Gillian Emery v. Frank Gallo

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