In re Gallo, 08-1315.

• Decision Date: 20 July 2009
• Docket Number: No. 08-1315.,08-1315.
• Citation: 573 F.3d 433
• Parties: In re Frank GALLO, Debtor-Appellee. Appeal of: Gillian A. Emery.
• Court: U.S. Court of Appeals — Seventh Circuit

573 F.3d 433

In re Frank GALLO, Debtor-Appellee Appeal of: Gillian A. Emery.

No. 08-1315.

United States Court of Appeals, Seventh Circuit.

Argued April 7, 2009.

Decided July 20, 2009.

Joseph W. Phebus, William R. Graham, Jr. (argued), Phebus & Koester, Urbana, IL, for Debtor-Appellee.

Scott Beatty, Henderson, Franklin, Starnes & Holt, Fort Myers, FL, Brett Kepley (argued), Rawles, O'Bryne, Stanko & Kepley, Champaign, IL, for Appellant.

Before POSNER, RIPPLE and WOOD, Circuit Judges.

RIPPLE, Circuit Judge.

Frank Gallo initiated a bankruptcy proceeding in the United States Bankruptcy Court for the Central District of Illinois under 11 U.S.C. § 1301 et seq. His former wife, Gillian Emery, filed a proof of claim with the bankruptcy court for slander of title.¹ See 11 U.S.C. § 553. Mr. Gallo later filed a motion under 11 U.S.C. § 542(b), seeking an order requiring Ms. Emery to pay the bankruptcy trustee the amount that she owed under an Illinois marriage dissolution judgment. The bankruptcy court entered an order denying Ms. Emery's proof of claim and directing her to pay $125,062.97 to the bankruptcy trustee; the district court later affirmed. For the reasons set forth in this opinion, we affirm the judgment of the district court.

I BACKGROUND

A.

In 2002, Frank Gallo and Gillian Emery initiated a divorce proceeding in the Circuit Court of the Sixth Judicial Circuit, Champaign County, Illinois ("Illinois circuit court"). During this time, Mr. Gallo also had a bankruptcy action pending under Chapter 13 of the Bankruptcy Code, 11 U.S.C. § 1301 et seq. On July 27, 2004, the Illinois circuit court entered a dissolution order awarding Ms. Emery property on Sanibel Island, Florida ("the Sanibel Property"). The order specified that Ms. Emery was to receive the property "free and clear of any interest [of Mr. Gallo]." R.3, Ex. 7 at 11. The parties stipulated that, at the time of the Illinois circuit court's order, the Sanibel Property had a value of $310,000. R.3, Ex. 7 at 3. The court further directed Ms. Emery to pay the bankruptcy trustee a total of $125,062.97.²

Mr. Gallo transferred his interest in the Sanibel Property to Ms. Emery, but Ms. Emery failed to make any payments to the bankruptcy trustee as required by the Illinois circuit court's dissolution order. Consequently, on November 29, 2004, Mr. Gallo's attorney filed a lis pendens notice against the Sanibel Property.³

Ms. Emery entered into negotiations with a property developer, Adam Menkus. She claims that he offered her $710,000 to purchase the Sanibel Property, but that the sale fell through when the parties discovered the lis pendens filed by Mr. Gallo. On February 23, 2005, Ms. Emery received a $350,000 loan, secured by a mortgage on the Sanibel Property; she used the proceeds toward the purchase of a home worth $705,000.

On June 29, 2005, Ms. Emery obtained a default judgment from the Circuit Court of the Twentieth Judicial Circuit for Lee County, Florida ("Florida circuit court"), quieting title to the Sanibel Property and discharging the lis pendens. On September 16, 2005, Ms. Emery sold the Sanibel Property for $490,000.

B.

On June 30, 2005, Mr. Gallo filed the present action, a second Chapter 13 bankruptcy proceeding. A major part of the funding of Mr. Gallo's Chapter 13 plan relied upon Ms. Emery's payment of the funds that the Illinois circuit court had ordered her to pay Mr. Gallo.

In this proceeding, Ms. Emery filed a proof of claim for slander of title under Florida law. See 11 U.S.C. § 553. The basis for this claim was the lis pendens notice filed by Mr. Gallo; Ms. Emery claimed that the filing of the lis pendens notice resulted in her losing the opportunity to sell her property to Menkus. Mr. Gallo sought an order that would direct Ms. Emery to pay the amount that she owed the estate under the Illinois circuit court's dissolution judgment. See 11 U.S.C. § 542(b). Ms. Emery attempted to reduce the amount she owed by the amount of damage she sustained from the alleged slander of title. In its subsequent ruling, the bankruptcy court denied Ms. Emery's proof of claim and granted the turnover order requested by Mr. Gallo. The district court affirmed the bankruptcy court's order. Ms. Emery filed this timely appeal.

II DISCUSSION

We review factual findings of the bankruptcy court for clear error and review conclusions of law de novo. In re Bonnett, 895 F.2d 1155, 1157 (7th Cir.1989).

