Kevin P. Gerard v. Michael J. Gerard

In the
United States Court of Appeals
For the Seventh Circuit
No. 14-1496
KEVIN P. GERARD and MARGARET M.
GERARD,
Plaintiffs-Appellees,
v.
MICHAEL J. GERARD,
Defendant-Appellant.
Appeal from the United States District Court for the
Eastern District of Wisconsin.
No. 13-cv-114— Charles N. Clevert, Jr., Judge.
ARGUED DECEMBER 3, 2014 — DECIDED MARCH 12, 2015
Before MANION, ROVNER, and HAMILTON, Circuit Judges.
MANION, Circuit Judge. Kevin and Margaret Gerard initiated
this adversary proceeding seeking a judicial determination that
the $281,000 interlocutory judgment they obtained against
Michael Gerard for slander of title is precluded from discharge
in bankruptcy under 11 U.S.C. § 523(a)(6). The bankruptcy
court concluded that the interlocutory judgment was pre-
cluded from discharge and entered judgment for Kevin and
2 No. 14-1496
Margaret. Michael appealed to the district court, and it
affirmed the judgment of the bankruptcy court. We hold that
these courts erred in concluding that the state court jury’s
slander of title findings preclusively established that Michael
acted “willfully” within the meaning of 11 U.S.C. § 523(a)(6)
because the jury’s verdict could have been based on Michael’s
negligence. Accordingly, we reverse the judgment of the
district court and remand to the bankruptcy court for a
determination of whether Michael’s conduct constitutes a
“willful and malicious injury” to the Gerards.
I. Background
In 2007, Michael Gerard sought to purchase a vacant parcel
of real property located on Lake Michigan in Ozaukee County,
Wisconsin (the “lot”), but he needed help with the financing so
he turned to his brother Kevin Gerard, and Kevin’s wife,
Margaret (the “Gerards”). In November 2007, the Gerards
purchased the lot, and by oral agreement the parties agreed
that Michael would cover the expenses, make payments, and
ultimately purchase the lot outright. As time went by, a
dispute arose between Michael and the Gerards. After some
fruitless negotiation, they concluded that Michael would not be
financially able to purchase the lot from them, so they put it up
for sale. In September 2008, Kevin sent e-mails and a letter to
Michael offering to reimburse him $54,049.10 for the funds
Michael had expended in connection with the lot. They also
directed Michael to stop tampering with the Gerards’ “For
Sale” signs posted on it. Michael did not accept Kevin’s offer;
instead, on September 26, 2008, he recorded a “Memorandum
of Interest” (the “lien”) in the land records of Ozaukee County.
Although Michael only owned about a 5% interest in the lot,
No. 14-1496 3
the lien he recorded stated that the Gerards “acquired title for
convenience only.”
In 2009, after some sale price reductions failed to attract a
buyer, the Gerards sued Michael in Ozaukee County Circuit
Court seeking a declaration of quiet title, slander of title,
partition, and breach of contract. Michael’s theory at trial was
that he was legally privileged to protect his approximately 5%
equitable and beneficial interest in the lot, and that by record-
ing the lien, he did not prevent any potential purchasers from
buying it. Michael testified that the lien caused no damage to
the market for the lot because
it’s always possible for someone to buy the lot.
That’s … the whole purpose of this lien so that the
public can see [that] someone else has an interest in
this lot. And if they really, you know, want to do
their homework, if they really like the lot, they can
call and say, there’s the attorney’s name on there.
They can say, what does your client want to remove
this lien and give me a figure, offer a fair market
value, that’s the whole purpose of the process.
Thus, the Gerards’ theory at trial was that Michael’s
conduct prior to and culminating in his recording of the lien
was done for the purpose of slandering their title and to
interfere with their ability to market and sell the lot. The
Gerards’ theory was bolstered by Michael’s own testimony at
trial, where he stated that:
[N]o matter how much [Kevin] drops the price, no
one’s going to put in an offer as long as there’s a
lien on it. So he can lower the price and make it
4 No. 14-1496
like he’s trying to sell the property, but he knows
no one’s going to put an offer as long as the title is
clouded so you can’t really give it much weight.
