Bankruptcy – Nondischargeable debts – slander of title

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U.S. Court of Appeals For the Seventh Circuit

Civil

Bankruptcy – Nondischargeable debts – slander of title

The district court erred in concluding that a state court verdict finding a debtor guilty of slander of title precluded discharge in bankruptcy.

“[T]he 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 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, 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 slander of title was ‘willful and malicious’ within the meaning of § 523(a)(6).

Reversed and Remanded.

14-1496 Gerard v. Gerard

Appeal from the United States District Court for the Eastern District of Wisconsin, Clevert, J., Manion, J.

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