Gillian Emery v. Frank Gallo ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-1315
IN RE:
F RANK G ALLO,
Debtor-Appellee.
A PPEAL OF:
G ILLIAN A. E MERY
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.
A RGUED A PRIL 7, 2009—D ECIDED JULY 20, 2009
Before P OSNER, R IPPLE and W OOD , Circuit Judges.
R IPPLE, 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
2 No. 08-1315
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
1
This tort is also referred to as “disparagement of title.” 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).
No. 08-1315 3
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
2
Specifically, the court ordered Ms. Emery to pay the bank-
ruptcy trustee: (1) $27,087.50 for dissipated art work;
(2) $43,388.15 for the balance due on a loan; (3) approximately
$41,144 for obligations owed to the Internal Revenue Service;
(4) $7,393.32 in marital credit card debt; and (5) $6,050 for the
value of a boat retained by Ms. Emery. The bankruptcy court
granted relief from the automatic stay in the bankruptcy
proceeding to allow the Illinois circuit court to enter judg-
ment regarding the distribution of marital assets and liabilities.
The bankruptcy proceeding was later dismissed voluntarily by
Mr. Gallo just prior to the filing of his present bankruptcy
petition.
3
Under Florida law, the acts of Mr. Gallo’s attorney are
imputed to Mr. Gallo. See Traylor v. State, 596 So. 2d 957, 979
(Fla. 1992) (Kogan, J., concurring in part, dissenting in part)
(“Florida law, for example, has long been settled that the acts
of an attorney are imputed to the client so completely that the
attorney legally is the alter ego of the client except in extreme
circumstances . . . .”); State v. Daniels, 826 So. 2d 1045, 1047 (Fla.
Dist. Ct. App. 2002) (citing Traylor concurrence). The bankruptcy
(continued...)
4 No. 08-1315
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 judg-
ment 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
3
(...continued)
court therefore found that, although Mr. Gallo did not have
knowledge that his attorney was filing a lis pendens notice,
there was no evidence that the attorney acted outside the
scope of his implied authority. In re Frank Gallo, No. 05-92345
(Bankr. C.D. Ill. Aug. 29, 2007).
No. 08-1315 5
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
6 No. 08-1315
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
4
Ms. Emery claims that these two decisions bind this court.
However, the Illinois circuit court did not address what the
status of the Sanibel Property would be if Ms. Emery failed to
comply with the dissolution order. The Florida circuit court
decision does not have preclusive effect on this court because
it was a default judgment. See Meyer v. Rigdon, 36 F.3d 1375,
1379 (7th Cir. 1994) (noting that “a default judgment is
normally not given preclusive effect under the collateral
estoppel doctrine because no issue has been actually litigated”)
(citation and quotation marks omitted). These cases do not
address the issue before us, which is whether Mr. Gallo commit-
ted the tort of slander of title at the time his attorney filed the
lis pendens. As we shall demonstrate in the text that follows,
the fact that Ms. Emery had clear title before the filing of the
lis pendens and after the Florida circuit court’s quiet-title action
is not analytically relevant to our resolution of that issue.
No. 08-1315 7
for doing so and because he lacked a bona fide claim to
the Sanibel Property. Specifically, Ms. Emery main-
tains 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 disparage-
ment of title under Florida law,5 a party must show the
following:
(1) A falsehood (2) has been published, or communi-
cated to a third person (3) when the defen-
dant-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 false-
hood.
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
5
The parties do not dispute that Florida law governs
Ms. Emery’s slander of title claim.
8 No. 08-1315
shift to Mr. Gallo to raise an affirmative defense of privi-
lege, 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 consti-
tutes 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 estab-
lish 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 bank-
ruptcy trustee, both were governed by the same
No. 08-1315 9
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 Chap-
ter 13 Plan of Reorganization in the then-pending bank-
ruptcy, 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 non-
compliance 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
6
An out-of-state court does not have in rem jurisdiction over
property in Florida, although it may place a constructive trust
on such property. Hirchert v. Hirchert Family Trust, 988 So. 2d 63,
65 (Fla. Dist. Ct. App. 2008). Because “[t]he imposition of an
equitable lien is considered an in rem action,” an Illinois court
(continued...)