When asked if “that’s because [he] slapped this [lien] on the
title, right?,” Michael responded “Yeah. That’s right.” Michael
also admitted during his testimony that prior to recording the
lien, on at least two occasions he went to the lot and physically
tore down the Gerards’ “For Sale” sign.
After closing arguments, the jury was presented with an
instruction based on Wis. Stat. § 706.13(1), which defines the
intentional tort of slander of title as follows:
any person who submits for filing, entering in the
judgment and lien docket or recording, any lien,
claim of lien, lis pendens, writ of attachment, financ-
ing statement or any other instrument relating to a
security interest in or the title to real or personal
property, and who knows or should have known
that the contents or any part of the contents of the
instrument are false, a sham or frivolous, is liable in
tort to any person interested in the property whose
title is thereby impaired, for punitive damages of
$1,000 plus any actual damages caused by the filing,
entering or recording.
The Special Verdict returned by the jury evinces that it
believed the Gerards’ trial theory over Michael’s. The material
questions and answers that the jury returned read as follows:
1. Did Michael Gerard cause the recording of the Memo-
randum of Interest In Real Estate against Lot 3 with the
No. 14-1496 5
Ozaukee County Register of Deeds Office (hereinafter
“Memorandum”)?
ANSWER (Yes or No): YES
2. Did Michael Gerard know, or should he have known,
the contents, or a part of the contents, of the Memoran-
dum were false, a sham, or frivolous?
ANSWER (Yes or No): YES
3. Did Michael Gerard have a reasonable ground for
believing the truth of all of the contents of the memoran-
dum?
ANSWER (Yes or No): NO
***
7. Were Kevin Gerard and Margaret Gerard deprived of
a market which would have been available to them if the
Memorandum had not been recorded?
ANSWER (Yes or No): YES
On the breach of contract claim, the jury found that Michael
had an agreement with the Gerards to purchase the lot and to
reimburse their out-of-pocket costs, and that Michael breached
that agreement. The jury then returned a Special Verdict
awarding damages to the Gerards in the amount of $280,000.
The judge also imposed an additional $1,000 award of punitive
damages pursuant to Wis. Stat. § 706.13(1). On December 9,
2011, an interlocutory judgment in the amount of $281,000 was
entered for the Gerards against Michael.
In 2012, Michael filed a petition for bankruptcy under
Chapter 11. The Gerards responded by initiating this adversary
6 No. 14-1496
proceeding in bankruptcy court to determine whether the
interlocutory judgment was precluded from discharge under
11 U.S.C. § 523(a)(6) of the bankruptcy code. Section 523(a)(6)
provides that a “willful and malicious injury by the debtor to
another entity or to the property of another entity” is
precluded from discharge. The Gerards then filed a motion for
summary judgment contending that the Ozaukee County
Circuit Court already decided that the injury was willful and
malicious and its decision should be given preclusive effect.
The bankruptcy court concluded that the issue was preclu-
sively decided and entered judgment for the Gerards. Michael
appealed to the district court, and it affirmed the judgment of
the bankruptcy court. This appeal followed.
Following oral argument, we learned that an appeal of the
final judgment entered by the Ozaukee County Circuit Court
in July 2014 was pending in the Wisconsin Court of Appeals.
We then ordered supplemental briefing on the issue of our
jurisdiction in light of this ongoing state court appeal. After the
benefit of supplemental briefing, we are confident that we have
jurisdiction over the underlying interlocutory judgment
adjudicated by the bankruptcy court. See Wis. Stat. § 806.01(2).
Furthermore, the ongoing state court appeal does not prevent
us from resolving the merits of this case now because a
Wisconsin judgment has preclusive effects even while it is on
appeal. See Virnich v. Vorwald, 664 F.3d 206, 216 (7th Cir. 2011);
accord, DeGuelle v. Camilli, 724 F.3d 933, 935 (7th Cir. 2013).
