Kevin P. Gerard v. Michael J. GerardKevin P. Gerard v. Michael J. Gerard
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
In 2009, after some sale price reductions failed to attract a buyer, the Gerards sued Miсhael 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 rеcording 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 seе [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 bolstеred 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 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
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, financing 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 persоn 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.
1. Did Michael Gerard cause the recording of the Memorandum of Interest In Real Estate against Lot 3 with the 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 Memorandum 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 memorandum?
ANSWER (Yes or No): NO
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7. Were Kevin Gerard and Margaret Gerard deprived of a market which would have been available tо 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
In 2012, Michael filed a petitiоn for bankruptcy under Chapter 11. The Gerards responded by initiating this adversary proceeding in bankruptcy court to determine whether the interlocutory judgment was precluded from discharge under
Following oral argument, we learned that an appeal оf 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 jurisdiсtion over the underlying interlocutory judgment adjudicated by the bankruptcy court. See
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
As noted above,
We recently had the occasion to describe the intersection of Wisconsin issue preclusion law and
[i]n Wisconsin (as in most stаtes), 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] necessary 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 addrеssed 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
While the Gerards obtained a verdict in their favor on both slandеr 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 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 Michaеl committed 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 “establish that Michael acted intentionally in recording the Memorandum 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 believing thе 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 statе court judgment preclusive effect. See Wheeler v. Laudani, 783 F.2d 610, 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 ambiguous 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
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