10 No. 08-1315
Ms. Emery also submits that Mr. Gallo filed the
lis pendens at a time when the Sanibel Property was not
the subject of litigation. She maintains that, under
Florida law, a lis pendens may not be filed in such circum-
stances. The bankruptcy court took the view that “it
was altogether possible that litigation could have en-
sued” in the Illinois circuit court, and that Mr. Gallo
could have sought to rescind the transfer of title of the
Sanibel Property. In re Gallo, No. 05-92345 (Bankr. N.D. Ill.
Aug. 29, 2007).
As we have noted, the purpose of lis pendens is to
alert others to the fact that the title to a piece of real
property is the subject of litigation. See S & T Builders,
944 So. 2d at 303 n.1. Furthermore, Florida Statute
§ 48.23(1)(a) (2008) states:
No action in any of the state or federal courts in this
state operates as a lis pendens on any real or personal
property involved therein or to be affected thereby
6
(...continued)
would not have authority to place an equitable lien on Florida
property. In re Scott, 347 B.R. 917, 919 (Bankr. M.D. Fla. 2006).
However, the Illinois circuit court could render a judgment
affecting indirectly the Sanibel Property because it had juris-
diction over both the parties to the dissolution and the
property settlement action in Illinois, see Iannazzo v. Stanson, 927
So. 2d 1005, 1007 (Fla. Dist. Ct. App. 2006). See also Fall v. Eastin,
215 U.S. 1, 8 (1909) (“A court of equity, having authority to act
upon the person, may indirectly act upon real estate in an-
other state, through the instrumentality of this authority over
the person.”).
No. 08-1315 11
until a notice of the commencement of the action is
recorded in the office of the clerk of the circuit court
of the county where the property is, which notice
contains the names of the parties, the time of institu-
tion of the action, the name of the court in which it
is pending, a description of the property involved or
to be affected, and a statement of the relief sought as
to the property.7
We do not believe that this language allows for a lis
pendens notice to be filed based on the mere possi-
bility of future litigation. See generally 51 Am. Jur. 2d
Lis Pendens § 50 (observing that in some states, “a notice
of lis pendens filed before the commencement of the
action is a nullity”). Moreover, there are apparently
substantial constraints under Florida law as to when
property can be considered sufficiently related to the
underlying litigation to be the proper subject of a
lis pendens notice. It appears to be established that a
lis pendens notice can be issued to give notice of the
7
This subsection has been amended, effective July 1, 2009. It
now reads:
(1)(a) An action in any of the state or federal courts in this
state operates as a lis pendens on any real or personal
property involved therein or to be affected thereby only if
a notice of lis pendens is recorded in the official records
of the county where the property is located and such notice
has not expired pursuant to subsection (2) or been with-
drawn or discharged.
Fla. Stat. § 48.23 (West July 1, 2009).
12 No. 08-1315
pendency of an action for dissolution of a marriage and
equitable division of property. See Seligman v. N. Am.
Mortgage Co., 781 So. 2d 1159, 1163 (Fla. Dist. Ct. App. 2001)
(holding that wife’s notice of lis pendens on marital
property was properly filed and gave the wife priority
over a subsequently filed mortgage). It is less clear, how-
ever, that a lis pendens is the proper device for a spouse
to give notice to third parties of intent to enforce an
equity payment against other marital property awarded
with clear title to the other spouse. See Brown v. Brown, 732
So. 2d 1169, 1171 (Fla. Dist. Ct. App. 1999) (“And while
the appellant failed to make the full equity payment
specified in the agreement, a lis pendens does not
pertain upon a payment which is merely related to but
which does not affect the alienability of the subject prop-
erty.”). The rule articulated in Brown seems to apply
when the action seeks to enforce a foreign judgment
against property in Florida. See Tortu v. Tortu, 430 So. 2d
531, 532 (Fla. Dist. Ct. App. 1983) (“[A] complaint which
will not support a claim against the specific property at
issue cannot provide a basis for tying it up by filing of
notice of lis pendens.”) (citations and quotation marks
omitted).
