IN RE GHILINO, (Bankr.C.D.Ill. 2000)

THOMAS L. PERKINS, U.S. Bankruptcy Judge.

Lois Ghilino died testate on January 23, 1992, and her will was admitted to probate in the Circuit Court of LaSalle County, Illinois. Her only son and the sole beneficiary under her will, RAYMOND GHILINO (DEBTOR) the Debtor in these proceedings, retained LOUIS OLIVERO (OLIVERO) as his attorney. The estate was opened and the DEBTOR was appointed independent administrator with will annexed. OLIVERO arranged for publication of the notice required by the Probate Act, prepared and filed an inventory of the estate assets, handled the sale of the decedent's real estate and otherwise assisted the DEBTOR in his duties as administrator of the estate.

As characterized by OLIVERO, the estate was not a large one, consisting of a tract of real estate in Utica, a vehicle, household goods and personal effects and $20,000 in accounts. OLIVERO contends that the decedent owned the mobile home situated on the real estate while the DEBTOR claims that it was owned by Lisa Ghilino. For the purposes of this ruling, the ownership of the mobile home is irrelevant.

In early 1993, at the conclusion of the administration of the estate, OLIVERO prepared a first and final account, a final report, an affidavit regarding creditors, and an order of discharge. In November of 1993, OLIVERO forwarded the documents to the DEBTOR in Wichita Falls, Texas, requesting that he sign and return them to the office, along with a check in payment of OLIVERO's attorney's fees in the amount of $1,558.00 and costs in the amount of $290.00. The letter advised the DEBTOR that upon receipt of the requested documents, OLIVERO would obtain an order closing the estate and discharging the DEBTOR as administrator. On January 5, 1994, OLIVERO again forwarded the documents to the DEBTOR, requesting that he sign and return them and advising the DEBTOR that attorney's fees in the amount of $425.00 charged for services rendered in connection with the sale of the real estate also remained unpaid. On February 11, 1994, OLIVERO wrote the DEBTOR, acknowledging receipt of the estate documents and requesting payment of his attorney's fees and advising the DEBTOR the estate would be closed upon receipt of the payment of the fees.

On April 22, 1996, the DEBTOR filed a joint Chapter 7 petition along with his spouse. OLIVERO was not listed as a creditor and no reference was made to the estate of the DEBTOR's mother. There were no non-exempt assets in the case and the DEBTOR was issued a discharge on August 13, 1996.

On August 11, 1998, OLIVERO wrote the DEBTOR at the Texas address, expressing his dismay with the DEBTOR's failure to satisfy his obligation and advising him of the necessity of taking action in the probate proceedings. The letter cautioned the DEBTOR that if he failed to make arrangements to pay the account, OLIVERO would bring suit to collect the fees. In December of 1998, an identical letter was sent to the DEBTOR in Windsor, Virginia. OLIVERO made good on his threat and sued the DEBTOR in state court for collection of the attorney's fees. On January 28, 1999, after being served with a summons for small claims court, the DEBTOR sent a letter to OLIVERO, claiming that OLIVERO had previously told him no fee was due.

On February 10, 1999, the DEBTOR filed a motion to reopen his bankruptcy case to add OLIVERO as a creditor. OLIVERO objected to the DEBTOR's motion to reopen, claiming that he represented the DEBTOR in his representative capacity as administrator of the estate and that no debtor-creditor relationship existed between himself and the DEBTOR in his individual capacity. After a hearing, an order was entered on April 1, 1999, permitting the case to be reopened to add OLIVERO as a creditor and allowing him 30 days to object to the DEBTOR's discharge or to the dischargeability of the debt. The order contained the following provision:

The LaSalle County, Illinois Circuit Court action to determine the amount of the obligation, if any, which is currently pending shall proceed, with the enforcement of any such order against Raymond or Alice Ghilino personally being stayed by these bankruptcy proceedings.

Amendments to the DEBTOR's schedule of unsecured creditors were filed to add both OLIVERO and the Estate of Lois Ghilino.

