Berman v. LaBonte (In re Michael S. Goldberg, LLC), Civil No. 3:15-cv-1687(AWT)

Citation595 B.R. 119
Decision Date20 September 2018
Docket NumberCivil No. 3:15-cv-1687(AWT),Adv. Pro. No. 14-02026(AWT)
Parties IN RE: MICHAEL S. GOLDBERG, LLC, and Michael S. Goldberg, Debtors. James Berman, Chapter 7 Trustee for the Substantively Consolidated Estate of Michael S. Goldberg, LLC, and Michael S. Goldberg, Plaintiff, v. Sally A. LaBonte, Trustee of the Scott A. LaBonte Dynasty Trust, et al., Defendants.
CourtUnited States District Courts. 2nd Circuit. United States District Court (Connecticut)

Stephen M. Kindseth, James M. Moriarty, Jed Horwitt, John Louis Cesaroni, Patrick Roberts Linsey, Christopher Holden Blau, Zeisler & Zeisler, P.C., Bridgeport, CT, for Plaintiff.

Charles Scott Schwefel, David M.S. Shaiken, Shipman, Shaiken & Schwefel, LLC, West Hartford, CT, for Defendants.

RULING ON MOTION TO COMPEL AND MOTIONS TO QUASH SUBPOENAS

Alvin W. Thompson, United States District Judge

James Berman, the Chapter 7 Trustee (the "Trustee") for the substantively consolidated bankruptcy estate of Michael S. Goldberg, LLC and Michael S. Goldberg (collectively, the "Debtors"), has filed a motion seeking an order compelling third-parties Cummings & Lockwood LLC ("C & L"), Charter Oak Law, P.C., as successor to Levy and Droney PC ("Charter Oak"), and CohnReznick LLP ("CohnReznick," collectively, the "Professional Firms") to fully comply with the Trustee's subpoenas duces tecum served on each of the Professional Firms, and the defendants in this action and the Professional Firms have filed motions to quash those subpoenas duces tecum. For the reasons set forth below, the motion to compel is being granted and the motions to quash are being denied.

I. Factual and Procedural Background

From the mid-1990s to October 2009, the Debtors operated a pure Ponzi scheme (the "Goldberg Scheme"). Scott A. LaBonte ("Scott LaBonte") was an investor in the Goldberg Scheme. He was also a "feeder" to the Goldberg Scheme in that he sought other people's money to fund his own investments; this magnified and spread the harm to the creditor-victims of the Estate by furthering and enlarging the Goldberg Scheme. Because Scott LaBonte knew the Goldberg Scheme was a fraud, he structured his own investments in the Goldberg Scheme, as well as those of individuals he introduced to the Goldberg Scheme, as loans memorialized by promissory notes issued to his cousin Edward Malley (the "Malley Notes"). The Malley Notes included hundreds of thousands of dollars of up-front "loan fees" payable to Scott LaBonte and expressly required that Edward Malley ("Malley") use the funds received from Scott LaBonte to invest with Goldberg. Also, they had usurious rates of interest. Both CohnReznick and Charter Oak advised on and assisted in drafting the Malley Notes, including the use of Nevada law to avoid Connecticut's usury laws. The structure of Scott LaBonte's investments in the Goldberg Scheme evidenced his fraudulent intent.

In November 2009, at a time when Goldberg was having difficulty raising the funds necessary to pay off earlier investors, many of whom were pressuring him for payment, and the number of new investments was dwindling, Goldberg voluntarily turned himself in to the Federal Bureau of Investigation. Scott LaBonte learned in November 2009 that Goldberg had turned himself in to law enforcement authorities and had admitted to running a Ponzi scheme.

Scott LaBonte is the settlor of the Scott A. LaBonte Revocable Trust (the "Revocable Trust"), which was settled in the 1990's. Scott LaBonte is also the settlor of the SAL Dynasty Trust, which was settled in 2006. The beneficiaries of the SAL Dynasty Trust are Sally LaBonte and the children of Scott and Sally LaBonte.

From the inception of the SAL Dynasty Trust through October 2013, the named trustees were Joseph Sparveri ("Sparveri"), Roland LaBonte and Sally LaBonte. Sally LaBonte is Scott LaBonte's wife. Roland LaBonte is Scott LaBonte's father. Sparveri is an accountant who, as of 2006, had served as Scott LaBonte's personal accountant for more than 15 years; he had also served as the accountant for other LaBonte family members (including Scott LaBonte's father) and for businesses in which Scott LaBonte held an ownership interest. Thus, Scott LaBonte was neither a beneficiary nor a trustee of the SAL Dynasty Trust.

