7th Circuit Rules Creditor Should be Held in Contempt for Jailing Discharged Debtor but No Contempt for Creditor’s Counsel

Posted by NACBA - August 14, 2019

On August 13, 2019, the Seventh Circuit Court of Appeals reversed in part and affirmed in part the lower courts. On appeal, NACBA board member Tara Twomey submitted an amicus brief on behalf the National Consumer Bankruptcy Rights Center (NCBRC) supporting the Debtor. 

The facts underlying the case started in 2001. Jacqueline M. Sterling (“Debtor”) was sued in state court for approximately $520.00 in membership fees owed to Southlake Nautilus Health & Racquett Club (“Creditor”). The Creditor was represented by the law firm Austgen, Kuiper & Associates (“Creditor’s Counsel”). After obtaining a judgment in 2002, Creditor’s Counsel filed “proceeding supplemental” in state court to collect on the judgment. The Debtor did not appear at the collection hearings and ultimately the state court issued a “body attachment” (bench warrant) against Debtor to show cause for violating the court’s orders.

In 2010, the Debtor filed for bankruptcy protection and listed the Creditor but not Creditor’s Counsel. The Debtor obtained a discharge. The Creditor was notified of the discharge but did not forward the discharge to Creditor’s Counsel. Creditor’s Counsel did not have knowledge of the discharge order.

In 2011, the Debtor had a flat tire and was assisted by the local police. The police discovered the bench warrant and the Debtor was arrested and held in jail for two days.

Subsequently the Debtor sued the Creditor and Creditor’s Counsel in Bankruptcy Court for violation of the discharge injunction found at Section 524 of the Bankruptcy Code.

The Bankruptcy Court ruled in favor of Creditor and Creditor’s Counsel. The Bankruptcy Court found the Debtor had failed to prove that Creditor’s Counsel knew of the discharge when it continued collection proceedings. Further, the Creditor didn’t violate the discharge injunction because it was unaware of the status of the case against the Debtor and that it didn’t direct Creditor’s Counsel to take any particular actions. The ruling was affirmed by the District Court.

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