Bankruptcy Court Properly Denied Proof Of Claim For Slander Of Title When Record Established Good Faith Of Debtor And Lack Of Actual Malice
IN RE: GALLO (July 20, 2009)
In 2004, a state court entered a dissolution order in the divorce proceedings of Frank Gallo and Gillian Emery. Gallo had a bankruptcy proceeding pending at the time. The divorce court awarded a Sanibel Island, Florida property to Emery but required her to pay $125,000 to the bankruptcy trustee. Gallo transferred his interest in the Sanibel Island property to Emery but Emery made no payments to the trustee. Gallo filed a lis pendens against the Sanibel Island property. Several months later, Emery obtained an order quieting title and sold the property for $490,000. In a subsequent Gallo bankruptcy proceeding, Emery filed a proof of claim for slander of title, alleging that she lost an opportunity to sell the Sanibel Island property because of the lis pendens notice. The bankruptcy court denied Emery's proof of claim and issued an order directing her to pay the amount of the state court dissolution order. Emery appeals.
In their opinion, Judges Posner, Ripple and Wood affirmed. The issues presented on appeal were whether Emery had a valid slander of title claim and whether the bankruptcy court erred in not considering her inability to pay. In order to establish slander of title under Florida law, one must establish a falsehood. A lis pendens is proper if there is a connection between an equitable interest in the property and a lawsuit. The Court did find that Gallo had an equitable interest in the property because the same order granted the property to Emery and required her to pay the trustee. It was less certain that Gallo could meet the litigation requirement of Florida law, since there was only a possibility of future litigation. The Court did not decide the issue, however, because it found the record established a good faith affirmative defense and absence of actual malice on the part of Gallo. The Court also rejected Emery's argument that the bankruptcy court should have considered her ability to pay. The bankruptcy court had no obligation to ensure her ability to pay before issuing its order, which was based on the final order of the state court. If later proceedings attempt to hold Emery in contempt for failure to pay, she may then present evidence of her financial situation.