Even though the LaBonte's home was not owned by the SAL Dynasty Trust, Sally LaBonte testified that her responsibilities as a trustee of the SAL Dynasty Trust were to take care of her home and to make sure household and family bills were paid. Sally LaBonte's testimony was, in effect, that she was not involved in the management of any of the assets of the SAL Dynasty Trust, was not familiar with the amount of income generated by the entities in which the SAL Dynasty Trust owned an interest, and was not involved in decisions related to the movement of funds by the SAL Dynasty Trust by and between entities in which it owned an interest. The second trustee, Roland LaBonte, did not make any decisions or take any action on behalf of the SAL Dynasty Trust. The third trustee, Sparveri, signed only a few, i.e., five or six, SAL Dynasty Trust checks. Sparveri testified he had two duties as a trustee of the SAL Dynasty Trust, investment of the trust assets and accounting. However, he also testified that neither he nor the other two trustees found investment opportunities for the SAL Dynasty Trust. The SAL Dynasty Trust had a line of credit with the Revocable Trust, and it could borrow against that line of credit when it wanted to make an investment. Scott LaBonte made decisions concerning the finances and movement of funds into and out of the SAL Dynasty Trust even though he was not a trustee.

On May 15, 2010, the Trustee commenced an adversary proceeding captioned James Berman, Chapter 7 Trustee for the Substantively Consolidated Estate of Michael S. Goldberg, LLC and Michael S. Goldberg v. Edward Malley, et al. (Adv. Pro. No. 10-02082) (the "Malley Adversary Proceeding"). In the Malley Adversary Proceeding, the Trustee sought to avoid and recover fraudulent transfers Malley received from the Goldberg Scheme. Malley was served with the complaint in the Malley Adversary Proceeding on May 21, 2010. Shortly after Malley was served with the complaint in the Malley Adversary Proceeding, Malley told Scott LaBonte that Malley had been sued by the Trustee. When Malley told Scott LaBonte that he had been sued by the Trustee, Scott LaBonte understood that the purpose of the Trustee's lawsuit was to "claw-back" for the benefit of creditor-victims the money Malley had received from the Goldberg Scheme.

In June of 2010, shortly after he learned that the Trustee had sued Malley to recover the Goldberg Scheme transfers, Scott LaBonte transferred (the "SAL/DT Transfers") substantially all of his assets to the SAL Dynasty Trust. Scott LaBonte did not execute the documents effectuating the SAL/DT Transfers until sometime after July 16, 2010, but the transfer documents were made effective retroactively to June 2, 2010. The assets transferred pursuant to the SAL/DT Transfers consisted primarily of Scott LaBonte's ownership interests in various limited liability companies, his interest in a limited partnership and the stock of two closely held corporations. The transferred assets were worth millions of dollars.

On or about June 2, 2010, Scott LaBonte met with professionals at C & L. C & L's privilege log reflects documents and communications concerning C & L professionals giving estate planning advice and advice concerning funding the SAL/DT Transfers, starting in May of 2010 and continuing into 2014.

Charter Oak's privilege log likewise reflects documents and communications, starting in June of 2010 and continuing through June 2012, with Levy & Droney professionals concerning, among other things, preparation of transactional documents to effectuate the SAL/DT Transfers, as well as estate planning advice. The C & L and Charter Oak privilege logs also reflect communications between the attorneys at those firms and Sparveri, who was at CohnReznick. The CohnReznick privilege log reflects communications between Sparveri and the LaBontes' counsel, as well as communications between Sparveri and Scott LaBonte. Both Scott and Sally LaBonte have testified that the SAL/DT Transfers were effectuated based upon the advice of their professionals.

In June 2010 Sally LaBonte and Scott LaBonte went on a trip to Italy with the individuals who had been named as guardians of their children. Sally LaBonte testified that in advance of the trip she was concerned about what would happen to their children in the event something happened to the LaBontes and the named guardians during that trip, and that this concern was the impetus for meeting with the lawyers at C & L in June of 2010 to discuss estate planning.

The Trustee commenced this adversary proceeding seeking (i) to avoid and recover fraudulent transfers made by Scott LaBonte to the SAL Dynasty Trust; (ii) a finding that Scott LaBonte so dominated and controlled the SAL Dynasty Trust that it and he are one and the same; and (iii) the avoidance and recovery of asset transfers by Scott LaBonte/the SAL Dynasty Trust to the named defendants.

The defendants have asserted the attorney-client privilege with respect to documents and communications with the Professional Firms. The defendants filed the instant motions to quash subpoenas seeking such documents and communications and, in response, the Trustee seeks a ruling that: (i) the crime-fraud exception to the attorney-client privilege is applicable; (ii) the inclusion of third-parties in attorney-client communications when they were not necessary for the facilitation of legal advice resulted in a waiver of any privilege that might otherwise be applicable; (iii) the LaBontes have waived the attorney-client privilege by placing the communications sought to be protected at issue in their own defense; and (iv) all responsive documents withheld on the basis of the attorney-client privilege, attorney work product or any other...

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2 cases
  • Berman v. Labonte
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Connecticut)
    • September 30, 2020
    ...mirrored the notes with Mr. Malley. Scott knew at the time that it was a fraud. [Compl. ¶ 43] (citing In re Michael S. Goldberg, LLC , 595 B.R. 119, 121 (D. Conn. 2018) (Thompson, J)("Because Scott LaBonte knew the Goldberg Scheme was a fraud, he structured his own investments in the Goldbe......
  • In re Harris, Case No. 18-14157-MSH
    • United States
    • United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts
    • January 14, 2019

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