & Fabrication, 570 F.3d at 848 (“The rule is
that all of the attorney’s misconduct (except in the cases where
the act is outside the scope of employment or in cases of ex-
cusable neglect) becomes the problem of the client.”). South-
lake chose to aggressively pursue small debts and was famil-
iar with the process of doing so; in fact, it referred hundreds
of collection cases to Austgen. Southlake cannot now disclaim
the results of its collection efforts. It had knowledge of the dis-
charge yet turned a blind eye to the progress of Sterling’s case.
Our conclusion here is not only consistent with our circuit
precedent, it is sensible. Holding otherwise would create a
loophole in the law through which creditors could avoid lia-
bility simply by remaining ignorant of their agents’ actions or
by failing to notify their agents of debtors’ bankruptcy pro-
ceedings. We decline to incentivize such careless behavior.6
Lastly, we note that Southlake is a sophisticated party that
retained counsel, a fact relevant to our holding. In cases where
counsel is appointed or recruited, however, “the usual as-
sumptions about the agency relationship between the lawyer
and client must be relaxed.” Dunphy v. McKee, 134 F.3d 1297,
1302 (7th Cir. 1998).
B. Austgen
As we just established, Austgen’s continuation of the ac-
tion against Sterling violated the discharge order. But what
about Austgen’s knowledge?
6
This loophole would not apply in situations where there is no agency
relationship, for example, when there is solely an independent contractor
relationship. Cf. Randolph, 368 F.3d at 729 (discussing the creditor and
debt-collector relationship under the Fair Debt Collection Practices Act).
No. 18-2773 11
The bankruptcy court found that Austgen “had neither
notice nor knowledge” of the discharge order. Specifically,
the court concluded that, although “at times” Southlake had
a practice of sending bankruptcy notices to Austgen, there
was no evidence that Southlake sent Sterling’s discharge or-
der to Austgen or that Austgen received it. Sterling urges us
to find otherwise.
Recall that Sterling was required to show Austgen’s
knowledge by clear and convincing evidence. But, unlike the
evidence against Southlake, which included a certificate of
mailing for the discharge order, there is a dearth of evidence
showing that Southlake sent the order to Austgen. On top of
that lack of evidence, David Austgen testified that he had re-
viewed Austgen’s files on Sterling, and they contained no rec-
ord of receiving the order. The bankruptcy court apparently
considered David Austgen credible, as it found that Austgen
had no record of receiving any bankruptcy notices pertaining
to Sterling.
Sterling points to evidence that might suggest the opposite
inference: she told Austgen that she was thinking of filing for
bankruptcy (albeit over a year before she actually did);
Shreibak testified that Southlake usually sent bankruptcy no-
tices to Austgen; and Austgen had poor record-keeping prac-
tices and a portion of her file was missing. As we have already
noted, however, we do not disturb a bankruptcy court’s find-
ing when it accepts one of two reasonable inferences. The
bankruptcy court has the opportunity to scrutinize witnesses
and determine credibility firsthand, an advantage we lack. See
In re Chlad, 922 F.3d at 861. The bankruptcy court’s finding
that Austgen did not have the requisite knowledge was
12 No. 18-2773
reasonable and was supported by the evidence. We see no
clear error in it.
This puts Austgen in the inverse position of Southlake—
Ausgten was unaware of the bankruptcy court’s discharge or-
der but acted in violation of it. Unlike with Southlake, how-
ever, we do not impute the principal’s knowledge to the
agent. See Restatement (Third) of Agency § 5.03 cmt. g (2006)
(“[A]n agent who deals with third parties on the principal’s
behalf is not treated as knowing facts known by the principal
that the agent does not know or have reason to know.”);
Schmitt v. FMA All., 398 F.3d 995, 997 (8th Cir. 2005) (per cu-
riam) (noting that “established agency law … dictates that
while the knowledge of the agent is imputed to the principal,
the converse is not true.”); see also Moriarty v. Glueckert Funeral
Home, Ltd., 155 F.3d 859, 866 n.15 (7th Cir. 1998) (noting that
courts rely on the Restatement of Agency to develop the fed-
eral common law of agency). Again, this proposition also ap-
pears to be true under Indiana law. See Hargis v. United Farm
Bureau Mut. Ins. Co., 388 N.E.2d 1175, 1179 (Ind. Ct. App. 1979)
(declining to impute the knowledge of a principal to its
agents).
So Austgen did not have firsthand knowledge of the dis-
charge order, nor do we impute Southlake’s knowledge to it.
Without knowledge, Austgen cannot have willfully violated
the discharge order and cannot be held in contempt. Both the
district court and the bankruptcy court correctly concluded as
much, and we affirm their rulings.
III. Conclusion
A final word of caution. Although we conclude that South-
lake acted in contempt, we note that this regrettable event
No. 18-2773 13
could have been avoided had Sterling complied with North-
ern District of Indiana Local Bankruptcy Rule B–4002–1(a).
Like the bankruptcy court, we strongly advise debtors and
their counsel to comply with this rule to avoid similar situa-
tions in the future. We leave to the bankruptcy court’s discre-
tion whether to factor this into the damages calculation.
We AFFIRM in part and REVERSE in part the judgment of
the district court and REMAND to the bankruptcy court for
further proceedings consistent with this opinion.