Seventh Circuit applies agency principles to find a creditor can be held in civil contempt for actions of its attorney

In In re: Jacqueline M. Sterling, No. 18-2773 (7th Cir. August 13, 2019) the Seventh Circuit held that a creditor could be held in civil contempt, on an agency theory, for violations of the discharge injunction by its attorney; but the attorney could not be held in contempt for violating the discharge injunction by his post discharge collection activity unless he had actual knowledge of the discharge order.

In Sterling, the creditor obtained a judgment in February 2002 and retained counsel to institute a state-court collection action against the debtor. The debtor repeatedly failed to show up for hearings, and ultimately, in April 2010, the court issued a body attachment. Nearly a year later, a police officer stopped to assist the debtor when her car got a flat tire and discovered the outstanding warrant. The debtor was arrested and spent approximately two days in jail. The problem for the creditor was that the debtor had filed for bankruptcy in 2009, listed the debt to the creditor on her petition, and obtained a discharge in January 2010.

The debtor sued in the bankruptcy court alleging that the creditor and the attorney violated the discharge injunction by seeking to collect on a discharged debt and asked that the creditor and the attorney be held in civil contempt. The bankruptcy court ruled in favor of the creditor and the attorney. To hold them in contempt the debtor had to establish that they “had knowledge of the granting of her discharge … and, despite that knowledge, undertook actions which willfully violated the discharge injunction.” As to the attorney, the court found the element of knowledge was lacking—the debtor failed to establish that the attorney knew of the discharge order when it continued proceedings against her. As for the creditor, the court found it had received notice of the discharge order and had knowledge of it. But it found that the creditor did not willfully violate the discharge order because, beyond initially referring the case for collection proceedings, there was no evidence it was aware of the status of its case against the debtor or that it directed the attorney to take any particular action in the case. The district court affirmed the judgment of the bankruptcy court and the debtor appealed.

On appeal, the Seventh Circuit affirmed the lower court’s ruling with respect to the attorney, agreeing that the debtor failed to prove he had actual knowledge of the discharge order; but reversed the judgment for the creditor. Applying agency principles, it found that the creditor could be held in civil contempt for the actions of its attorney. It was undisputed that the attorney was the creditor’s legal counsel and that the creditor directed the attorney to collect the debt. The attorney’s actions were also direct violation of the discharge order. Acting within that scope, the attorney continued proceedings against the debtor. Therefore, the attorney’s actions, imputed to the creditor, in conjunction with the creditor’s own knowledge of the discharge order, met the requirement for civil contempt against the creditor.

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