In re Morency, Case No. 10-13666-JNF

• Decision Date: 18 September 2015
• Docket Number: Case No. 10-13666-JNF
• Parties: In re SUSAN C. MORENCY, Debtor
• Court: U.S. Bankruptcy Court — District of Massachusetts

In re SUSAN C. MORENCY, Debtor

Case No. 10-13666-JNF

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS

September 18, 2015

Chapter 7

MEMORANDUM

I. INTRODUCTION AND PROCEDURAL BACKGROUND

The contested matter before the Court is the Objection by the Creditor, Conn Kavanaugh Rosenthal Peisch & Ford LLP (the "Creditor" or "Conn Kavanaugh"), to the proof of claim filed by Carl Follo, Follo Hospitality, Inc. and Carpa Real Estate, LLC (collectively, "Follo"), through which Follo asserts Susan C. Morency ("Morency" or the "Debtor") owes him the sum of $501,174 based on a Vermont state court judgment. The Creditor objects to Follo's proof of claim, asserting that the Vermont judgment was not final, has no preclusive effect in this case, and was obtained with falsified evidence. Follo responds, arguing that the Vermont judgment was final and has preclusive effect.¹ This Court shall refer to this contested matter as the "claim objection."

The Debtor and the Follo also are parties to an adversary proceeding in which Follo has sought to except the debt owed to him by Morency from discharge.² In this decision, the Court shall refer to that dispute as the "adversary proceeding." Although the claim objection and the adversary proceeding arise in the same case and in some respects present similar issues, they have not been consolidated for hearings or for determination on the merits.

Judge Frank J. Bailey initially heard the claim objection on March 8, 2013, and, approximately two months later, on May 16, 2013, in a "Proceeding Memorandum/Order," indicated his intention to schedule an evidentiary hearing on the claim objection (the "May 16^th Order"). In the May 16^th Order, Judge Bailey summarized the positions of the parties, and, as noted above, denied the Cross-Motion for Equitable Subordination. In addition, he ruled as follows:

Creditor CKRPF objects to Follo's claim in the amount of $501,174 plus attorney's fees, costs and post judgment interest accruing subsequent to May 4, 2007. CKRPF objects to the claim (i) because it purports to be based on a judgment, but the judgment was vacated on appeal and has not yet been re-entered and therefore is not final or preclusive and (ii) because the judgment was obtained with falsified evidence. Follo defends his claim, arguing that the judgment is final, preclusive and protected from review here by the Rooker-Feldman doctrine. In addition, Follo moves under 11 U.S.C. § 510(c)to equitably subordinate the proof of claim filed by CKRPF, for $4,7287.51, on the basis that CKRPF's objection to Follo's claim is meritless. (Only three claims have been filed in this case, all nonpriority and unsecured; the third, to which no challenge has been filed, is for $5,727.69.)

In an adversary proceeding to determine the dischargeability of Follo's claim, this court has had occasion to determine the preclusive effect of the Vermont judgment on which Follo relies. There the court determined that, because the judgment was vacated on appeal (albeit only to consider a possible increase in the amount of the judgment) and has not entered anew [sic], for most purposes, including merger, it does not have preclusive effect. Therefore, the judgment has no claim-preclusive effect here and is not an independent right of recovery from Follo's underlying tort claim. At the same time, the Court determined that the judgment is final for purposes of issue preclusion (or collateral estoppel), but also that, under Vermont law (which governs the preclusive effect of the judgment), issue preclusion will apply only if, among other things, (i) there was a full and fair opportunity to litigate the issue in the earlier action and (ii) applying preclusion in the later action is fair. The burden of proof as to these two issues is on the party opposing preclusion (but the burden of proof as to preclusion in general is on the party urging preclusion. I understand CKRPF to be contending that, where the judgment was obtained with falsified evidence, applying issue preclusion in this proceeding, especially against CKRPF, as a stranger to the earlier proceeding, is not fair and does not afford CKRPF a full and fair opportunity to litigate the validity of Follo's claim. . . .

Follo also suggests, in a reply brief, that CKRPF, as a creditor, lacks standing to object to Follo's claim. This argument is without basis. A creditor whose recovery would be diluted by the claim of another creditor is a party in interest and, as such, has standing to object to the other creditor's claim. 11 U.S.C. § 502(a) (a party in interest may object to a claim).

The Rooker-Feldman doctrine is of no help to Follo. It applies only to a final judgment, which is lacking here. Absent finality, there is no judgment.³

Follo filed a Notice of Appeal from the May 16^th Order, as well as an Election to the District Court. The Creditor moved to dismiss the appeal, and the United States District Court for the District of Massachusetts dismissed the appeal as interlocutory on September 19, 2013. Prior to the dismissal of the interlocutory appeal, the Creditor sought discovery from Follo in the claim objection matter pursuant to Fed. R. Bankr. P. 2004. On September 12, 2013, the bankruptcy court granted the Creditor's Motion to Conduct Rule 2004 Examination of Creditor Carl Follo over Follo's objection.