The ultimate issue that we must decide is whether the bankruptcy court and the district court were correct in holding that Ms. Emery's obligation to pay the Chapter 13 trustee under the terms of the Illinois circuit court order should not be offset by the allowance of her proof of claim for slander of title against Mr. Gallo. To resolve this contention, we must address two issues raised by Ms. Emery: (1) whether she has a valid claim for slander of title and (2) whether the bankruptcy court erred in ordering the turnover despite her alleged inability to pay the amount in question.

A.

Ms. Emery submits that Mr. Gallo committed slander of title by improperly filing the lis pendens notice. The notice was false, she claims, because Mr. Gallo does not have a cognizable claim to the Sanibel Property based on the money judgment from the Illinois circuit court. She observes that the court awarded her the Sanibel Property "free and clear of any interest [of Mr. Gallo]" and that the Florida circuit court quieted title.⁴ R.3, Ex. 7 at 11. Ms. Emery contends that Mr. Gallo did not establish that he acted in good faith in filing the lis pendens notice because he presented no evidence regarding his motive for doing so and because he lacked a bona fide claim to the Sanibel Property. Specifically, Ms. Emery maintains that Mr. Gallo filed the lis pendens without legal justification because, at the time of filing, there was no ongoing litigation regarding the Sanibel Property. She further contends that she suffered damages because Menkus would have paid her $710,000 for the Sanibel Property if it had not been subject to a lis pendens.

We must decide whether Mr. Gallo committed slander of title when he filed a lis pendens against the Sanibel Property. To establish a claim for slander or disparagement of title under Florida law,⁵ a party must show the following:

(1) A falsehood (2) has been published, or communicated to a third person (3) when the defendant-publisher knows or reasonably should know that it will likely result in inducing others not to deal with the plaintiff and (4) in fact, the falsehood does play a material and substantial part in inducing others not to deal with the plaintiff; and (5) special damages are proximately caused as a result of the published falsehood.

Palm Devs., Inc. v. Ridgdill & Sons, Inc., No. 2:08-cv-322-FtM-DNF, 2009 WL 513027, at *4 (M.D.Fla. Feb.27, 2009) (quoting McAllister v. Breakers Seville Ass'n, 981 So.2d 566, 573 (Fla.Dist.Ct.App. 2008)). If Ms. Emery establishes these elements, the burden would shift to Mr. Gallo to raise an affirmative defense of privilege, such as good faith. See Residential Cmtys. of Am. v. Escondido Cmty. Ass'n, 645 So.2d 149, 150 (Fla.Dist.Ct.App. 1994). If Mr. Gallo, in turn, meets his burden, the burden then would shift back to Ms. Emery to prove actual malice. See id. Whether Mr. Gallo acted in good faith is a question of fact. See Allington Towers Condo. N. v. Allington Towers N., 415 So.2d 118, 119 (Fla.Dist.Ct.App.1982).

We first must consider whether the lis pendens constitutes a falsehood. The Supreme Court of Florida has said that "[t]he purpose of a notice of lis pendens is to alert creditors, prospective purchasers and others to the fact that the title to a particular piece of real property is involved in litigation." S & T Builders v. Globe Props., 944 So.2d 302, 303 n. 1 (Fla.2006) (citation and quotation marks omitted); see also Fla. Stat. § 48.23 (2008). Lis pendens "protect[s] the plaintiff from intervening liens that could impair any property rights claimed and also from possible extinguishment of the plaintiff's unrecorded equitable lien." Chiusolo v. Kennedy, 614 So.2d 491, 492 (Fla.1993). It is proper where "the proponent can establish a fair nexus between the apparent legal or equitable ownership of the property and the dispute embodied in the lawsuit." Id.

Ms. Emery maintains that the lis pendens notice was false because Mr. Gallo did not have an equitable interest in the Sanibel Property. The transfer of the Sanibel Property, as well as the payment to the bankruptcy trustee, both were governed by the same dissolution order. At the time the Illinois circuit court entered this order, it noted that the allocation of marital property was "unequal" and favored Ms. Emery, but noted that "the inequity of the distribution" would be "somewhat offset" by the payments Ms. Emery would make to the bankruptcy trustee to fund Mr. Gallo's Chapter 13 Plan of Reorganization in the then-pending bankruptcy, R.3, Ex. 7 at 14; the payment to the trustee was necessary to make the distribution of assets more equitable. The money that Ms. Emery owed Mr. Gallo, therefore, was very clearly related to the award of the Sanibel Property. By November 2004, Mr. Gallo had complied with the order by transferring his interest in the Sanibel Property to Ms. Emery; however, Ms. Emery had not satisfied her responsibilities under the order because she had failed to pay the bankruptcy trustee $125,062.97. Mr. Gallo has an equitable interest in the Sanibel Property and could have sought a lien on it in a Florida state court as a remedy for Ms. Emery's noncompliance with the dissolution judgment. See Wolk v. Leak, 70 So.2d 498, 501 (Fla.1954) (affirming circuit court's decision to place an equitable lien on the former husband's property where the former husband owed alimony and child support under an Ohio divorce decree).⁶

Ms. Emery also submits that Mr. Gallo filed the lis pendens at a time when the Sanibel...