However, even if we assume that the notice of lis
pendens was filed in error, that conclusion does not
establish slander of title. See Allington Towers, 415 So. 2d
at 119. Slander of title is subject to an affirmative defense
of good faith. Id. Mr. Gallo asserted such a defense when
he claimed that he had a credible equitable right in the
Sanibel Property, a right he was attempting to enforce
in the Illinois circuit court and subject to satisfaction
No. 08-1315 13
through a lien on the Sanibel Property. Cf. Residential
Communities of Am., 645 So. 2d at 150 (holding that
appellee did not act with actual malice because, although
it did not have authority to unilaterally enact an amend-
ment to a condominium declaration, it had a good faith
belief that it acted permissibly). There is, moreover, no
evidence that he acted with actual malice when he filed
the notice.8 We believe that the bankruptcy court was
on solid ground, after hearing the witnesses and
evaluating the evidence, to determine that Mr. Gallo’s
good faith had been established and that there was no
showing of malice on his part.
8
In commenting on the scope of the privilege created by a good
faith defense to a slander of title action, one Florida court
relied upon Prosser’s Law of Torts:
A rival claimant to the property disparaged, in his capacity
as such, is recognized as privileged to assert a bona fide
claim by any appropriate means of publication . . . [.] The
privilege is uniformly held, however, to be a qualified one,
and it is defeated if the defendant’s motive is shown to be
solely a desire to do harm, or if it is found that he did not
honestly believe his statements to be true, or that the
publication of the statement was excessive. A few cases
have gone further and have said that he must have reason-
able grounds for believing his disparaging words to be
the truth; but the better view, which is now more generally
accepted, is that a genuine belief in their truth is sufficient,
however unfounded or unreasonable it may be.
Allington Towers Condo. N. v. Allington Towers N., 415 So. 2d 118,
119-20 (Fla. Dist. Ct. App. 1982) (quoting W. Prosser, Law
of Torts, § 128 (4th ed. 1971)) (alteration in original).
14 No. 08-1315
The bankruptcy court also concluded that Ms. Emery
has not carried her burden of establishing, by a preponder-
ance of the evidence, that she has suffered damages
from the statement in the lis pendens notice. On this
record, we believe that the bankruptcy court’s determina-
tion must be sustained. Ms. Emery claims that Menkus
offered her $710,000 for the sale of her home, but that this
opportunity was lost because of Mr. Gallo’s false state-
ment that the Sanibel Property was subject to ongoing
litigation. As the bankruptcy court noted, however, she
has not been able to produce a written contract with
respect to that transaction.9 Furthermore, the evidence
9
At trial, Ms. Emery testified that there was a written contract,
although at her deposition she had testified that she did not
remember a written contract. At trial she testified as follows:
BY MR. BADDLEY:
Q. And you don’t remember there being a contract
with Mr. Menkes, do you?
A. I remember actually there was a contract, but I
couldn’t find it.
Q. Okay, well, I’m going to read from page 34, beginning
on line 25—line 23.
“Did you sign a contract?
A. We didn’t use real estate agents.”
And then I said,
“My question is whether he signed a contract,”
And you answered:
(continued...)
No. 08-1315 15
in the record suggests strongly that any such offer
would have been far in excess of the Sanibel Property’s
value. Ms. Emery sold it in September 2005 for $490,000.
The record shows that, in February of that year, Ms. Emery
had secured a mortgage of $350,000 on the Sanibel
Property despite the lis pendens notice. The district court
aptly characterized Ms. Emery’s proof of damages as
“unconvincing,” and we agree with the district court’s
conclusion that the decision of the bankruptcy court
must be sustained.