On November 20, 2013, Judge Bailey conducted an evidentiary hearing on the claim objection at which four witnesses testified, namely Stephen S. Ankuda ("Attorney Ankuda"), Carl Follo, Paul D. Florindo ("Florindo"), and Morency, and 11 exhibits were introduced into evidence. Consistent with the bankruptcy court's bench order, the parties filed a "Joint Submission and Stipulation of Additional Evidence in Connection with the November 20, 2013 Evidentiary Hearing on Conn Kavanaugh's Objection to Claim" pursuant to which they submitted three additional exhibits, namely Carl Follo's testimony in Adv. P. No. 10-1133, and two portions of his testimony during litigation in the Windham County Superior Court, which litigation resulted in entry of judgment in favor of Follo and an appeal to the Vermont Supreme Court. See Follo v. Florindo, 185 Vt. 390, 970 A.2d 1230 (2009).

Following the trial, on December 18, 2013, the parties submitted proposed findings of fact and rulings of law. In addition, the Creditor submitted a brief. Approximately seventeen months later, on May 22, 2015, Judge Bailey recused himself from the claimobjection and the adversary proceeding.

On June 18, 2015, this Court conducted a status conference as to the claim objection. At the status conference, Follo withdrew his Motion for Equitable Subordination, which, in any event, had been denied by Judge Bailey. Upon inquiry from the Court as to the effect of Judge Bailey's recusal on the matter under advisement and how the parties wished to proceed, counsel for both Follo and the Creditor consented in open court to this Court's determination of the claim objection without further evidence or proceedings based upon the existing record.

The Court now makes its findings of fact and conclusions of law in accordance with Fed. R. Bankr. P. 7052. Moreover, this Court certifies that it is familiar with the entire record of proceedings and that the claim objection may be completed on the record without prejudice to the parties. See Fed. R. Bankr. P. 9028. The issue presented is whether the Creditor has sustained its burden of proof that Follo does not have an allowed claim in this bankruptcy case because of alteration of an exhibit in the Vermont litigation. For the reasons set forth below, this Court shall enter an order overruling the Creditor's Objection.

II. FACTS

A. Stipulated Facts

On November 7, 2013, Conn Kavanaugh and Follo filed a Joint Pre-Trial Memorandum in which they set forth the following admitted facts which required no proof:

1. Follo's claim (the "Claim") against . . . Morency . . . arises from a 2003transaction, whereby Follo purchased an inn and an adjoining cottage located in Rockingham, Vermont (the "Inn") from Morency and Paul Florindo for $1,245,000.00. Follo v. Florindo et al., 970 A.2d 1230, 2009 VT 11 (Supreme CT. of Vt. 2009) (the "Vermont Supreme Court Decision"); FolIo's Trial Exhibit 15, Bill of Sale.

2. Follo claims that his decision to purchase the Inn for the Purchase Price was based on his belief that the Inn generated certain levels of revenue and maintained certain occupancy rates. Vermont Supreme Court Decision at 1241, Carl Follo Trial Testimony, Jury Trial Day 1 at 97-100, 216.

3. Specifically, Follo employed a "gross revenue multiplier" approach to calculating appropriate sales prices for inns [sic]. Vermont Supreme Court Decision at 1241, Carl Follo Trial Testimony, Jury Trial Day 1 at 97-100, 216.

4. The sale of the Inn to Follo closed in March, 2003.

5. In 2004, Follo filed a complaint against Florindo, Morency, Cranberry Farm LLC, PSFM, Inc., and the real estate agents involved in the sale of the Inn in the Windham Superior Court [Docket No. 110·2·04 Wmcv], seeking, inter alia, damages based upon common law fraud and consumer fraud. Vermont Supreme Court Decision at 1235.

6. At the close of Follo's case, the Superior Court granted Morency and Florindo's motion to exclude punitive damages as a matter of law. The jury in the Windham County Superior Court awarded a judgment in favor of Follo and against Florindo and Morency for common-law fraud and violations of the Vermont Consumer Fraud Act in the amount of $645,000. The Superior Court concluded in deciding post-verdict motions that the jury award was too high. Follo accepted remittur of the damages to $295,000. The Superior Court entered final judgment against Morency and Florindo in the amount of $295,000 plus prejudgment interest, costs and attorneys' fees for a total judgment of $501,174.00 with post-judgment interest to accrue subsequent to May 4, 2007 (the "Vermont Judgment").

7. Morency and Florindo appealed the

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