Rather than filing an action objecting to the DEBTOR's discharge or to determine the dischargeability of his debt, OLIVERO brought this adversary proceeding, denying his status as a creditor of the DEBTOR, maintaining that his fees were due from the probate estate and seeking a determination that no debtor-creditor relationship existed and a ruling that the bankruptcy filing had no impact upon the administration of the probate estate, including the payment of his fees. After a hearing, Judge William V. Altenberger, this Court's predecessor, issued a written opinion on January 19, 2000, rejecting OLIVERO's contention that he was not a creditor of the DEBTOR and holding that any personal liability the DEBTOR had to OLIVERO resulting from his retention of OLIVERO as attorney for his mother's estate had been discharged. Judge Altenberger ruled that the state court was free to proceed with the administration and closing of the estate, but that there could be no attempt to collect or recover OLIVERO's fees from the DEBTOR as a personal liability. OLIVERO did not appeal.

On July 5, 2000, the DEBTOR filed a motion for contempt of the discharge order against OLIVERO in this Court, alleging that despite his knowledge that estate funds had been depleted, and contrary to Judge Altenberger's ruling, OLIVERO had continued his collection efforts against the DEBTOR. Having been required to return to Illinois from Virginia on four separate occasions, the DEBTOR seeks reimbursement for his travel expenses in appearing in both the state court and bankruptcy proceedings and an award of attorney's fees for services rendered subsequent to Judge Altenberger's ruling. OLIVERO moved to strike the DEBTOR's motion for contempt of the discharge order, denying that he has attempted to collect his fees from the DEBTOR and insisting that he is only endeavoring to comply with the instructions of the probate court in LaSalle County. A hearing was held on August 8, 2000, and the Court directed OLIVERO to file a complete record of the state court proceedings from January 1, 2000, forward, along with a transcript of the hearing on July 19, 2000. Excerpts of the common law record for the requested time period, as well as the transcript of the hearing, were filed and a further hearing was set for September 25, 2000.

The record of the state court proceedings discloses that a status hearing was held on Jan. 31, 2000, at which time the state court acknowledged receiving a copy of Judge Altenberger's opinion and directed OLIVERO, as counsel for the legal representative of the estate, to present documents to close the estate and to present evidence as to the payment of his fees and costs. The matter was set for hearing on March 1, 2000. The order entered on that date reflects that the DEBTOR failed to appear and a rule to show cause should issue to the DEBTOR to appear on April 26, 2000, and show cause why he should not be held in contempt of court for failure to appear and to respond to the fee petition and for the entry of an order for contempt for failure to pay from the assets of the estate an obligation of the estate. The order entered on April 26, 2000, continued the matter to May 5, 2000, for a further status hearing. On that date, OLIVERO filed a motion for rule to show cause as to why the DEBTOR should not be adjudged in contempt for violating and disregarding the March 1, 2000 order for failing to pay the obligations of the estate from estate assets and requesting an "immediate hearing." Finding that the motion was well taken, the state court entered a handwritten order that the rule to show cause should issue, and the DEBTOR was ordered to appear on June 14, 2000. On that date, an order was entered setting the rule to show cause for July 19, 2000. OLIVERO prepared the motion for order to show cause and forwarded it, along with a check from his trust account in payment of the service fee, to the County Sheriff in Virginia for service upon the DEBTOR.

The DEBTOR appeared at the hearing on July 19, 2000, and was questioned at length by the state court. Determining that the DEBTOR had not filed an account and report setting forth his disposition of the estate funds, the state court ordered the DEBTOR to do so on or before August 8, 2000, and set the matter for hearing on August 23, 2000. Inviting the DEBTOR to submit authority in support of his position that his discharge in bankruptcy relieved him from repaying any funds to the estate and suggesting that the DEBTOR obtain counsel in order to do so, the state court admonished the DEBTOR that the sureties on his administrator's bond would be held to answer for his failure to satisfy any obligations of the estate. The DEBTOR filed a statement with the state court on August 7, 2000, itemizing the expenditure and depletion of the estate funds.

A fundamental aspect of the fresh start concept inherent in the Bankruptcy Code is the debtor's right to be free from post-discharge collection efforts. The § 524(a) discharge injunction is broad in scope and is intended to effect a total prohibition on any and all efforts to collect a discharged debt as a personal liability of the debtor. In re Lafferty, 229 B.R. 707 (Bkrtcy. N.D. Ohio 1998). By enjoining the commencement or continuation of actions against the debtor, § 524(a) protects a debtor against even having to appear in court, when the appearance concerns a discharged debt. See In re Walker, 180 B.R. 834 (Bkrtcy. W.D. La. 1995) at n. 9.