Thus, we proceed to the merits.
No. 14-1496 7
II. Analysis
On appeal, Michael argues that the courts below incorrectly
applied issue preclusion under Wisconsin law by granting (and
then affirming) the Gerards’ summary judgment motion. He
argues that the Special Verdict does not support the conclusion
that he committed “willful and malicious injury” causing the
$281,000 Ozaukee County Circuit Court’s interlocutory
judgment to be precluded from discharge under 11 U.S.C.
§ 523(a)(6). “We review conclusions of law made by a bank-
ruptcy court and affirmed by a district court de novo.” Niedert
v. Rieger, 200 F.3d 522, 525 (7th Cir. 1999).
As noted above, § 523(a)(6) provides that “this title does not
discharge an individual debtor from any debt for willful and
malicious injury by the debtor to another entity or to the
property of another entity.” In other words, “[u]nder
§ 523(a)(6), a debtor’s debt may not be discharged if he
willfully and maliciously injured the plaintiff or the plaintiff’s
property.” Gambino v. Koonce, 757 F.3d 604, 607 (7th Cir. 2014).
A plaintiff-creditor seeking to establish nondischargeability
under § 523(a) must do so by a preponderance of the evidence.
Grogan v. Garner, 498 U.S. 279, 291 (1991). However, rather than
prove the nondischargeability of the debt in the bankruptcy
court, a creditor may invoke issue preclusion to avoid future
litigation of the elements necessary to meet a § 523(a) excep-
tion. Id. at 285 n.11.
We recently had the occasion to describe the intersection of
Wisconsin issue preclusion law and 11 U.S.C. § 523(a)(6) in
some detail. See First Weber Group, Inc. v. Horsfall, 738 F.3d 767,
772–73 (7th Cir. 2013). There, we explained that
8 No. 14-1496
[i]n Wisconsin (as in most states), the question
whether issue preclusion applies depends on two
criteria. The first (the “actually litigated step”)
requires “that the question of fact or law that is
sought to be precluded actually must have been
litigated in a previous action and [have been] neces-
sary to the judgment.” Mrozek v. Intra Fin. Corp., 281
Wis.2d 448, 699 N.W.2d 54, 61 (2005). The second
(the “fundamental fairness step”) requires the court
to “determine whether it is fundamentally fair to
employ issue preclusion given the circumstances of
the particular case at hand.” Id.Id. at 773. If these standards are satisfied, a bankruptcy court
cannot revisit the issue because the debt is precluded from
discharge. However, if the jury’s findings are inconclusive or
were not necessary to the state court judgment, then issue
preclusion does not apply, in which case the bankruptcy court
must determine whether or not the debt is the result of willful
and malicious conduct.
In this case, the jury instructions did not ask the jury
whether Michael’s conduct was “willful and malicious.”
Although we have yet to consider whether the statutory
“willful and malicious” language must be used in the state
court proceedings for the judgment to have preclusive effect,
the Second Circuit addressed this question in Ball v. A.O. Smith
Corp., 451 F.3d 66 (2d Cir. 2006). In Ball, the Second Circuit held
that state court proceedings could have preclusive effect even
where the jury was not charged to find liability for “willful and
malicious” conduct, so long as the verdict satisfied § 523(a)(6)’s
No. 14-1496 9
definitions. Id. at 69–71. We agree that Ball’s reasoning is sound
and conclude that the failure of the statutory text of § 523(a)(6)
to appear in the state court proceedings does not bar the
application of issue preclusion. Thus, that the jury in the
underlying state court proceedings did not find that Michael
had acted “willfully and maliciously” does not bar issue
preclusion. Rather, we must assess whether the jury’s findings
satisfy the “willful and malicious” standard within the mean-
ing of § 523(a)(6).
