780 F.3d 806
7th Cir.2015Background
- In 2007 Kevin and Margaret Gerard bought a Lake Michigan lot with an oral agreement that Michael Gerard (their brother) would finance and later purchase it; dispute arose and the Gerards put the lot up for sale.
- Michael recorded a “Memorandum of Interest” asserting an interest and stating the Gerards held title “for convenience only,” and he twice removed the Gerards’ For Sale sign.
- The Gerards sued in Wisconsin state court for, inter alia, slander of title and breach of contract; a jury returned a special verdict finding Michael recorded the memorandum, knew or should have known it was false, had no reasonable grounds to believe it, and that the Gerards were deprived of a market; damages of $280,000 plus $1,000 punitive were awarded (interlocutory judgment $281,000).
- Michael filed Chapter 11 bankruptcy; the Gerards sought a nondischargeability determination under 11 U.S.C. § 523(a)(6) (willful and malicious injury), and moved for summary judgment invoking issue preclusion based on the state-court verdict.
- Bankruptcy and district courts gave preclusive effect to the state-court findings and held the debt nondischargeable; the Seventh Circuit reversed, holding the verdict could have rested on negligence and therefore was not necessarily proof of “willful” injury under § 523(a)(6).
- The Seventh Circuit remanded to the bankruptcy court to determine whether Michael’s conduct meets the statutory “willful and malicious” standard; parties must update on the status of the ongoing state appeal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether state-court slander-of-title verdict has preclusive effect to establish "willful and malicious" injury under § 523(a)(6) | Gerard: The special verdict (questions 1,2,3,7) necessarily established Michael acted willfully and thus debt is nondischargeable | Michael: The special verdict is ambiguous and could reflect negligence (knows or should have known), so it does not necessarily prove "willful" injury | Reversed; verdict could be based on negligence so preclusion inappropriate—remand to decide willfulness under § 523(a)(6) |
Key Cases Cited
- Virnich v. Vorwald, 664 F.3d 206 (7th Cir. 2011) (Wisconsin judgment has preclusive effect even while on appeal)
- DeGuelle v. Camilli, 724 F.3d 933 (7th Cir. 2013) (same principle on preclusive effect during appeals)
- First Weber Group, Inc. v. Horsfall, 738 F.3d 767 (7th Cir. 2013) (interpreting § 523(a)(6) and standards for issue preclusion under Wisconsin law)
- Gambino v. Koonce, 757 F.3d 604 (7th Cir. 2014) (§ 523(a)(6) bars discharge for willful and malicious injury)
- Grogan v. Garner, 498 U.S. 279 (1991) (preponderance of the evidence standard for nondischargeability; issue preclusion may be invoked)
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (willfulness requires a deliberate or intentional injury, not merely a deliberate act)
- Ball v. A.O. Smith Corp., 451 F.3d 66 (2d Cir. 2006) (state verdict may have preclusive effect for § 523(a)(6) even without explicit statutory language if findings satisfy the statute)
- Wheeler v. Laudani, 783 F.2d 610 (6th Cir. 1986) (refusing preclusive effect where judgment rested on reckless or negligent conduct that did not meet willful-and-malicious standard)