We also see no basis for awarding attorneys’ fees to
Ms. Emery for her action to quiet title in the Florida
courts. Since she has not established a prima facie case
for slander of title in this bankruptcy action, she certainly
cannot establish a right to attorneys’ fees on the basis
of this litigation. Nor do we believe that the default
judgment to quiet title in the Florida circuit court can
be deemed a basis for her seeking attorneys’ fees here.
She has offered no proof that the Florida court awarded
those fees. Moreover, her damages would be limited to
the amount of a surety bond and the record contains no
evidence of the existence of such a bond or its amount.
See S & T Builders, 944 So. 2d at 305-06.
9
(...continued)
“I don’t remember a contract.”
Did I read that correctly?
A. You remem—yes, you read it correctly.
Tr. of Hearing on Debtor’s Motion for Turnover at 32.
16 No. 08-1315
B.
Ms. Emery also submits that the bankruptcy court erred
in granting Mr. Gallo’s motion for turnover because the
court failed to establish that she was able to make the
payment. Ms. Emery maintains that she has no tangible
funds available and that the real estate she owns in
Florida is exempt from creditors under the Florida home-
stead exemption.
The bankruptcy court properly granted Mr. Gallo’s
motion for turnover. It is undisputed that the Illinois
circuit court’s dissolution judgment is a valid final order.
See 11 U.S.C. § 542(b) (“an entity that owes a debt that
is property of the estate and that is matured, payable
on demand, or payable on order, shall pay such debt to, or
on the order of, the trustee”). Moreover, Ms. Emery has
failed to establish that the bankruptcy court had any
obligation to ensure her ability to pay the judgment
before granting the turnover motion. If the bankruptcy
court later attempts to hold Ms. Emery in civil contempt
for failing to comply with its order, then Ms. Emery can
put forth evidence that she attempted to comply with
the order, but lacked the financial resources to do so.
See Am. Fletcher Mortgage Co. v. Bass, 688 F.2d 513, 517
(7th Cir. 1982) (“The district court may find a defendant
in civil contempt if he has not been reasonably diligent
and energetic in attempting to accomplish what was
ordered.”) (citation and quotation marks omitted).
Ms. Emery’s attempt to raise the homestead exemption
is premature. At this time, the bankruptcy court has not
attempted to place a lien on Ms. Emery’s home or to
No. 08-1315 17
force her to sell her home to satisfy the turnover order.1 0
Consequently, whether the homestead exemption is
applicable to Ms. Emery is an issue that is not yet ripe
for review.11
10
See Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So.
2d 201, 204 (Fla. 1962) (noting that the Florida Constitution
homestead exemption’s “design and purpose is to benefit the
debtor by securing to him his homestead beyond all liability
from forced sale under process of any court”); Rossano v.
Britesmile, Inc., 919 So. 2d 551, 552 (Fla. Dist. Ct. App. 2005)
(“[T]he proceeds of a voluntary sale of a homestead to be
exempt from the claims of creditors just as the homestead itself
is exempt if, and only if, the vendor shows, by a preponderance
of the evidence an abiding good faith intention prior to and at
the time of the sale of the homestead to reinvest the proceeds
thereof in another homestead within a reasonable time.”)
(citations and quotation marks omitted). But see Palm Beach
Sav. & Loan Ass’n v. Fishbein, 619 So. 2d 267, 270 (Fla. 1993)
(noting that the homestead exemption should not be applied
where the homeowner acted fraudulently).
11
See Wis. Cent., Ltd. v. Shannon, 539 F.3d 751, 759 (7th Cir. 2008)
(observing that ripeness “is predicated on the central percep-
tion . . . that courts should not render decisions absent a
genuine need to resolve a real dispute” and further noting that
“[c]ases are unripe when the parties point only to hypothetical,
speculative, or illusory disputes as opposed to actual, concrete
conflicts”) (citations and quotation marks omitted) (alterations
in original).
18 No. 08-1315
Conclusion
For the foregoing reasons, the judgment of the district
court is affirmed.
A FFIRMED
7-20-09