Carl Follo, Follo Hospitality, Inc. v. Morency (In re Morency)

Decision Date18 September 2015
Docket NumberCase No. 10-13666-JNF,Adv. P. No. 10-1133
PartiesIn re SUSAN C. MORENCY, Debtor CARL FOLLO, FOLLO HOSPITALITY, INC., and CARPA REAL ESTATE, LLC, Plaintiffs v. SUSAN C. MORENCY, Defendant
CourtU.S. Bankruptcy Court — District of Massachusetts

Chapter 7

MEMORANDUM
I. INTRODUCTION

The matters before the Court are two motions filed by Carl Follo, Follo Hospitality Inc. and Carpa Real Estate, LLC (collectively "Follo"): (1) a Motion to Amend Complaint Following Trial, and (2) a Motion for the Court to Take Judicial Notice of Jury Instructions. Susan C. Morency ("Morency" or the "Debtor") filed Oppositions to both Motions.

Follo commenced an adversary proceeding against Morency which has been pending for over five years. Bankruptcy Judge Frank J. Bailey, following (1) a trial onAugust 17, 2011, (2) the issuance of a decision on April 2, 2013, see Follo v. Morency (In re Morency), No. 13-1133, 2013 WL 1342485 (Bankr. D. Mass. April 2, 2013), (3) the issuance of a decision by the United States District Court for the District of Massachusetts, affirming in part and remanding the matter to the bankruptcy court, see Follo v. Morency, 507 B.R. 421 (Bankr. D. Mass. 2014), (4) a status conference conducted by Judge Bailey on July 10, 2014, and (5) the filing by Follo and Morency of a "Joint Statement of Issues to be Briefed and Proposed Briefing Schedule following Remand," as well as briefs, recused himself from the adversary proceeding and the main case on May 22, 2015. The main case and adversary proceeding, promptly and randomly, were assigned to this Court. This Court conducted a status conference on June 18, 2015 at which the parties expressly consented to this Court's determination of the foregoing Motions without further evidence, as well as its consideration of the issues identified in the District Court's Memorandum and Order, pursuant to which it remanded the matter to the bankruptcy court. See Fed. R. Bankr. P. 9028.

II. PROCEDURAL BACKGROUND
A. The State Court Litigation

This adversary proceeding relates to the purchase of the Inn at Cranberry Farm and a cottage (collectively, the "Inn") in Rockingham, Vermont by Follo from Morency, Paul Florindo ('Florindo") and their related entities. Follo obtained a judgment against Morency and Florindo for common law fraud and violations of the Vermont Consumer Fraud Act in the Windham County Superior Court following six days of trial and four hours of jurydeliberation. Both parties appealed the decision of the Superior Court to the Supreme Court of Vermont, which issued a decision on January 23, 2009. See Follo v. Florindo, 185 Vt. 390, 970 A.2d 1230 (2009). The Vermont Supreme Court capsulized its ruling as follows:

Defendants Paul Florindo and Susan Morency appeal from a jury verdict and judgment against them for common-law fraud and violations of Vermont's Consumer Fraud Act in connection with their sale of a bed and breakfast business. Both defendants claim that the evidence did not support the verdict, that the jury instructions regarding common law and consumer fraud were plainly erroneous, and that the trial court's decision to preclude their expert witnesses from testifying was error. Defendant Florindo also contends that it was error for the trial court to allow plaintiff's expert witness and the jury to value the two parcels of property at issue as one parcel for purposes of the damages calculation. Defendant Morency claims further that plaintiff's closing argument at trial was prejudicial and improper. We affirm on all counts.
. . . Plaintiff, Carl Follo, the purchaser and current operator of the bed and breakfast, cross-appeals on two issues. First, he claims error in the trial court's exclusion of punitive damages as a matter of law. Second, plaintiff argues that it was improper for the trial court to order remittitur of a portion of the jury award. We reverse the trial court's punitive-damages decision and affirm the remittitur order.

185 Vt. at 394. The Vermont Supreme Court affirmed in part and reversed in part the decisions of trial court and remanded for the jury's determination of punitive damages, if any. Id. at 417.

Following the decision of the Vermont Supreme Court, Morency, on April 5, 2010, filed a Chapter 7 bankruptcy petition. On May 14, 2010, Follo timely filed a two-count Complaint against Morency under "11 U.S.C. § 523(a)(2)" and 11 U.S.C. § 523(a)(6). Follo has waived any claim to relief under 11 U.S.C. § 523(a)(6) by failing to pursue it.

