50 Patton Drive, LLC v. Fustolo (In re Fustolo)

• Decision Date: 11 September 2015
• Docket Number: Adv. P. No. 14–1193,Case No. 13–12692–JNF
• Citation: 537 B.R. 55
• Parties: In re Steven C. Fustolo, Debtor 50 Patton Drive, LLC, and The Patriot Group, LLC, Plaintiff v. Steven C. Fustolo, Defendant
• Court: U.S. Bankruptcy Court — District of Massachusetts

537 B.R. 55

In re Steven C. Fustolo, Debtor50 Patton Drive, LLC, and The Patriot Group, LLC, Plaintiff

v.Steven C. Fustolo, Defendant

Case No. 13–12692–JNF

Adv. P. No. 14–1193

United States Bankruptcy Court, D. Massachusetts.

Signed September 11, 2015

Howard P. Blatchford, Jr., Michael J. Fencer, Jonathan Horne, Jager Smith, P.C., Michael Paris, Jack I. Siegal, Nystrom Beckman & Paris LLP, Boston, MA, for Plaintiff.

Susan H. Christ, David M. Nickless, Nickless, Phillips and O'Connor, Fitchburg, MA, for Defendant.

MEMORANDUM

Joan N. Feeney, United States Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is the “Motion for Partial Summary Judgment on Count IV and Under 11 U.S.C. § 727(a)(4)(A) against Defendant/Debtor Steven C. Fustolo” filed by the Plaintiff, the Patriot Group, LLC (“Patriot” or the “Plaintiff”).¹ Pursuant to its Motion, the Plaintiff seeks entry of an order denying the Debtor a discharge for knowingly and fraudulently making a false oath in connection with filing his Chapter 7 Schedule of Assets. Specifically, the Plaintiff asserts that the Debtor made a false oath on an Amended Schedule B, dated August 14, 2014, when, under penalty of perjury, he listed a “possible whistleblower recovery” with an “[u]nknown” value.

The Debtor filed an Opposition to the Motion for Partial Summary Judgment to which Patriot filed a Reply Brief. The Court heard the Motion for Partial Summary Judgment on August 25, 2015 and took the matter under advisement. The issue presented is whether Patriot sustained its burden of proof such that there are no material facts in dispute and it is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(a), made applicable to this proceeding by Fed.R.Civ.P. 7056. For the reasons set forth below, the Court concludes that Patriot failed to sustain its burden.

II. FACTS

A. Patriot's Undisputed Facts

On May 6, 2013, Patriot, together with 50 Thomas Patton Drive, LLC and Richard Mayer filed an involuntary petition for relief against Fustolo under Chapter 7 of the Bankruptcy Code. The Court entered an order for relief on December 16, 2013. See In re Fustolo, 503 B.R. 206 (Bankr.D.Mass.2013), aff'd, Fustolo v. 50 Patton Drive, LLC., No. 14–10248–RWZ, 2015 WL 4876075 (D.Mass. Feb. 17, 2015). Patriot is an unsecured creditor of Fustolo, holding a claim in the approximate amount of $25,756,305.33.

Fustolo is a certified public accountant and has substantial expertise in the area of tax reporting. He is a frequent lecturer and writes about various tax and accounting issues.

On January 17, 2014, Fustolo filed Schedules A, B, C, E, G, H, I, J, Summary of Schedules, Statement of Financial Affairs, and Amended Schedules D & F. He did not list a claim for “possible whistleblower recovery” on his original Schedule B.

The Chapter 7 Trustee conducted a § 341 meeting of creditors on January 21, 2014 and continued it several times, including to May 9, 2014. On May 7, 2014, Fustolo sent an email to his counsel, Bruce W. Edmands, Esq. (“Attorney Edmands”),² stating that “today or tomorrow” he would be “filing with the IRS and will be filing with the SEC's office of the whistleblower under Dodd–Frank.” In other words, as of May 7, 2014, Fustolo intended to file whistleblower complaints on May 7, 2014 or May 8, 2014 alleging that Patriot had committed tax fraud. On May 7, 2014, Fustolo also forwarded a draft of a letter he authored for Attorney Edmand's review and signature addressed to Patriot's counsel in which he alleged that Patriot was abusing the bankruptcy process in his case as a means to retaliate against him for reporting Patriot's alleged tax fraud. Attorney Edmands agreed to assist Fustolo in finishing the letter. According to Attorney Edmands, Fustolo wanted to send the letter prior to the § 341 examination to put parties on notice that he believed he was entitled to redress under anti-retaliatory provisions of whistleblower statutes. Fustolo was afraid that he was going to be “bullied” at the § 341 hearing, and he wanted to throw Patriot's attorney “off his game.”