At the hearing held by this Court on September 25, 2000 on the DEBTOR's motion to hold OLIVERO in contempt, OLIVERO first attempted to reassert the arguments that Judge Altenberger previously rejected. Sensing correctly that he was making no headway along these lines with the new Bankruptcy Judge, OLIVERO switched gears and attempted to convince this Court that the contempt proceedings against the DEBTOR had not moved forward at his urging, but rather that the state court was unilaterally driving the proceedings and his role was simply that of an officer of the court, neutral and impartial, acting only as a scrivener at the court's direction. This Court finds OLIVERO's position to be incredible. The sheaf of correspondence from OLIVERO to the DEBTOR, and of pleadings filed both in state court and in this bankruptcy case and the proceedings therein, convince this Court that the impetus has always been the payment of OLIVERO's fees and that OLIVERO has been the driving force in that regard. OLIVERO, although he prepared the final report to close the estate in 1993, at that point a perfunctory matter, was perhaps initially justified in refusing to proceed with the closing of the estate until his fees were paid. That justification evaporated, however, when the DEBTOR filed for bankruptcy relief.

According to the probate pleadings prepared by OLIVERO, the DEBTOR was the decedent's sole heir entitled to receive the entire residue of the estate. Despite OLIVERO's claims of uncertainty, it does not appear that the DEBTOR failed to pay claims filed against the estate or failed to distribute estate assets to rightful heirs designated in the will. It appears that the DEBTOR's only non-performance in his capacity as Administrator was his failure to pay OLIVERO's attorney's fees. It has always been OLIVERO's position that as soon as his fees were paid, he would file the Final Account and obtain an order closing the estate. OLIVERO denies that the contempt proceedings now pending in the probate action are motivated by an intent to collect his unpaid fees. Given that the only alleged non-performance by the DEBTOR is the failure to pay his fees, OLIVERO's denials are disingenuous and contradicted by the record in both the probate proceedings and the bankruptcy proceedings.

Giving him the benefit of the doubt, when OLIVERO filed his adversary complaint, he may have been relying upon a misguided belief that even if the DEBTOR's obligation to pay OLIVERO's fees was discharged in Bankruptcy as a personal liability, he could still collect them from the DEBTOR as an estate liability. However, this creative but hollow fiction was flatly rejected by Judge Altenberger in his January 19, 2000 opinion. Since that opinion, therefore, OLIVERO has been undeniably on notice that any further attempt to collect his fees from the DEBTOR (in any role or capacity) was enjoined.

Nevertheless, it is clear to this Court that OLIVERO has not accepted the clear impact of Judge Altenberger's ruling. At the hearing on September 25, 2000, he continued to attempt to advocate the personal/estate fictional distinction and, in his written Reply to Response to Motion to Strike Motion for Contempt filed September 25, 2000, he states in paragraph three:

While debtor may seek to be discharged of his personal indebtedness in the United States Bankruptcy Court, any discharge granted to debtor does not operate to discharge the Estate of Lois Ghilino from its financial obligation to its creditors and a proper accounting to the heirs of the estate.

Again giving OLIVERO the benefit of the doubt, this seems to be a resurrection of the "quasi in rem" theory rejected by the Seventh Circuit in Matter of Hunter, 970 F.2d 299 (7th Cir. 1992). In Hunter, the creditor bank took the position that it could continue to attempt to collect a debtor-husband's discharged debt so long as it directed its efforts only against a specific piece of property owned by the husband and wife as tenants by the entireties, even though it held no lien on the property. Because establishing the personal liability of the debtor was a necessary precondition to execution against the property, the Seventh Circuit held that the proposed collection activity was barred by § 524.

Here, the residue of Lois Ghilino's estate was in the possession and control of the DEBTOR in 1993. When the DEBTOR's bankruptcy was filed in 1996, the case was administered as a no asset case and all exemptions were allowed as claimed. Any property that the DEBTOR inherited from his mother's estate was thus subject to the trustee's administration of his bankruptcy case. Any assertion now that OLIVERO's claim for unpaid fees may still be collected from "the estate" is virtually frivolous. Since such a collection effort would necessarily invoke the DEBTOR's personal liability, it is barred by the discharge injunction.