We addressed the meaning of the phrase “willful and
malicious injury” in Horsfall. There we stated that willfulness
requires “a deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury.” Horsfall, 738
F.3d at 774 (quoting Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998))
(emphasis omitted). We further explained that willfulness is
judged by an objective standard: it “can be found either if the
‘debtor’s motive was to inflict the injury, or the debtor’s act
was substantially certain to result in injury.’” Id. (quoting
Bukowski v. Patel, 266 B.R. 838, 844 (E.D. Wis. 2001)). The
question is whether the jury’s verdict in the Wisconsin state
trial court established that this standard was met.
While the Gerards obtained a verdict in their favor on both
slander of title and breach of contract theories, they base their
nondischargeability argument in Special Verdict answers 1, 2,
3, and 7, which only implicate slander of title. The elements of
statutory slander of title are “[a] knowingly false, sham or
frivolous claim of lien or any other instrument relating to real
or personal property filed, documented or recorded which
10 No. 14-1496
impairs title is actionable in damages.” Kensington Dev. Corp. v.
Israel, 142 Wis.2d 894, 419 N.W.2d 241, 244 (1988).
The bankruptcy court concluded that jury Special Verdict
Nos. 1, 2, and 7 proved that Michael acted “willfully” because
the jury’s answer to Question 1 “shows that Michael commit-
ted an intentional act by recording the Memorandum.” In re
Gerard, 482 B.R. 265, 271 (Bankr. E.D. Wis. 2012). And the
bankruptcy court opined that “by answering ‘Yes’ to questions
2 and 7, it is apparent that the jury did consider Michael’s
knowledge and intent in recording the memorandum.” Id. The
district court reached the similar but not identical conclusion
that the jury’s answers in Jury Verdict Nos. 1, 2, and 3 “estab-
lish that Michael acted intentionally in recording the Memoran-
dum of Interest.” Gerard v. Gerard, 2014 WL 461182, *10 (E.D.
Wis., Feb. 5, 2014).
However, the bankruptcy and district courts’ reasoning
failed to recognize the fact that the Special Verdict form
allowed the jury to respond affirmatively based on either
intentional or negligent conduct. Specifically, Question 2 asked:
“Did Michael Gerard know, or should he have known, the
contents, or a part of the contents, of the Memorandum were
false, a sham, or frivolous?” (emphasis added). And Question
3 asked whether Michael had “reasonable ground” for believ-
ing the truth of the contents of the lien. Our decision in Horsfall
teaches that one must act with the specific intent to cause a
certain result in order to prove willfulness. 738 F.3d at 774.
Because the jury’s verdict could have been based on Michael’s
negligence, the lower courts erred by affording the state court
judgment preclusive effect. See Wheeler v. Laudani, 783 F.2d 610,
No. 14-1496 11
615 (6th Cir. 1986) (reversing preclusive effect of libel judgment
because it was imposed based on “knowledge of its falsity or in
reckless disregard of whether it was false” when the latter
conduct did not rise to the level of “willful and malicious
injury”). Of course, this conclusion does not mean that the state
court’s interlocutory judgment is necessarily dischargeable.
With the exception of the findings of fact memorialized on the
Special Verdict, the trial record is devoid of any evidence that
Michael acted negligently. Still, the Special Verdict is ambigu-
ous on that issue, so we are unable to afford this finding
preclusive effect. Accordingly, we must remand this case to the
bankruptcy court for it to decide whether Michael’s slander of
title was “willful and malicious” within the meaning of §
523(a)(6).
III. Conclusion
The district court and the bankruptcy court erred in holding
the state court jury’s slander of title findings preclusively
established that Michael acted “willfully” within the meaning
of 11 U.S.C. § 523(a)(6). Accordingly, the interlocutory judg-
ment of the district court is REVERSED and this case is
REMANDED to the bankruptcy court for a determination of
whether Michael’s conduct constitutes a “willful and malicious
injury” to the Gerards. On remand, counsel for the parties are
instructed to provide the bankruptcy court with an update on
the status of the ongoing state court appeal.