On May 9, 2014, Attorney Edmands sent the letter which was drafted by Fustolo to Patriot's counsel, Michael J. Fencer, Esq. (“Attorney Fencer”), entitled “Whistleblower Notification.” In the letter, Attorney Edmands stated that Fustolo had filed a claim against Patriot with the Internal Revenue Service (“IRS”) and “had filed a notice with the Security and Exchange Commission. The letter provided in pertinent part the following:

The purpose of this letter is to inform you and your clients, The Patriot Group LLC, Old Hill Partners Inc. (as successor to Patriot Group) (hereinafter “Patriot”) that Steven Fustolo has filed a claim against Patriot in accordance with the Internal Revenue Service Whistleblower statute, Section 7623 of the Internal Revenue Code. Mr. Fustolo's IRS filing may also affect Patriot's members, investors, and affiliated off-shore entities and funds.

Additionally, Mr. Fustolo has filed a notice with Security [sic] and Exchange Commission's Office of the Whistleblower, identifying himself as a whistleblower in respect to Patriot pursuant to the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank). Moreover, Mr. Fustolo anticipates the possibility of filing additional claims regarding Patriot under other federal and state whistleblower statutes.

Having previously informed a Patriot representative of his intention to notify the Internal Revenue Service of Patriot's alleged tax fraud, Mr. Fustolo has come to believe and now alleges that Patriot and its principal, John Howe, abused and will continue to abuse the bankruptcy proceedings as a means to retaliate against him for reporting Patriot's tax violations.

More particularly, Mr. Fustolo alleges that with advance knowledge of Mr. Fustolo's pending IRS filings, Patriot and John Howe, personally, embarked on a campaign to harass and intimidate him and destroy his reputation by filing a petition for involuntary bankruptcy under Section 303(b) of the Bankruptcy Code. In doing so, Patriot also conspired with two other creditors whom you represent, 50 Thomas Patton Drive, LLC and Richard Mayer, who joined Patriot in filing the involuntary bankruptcy petition which is currently pending against Mr. Fustolo in the United States Bankruptcy Court in Massachusetts.

Mr. Fustolo believes that the petitioners filed bankruptcy petition [sic] and prosecuted their claims in bad faith in violation of anti-retaliatory provisions of the whistleblower protections referenced above.

On August 14, 2014, after the conclusion of the § 341 meeting of creditors, Fustolo filed an Amended Schedule B in which he listed among his assets “claims” involving “possible whistleblower recovery” to which he ascribed an “[u]nknown value.” Fustolo thereafter filed documents with this Court specifically stating that he had filed whistleblower claims with the IRS and the SEC (the “Whistleblower Claims”).

On August 27, 2014, during his Rule 2004 Examination, Fustolo was questioned about the Whistleblower Claims that were the subject of the May 9, 2014 letter, which was sent to Patriot's counsel. During the examination, Fustolo testified that he did not have a copy of anything he sent to the IRS or SEC and had no notes or documents to substantiate that he actually filed Whistleblower Claims, stating “I have kept no notes and no documents that would refresh my memory on this.” Fustolo admitted that he did not retain a copy of what was sent to the IRS and the SEC, although he averred that in July of 2014 he supplied Patriot's counsel with 500 pages of papers he had obtained concerning whistleblower statutes, Patriot and JH Howe Family Foundation, among others, as well as a copy of the acknowledgment of the SEC that it had received the Whistleblower Claim.

According to Patriot, Fustolo, a highly experienced CPA, could not recall any facts or basic details supporting the allegations of tax fraud that supposedly formed the basis of the Whistleblower Claims.³ Fustolo also could not recall when he allegedly filed his claims with the IRS and SEC or the contents of his filings. Fustolo also could not recall whether he had advised Patriot of his allegations that its filing of the involuntary bankruptcy petition was in retaliation for his whistleblower activities. When questioned by Patriot's counsel, Attorney Fencer, he testified as follows:

Q. Did you convey your intention to report Patriot to the Internal Revenue Service orally to anyone at Patriot?

A. I don't recall.

Q. Did you report or inform a representative of Patriot of your intention to notify the Internal Revenue Service of this alleged tax fraud in writing?

A. I don't recall.

Attorney Edmands, Fustolo's counsel, testified at his deposition that he did not have copies of the Whistleblower Claims, or any documents concerning the Whistleblower Claims. In addition, Fustolo's counsel could not recall any details or subsidiary facts supporting the allegations of tax fraud. Fustolo's counsel further admitted that he did not independently verify the bases for the purported claims; rather, he relied solely on Fustolo because Fustolo is an “expert in tax, has written nine books on the subject, and has lectured extensively.” In short, Attorney Edmands had no information or knowledge about the basis of the alleged Whistleblower Claims and could not articulate any legal basis for claiming that putting a person into bankruptcy could constitute retaliation under any whistleblower statute. Fustolo's counsel did nothing to confirm that Fustolo had filed the Whistleblower Claims and did not know whether he actually submitted the claims.

A review of the transcript of the deposition of Attorney Edmands, however, reveals that Attorney Edmands was in receipt of an email from Fustolo in which Fustolo stated: “today [May 7, 2014] I filed the IRS WB application.” In addition, as noted above, Attorney Edmands edited and sent a letter, dated May 9, 2014, addressed to Attorney...