OLIVERO also continues to assert his position that the DEBTOR's non-payment of the fees may constitute malfeasance or a breach of fiduciary duty rendering the debt nondischargeable. See Louis E. OLIVERO's Reply (para. 12) filed September 25, 2000. One of the bases for objecting to the dischargeability of a particular debt, found in § 523(a)(4) of the Bankruptcy Code, 11 U.S.C. § 523 (a)(4), excepts from discharge any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." Under this provision, a personal representative's dissipation of estate monies for unauthorized, personal expenditures may constitute a defalcation rendering the obligation to the estate nondischargeable. See In re Kusmierek, 224 B.R. 651 (Bkrtcy.N.D.Ill. 1998); In re Valdes, 98 B.R. 78 (Bkrtcy.M.D.Fla. 1989). OLIVERO was afforded an opportunity to object to the dischargeability of the debt owed to him individually as well as to the debt owed by the DEBTOR to the Estate of Lois Ghilino, but he declined to pursue either of those remedies, and the deadline for bringing such actions has long passed.

OLIVERO's actions in the probate court since January, 2000 (specifically, seeking a contempt finding against the DEBTOR based on the nonpayment of OLIVERO's fees) are, at a minimum, inconsistent with a full appreciation for the scope of the discharge injunction imposed by 11 U.S.C. § 524(a) and contrary to Judge Altenberger's opinion of January 19, 2000. Because OLIVERO continues to assert arguments to this Court that were previously rejected by Judge Altenberger, this Court believes that OLIVERO has simply chosen to ignore Judge Altenberger's opinion. At the September 25, 2000 hearing, OLIVERO expressed a desire to comply with the discharge injunction and Judge Altenberger's opinion, if only he could be allowed to do so by the probate court. OLIVERO's belated compliance can readily be achieved by the following:

1. OLIVERO should promptly file with the probate court the originally executed First and Final Account. The Account can easily be corrected to show the non-payment and discharge of the attorney's fees and costs by interlineation or addendum.

2. OLIVERO should promptly file a motion for leave to withdraw the previously filed "Motion for Order to Show Cause Why Executor Raymond Ghilino Should Not be Adjudged in Contempt of Court."

3. OLIVERO should also oppose any further efforts to compel the DEBTOR's appearance in conjunction with the probate proceeding or on account of the DEBTOR's non-payment of OLIVERO's fees and costs.

4. OLIVERO should file with the bankruptcy court copies of all pleadings filed and orders entered in the probate action from this point forward.

Two additional issues must be addressed. First, at the September 25 hearing, OLIVERO stated his belief that the DEBTOR's non-payment of his fees and costs constituted a breach of the DEBTOR's fiduciary duties such as to trigger the liability of the sureties on his representative's bond. OLIVERO believes that it is necessary to enter judgment against the DEBTOR before the sureties can be pursued. This position is contrary to Illinois law. Section 12-15 of the Probate Act of 1975, 755 ILCS 5/12-15, deals with a suit on a bond and expressly provides that "It is not necessary to recovery that a devastavit shall have previously been established against the principal." It has long been established by the Illinois Supreme Court that it is not necessary that the liability of the principal on the bond be first established by obtaining judgment against him alone before the surety on the bond can be held liable. Winslow v. People, 117 Ill. 152 (1886). Therefore, the sureties on the DEBTOR's bond can be sued immediately without further recourse against the DEBTOR. Any action against the sureties is not enjoined so long as there is no attempt to collect from the DEBTOR or to compel the DEBTOR's appearance.

Second, at the September 25 hearing, the DEBTOR requested that this Court reserve the issue of sanctions against OLIVERO for violating the discharge injunction. This Court reserves those issues pending a review of the actions ordered to be taken by OLIVERO in the probate court and of the status of the closing of the estate and discharge of the Administrator. As clearly stated in Judge Altenberger's opinion, the necessary actions to close the probate estate may and should be taken. A hearing to review the status of this matter will be scheduled.

This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.

See written Order.

ORDER

For the reasons stated in an OPINION filed this day, IT IS HEREBY ORDERED that

1. OLIVERO shall promptly file with the probate court the originally executed First and Final Account, showing the non-payment and discharge of the attorney's fees and costs by interlineation or addendum.

2. OLIVERO shall promptly file a motion for leave to withdraw the previously filed "Motion for Order to Show Cause Why Executor Raymond Ghilino Should Not be Adjudged in Contempt of Court."

3. OLIVERO shall also oppose any further efforts to compel the DEBTOR's appearance in conjunction with the probate proceeding or on account of the DEBTOR's non-payment of OLIVERO's fees and costs.

4. OLIVERO shall file with the bankruptcy court copies of all pleadings filed and orders entered in the probate action from this point forward.

5. A telephonic status hearing is scheduled for December 6, 2000 at 9:00 a.m.