B. The Complaint, the Motion for Summary Judgment, and the Parties' Joint Pretrial Memorandum

The Complaint contained no specific references to any subsection of § 523(a)(2), which provides exceptions to discharge under subsection § 523(a)(2)(A) for "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition," under § 523(a)(2)(B ) for use of false written statements of financial condition made or published with intent to deceive upon which a creditor reasonably relied; and under § 523(a)(2)(C) for certain consumer debts or cash advances. As noted above, Follo set forth two counts in the Complaint; the Count under § 523(a)(2) referenced "False Representation and Actual Fraud by the Debtor."

On July 2, 2010, the bankruptcy court issued a Pretrial Order. Pursuant to that order, the parties were directed to file a memorandum including, among other things, brief statements of their respective cases. The Pretrial Order required the filing of any dispositive motion "no less than seven (7) business days prior to the date fixed for the filing of the Joint Pretrial Memorandum or the relief sought in such motions shall be deemed to have been waived."

On November 5, 2010, Follo filed a Motion for Summary Judgment, seeking the entry of judgment under § 523(a)(2)(A). Follo stated: "It is undisputed that the Vermont state courts have found that Morency committed common-law fraud and made intentional and reckless misrepresentations of material facts, which the Plaintiffs relied on in purchasing the Inn." Follo filed a Memorandum in support of the summary judgmentmotion to which Follo attached, as Exhibit A, a portion of the jury instructions. Morency opposed the Motion for Summary Judgment. On February 4, 2011, the bankruptcy court denied the motion for a number of reasons, stating the following:

The Motion relies entirely on collateral estoppel to establish Plaintiffs' right to judgment under section 523(a)(2)(A), but collateral estoppel is unavailable because at least one element of a cause of action under section 523(a)(2)(A) was neither actually determined by the Vermont judgment nor necessary to that judgment. Section 523(a)(2)(A) requires that the alleged misrepresentation be made "with intent to induce the plaintiff to rely on the misrepresentation." Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir. 1997). The jury instruction in the Vermont action included no such requirement. In addition, the judgment was vacated on appeal and remanded and is not presently a final judgment.

On February 15, 2011, Follo moved for reconsideration of the denial of the summary judgment motion. The bankruptcy court denied the motion three days later.1

On April 12, 2011, in accordance with the Pretrial Order, the parties filed a 22-page,Joint Pretrial Memorandum. In it, Follo disclosed that he intended to call two witnesses, namely himself and Morency, and to introduce 76 exhibits into evidence. In addition, the parties set forth "agreed upon facts which require no proof at trial," including the following:

1. The Plaintiffs' claim against Morency arises from a 2003 transaction whereby the Plaintiffs purchased an inn and an adjoining cottage located in Rockingham, Vermont (the "Inn") from Morency and a Paul Florindo ("Florindo") for $1,245,000 (the "Purchase Price").
2. Morency was the majority owner, president, and treasurer of the entity which held the Inn, Cranberry Farms LLC.
3. Morency owned 51 percent of the Inn and Florindo owned 49 percent.
4. The Inn's employee reported to Morency, and Morency wrote checks to the employee in payment.
5. Prior to her ownership of the Inn, Morency owned an interest in a family-owned floor covering company and also owned a rental property together with Florindo.
6. Follo's decision to purchase the Inn for the Purchase Price was based on their [sic] belief that the Inn generated certain levels of revenue and maintained certain occupancy rates.
7. Specifically, Follo employed a "gross revenue multiplier" approach to calculating appropriate sales prices for inns.
8. The sales brochure for the Inn included a profit and loss statement for the year 2001, which reflected $226,000 in sales and net income of $150,000.
9. The sale of the Inn to Follo closed in March, 2003.2

Follo set forth the following "Statement of the Case":

The purpose of §523(a)(2)(A) is to prevent a debtor from retaining the benefits of property obtained by fraudulent means and to ensure that the relief intended for honest debtors does not go to dishonest debtors. See Collier on Bankruptcy, Vol. 4, Sec. 523.08[1][a]. As set forth above, Morency's actions constitute false representations under §523(a)(2)(A). In addition, the instant circumstances fulfill the other criteria of §523(a)(2)(A). Morency intended Follo to rely on her flase [sic]statements and the Follo [sic] relied on Morency's false representations. Folio's reliance on Morency false representations resulted in a loss of property to Follo [sic]
Morency's conduct resulted in a loss of property to Follo in the form of payment in excess of the Inn's value. Follo relied on the representations of Morency and their reliance [sic] was justifiable under the circumstances. Follo in this matter investigated the Inn's revenues and occupancy rates and obtained documents which were either created by Morency, based on information that Morency provided, and/or executed by Morency. Follo could not have
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