In re Gallo, 072009 FED7, 08-1315

Docket Nº:08-1315
Party Name:In re Frank Gallo, Debtor-Appellee. Appeal of Gillian A. Emery
Case Date:July 20, 2009
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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In re Frank Gallo, Debtor-Appellee.

Appeal of Gillian A. Emery

No. 08-1315

United States Court of Appeals, Seventh Circuit

July 20, 2009

Argued April 7, 2009.

Appeal from the United States District Court for the Central District of Illinois. No. 2:07-cv-02182-MPM-DGB—Michael P. McCuskey, Chief Judge.

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...

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