Patriot Grp., LLC v. Fustolo (In re Fustolo)

• Citation: 563 B.R. 85
• Decision Date: 09 January 2017
• Docket Number: Case No. 13–12692–JNF,Adv. P. No. 14–1193
• Parties: IN RE Steven C. FUSTOLO, Debtor The Patriot Group, LLC, Plaintiff v. Steven C. Fustolo, Defendant
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

563 B.R. 85

IN RE Steven C. FUSTOLO, Debtor

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 January 9, 2017

David Himelfarb, McCarter & English, LLP, Michael Paris, Nystrom Beckman & Paris LLP, Jack I. Siegal, Devine Millimet & Branch, PA, Boston, MA, Katherine Mayer, McCarter & English LLP, Wilimington, DE, Jeffrey Testa, McCarter & English LLP, Newark, NJ, for Plaintiff.

Susan H. Christ, David M. Nickless, James L. O'Connor, Jr., Nickless, Phillips and O'Connor, Fitchburg, MA, Martin P. Desmery, Patridge, Snow & Hahn, LLP, Evan Fray–Witzer, Ciampa Fray–Witzer, Boston, MA, Travis McDermott, Partridge Snow & Hahn LLP, Providence, RI, for Defendant.

MEMORANDUM

Joan N. Feeney, United States Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is the Motion of the plaintiff, The Patriot Group, LLC ("Patriot") to Conform the Pleadings to the Evidence (the "Motion to Conform"). Patriot seeks, pursuant to Fed. R. Civ. P. 15(b)(2), made applicable hereto by Fed. R. Bankr. P. 7015, to conform its Complaint filed against the debtor, Steven C. Fustolo ("Fustolo," the "Debtor," or the "Defendant"), to the evidence to assert a claim and obtain judgment against Fustolo for denial of his discharge pursuant to 11 U.S.C. § 727(a)(6) based on his refusal to comply with this Court's Order dated December 31, 2015. Fustolo opposes the Motion to Conform which was filed nearly three months following the conclusion of the trial. Many of the facts and issues pertinent to the Motion to Conform are set forth in this Court's Memorandum issued in this proceeding on December 31, 2015 (the "Memorandum"), see 50 Patton Drive, LLC v. Fustolo (In re Fustolo), Adv. Pro. No. 14–1193, 2015 WL 9595421 (Bankr. D. Mass. Dec. 31, 2015), and this Court's Order of even date (the "December 31st Order" or the "Order"), which are incorporated herein by reference. Determination of the Motion to Conform requires a review of additional relevant facts, as supplemented by the events which occurred after the entry of the December 31st Order.¹

II. BACKGROUND AND PROCEDURAL HISTORY

In March 2007, Fustolo, through business entities he owned and controlled, sought to develop property located in Revere, Massachusetts (the "Revere Beach property"). On March 29, 2007 one of these entities, Revere Beach Holdings, LLC, borrowed $12.7 million from Patriot which loan was secured by a mortgage on the Revere Beach property and was personally guaranteed by Fustolo. In 2008, Revere Beach Holdings defaulted on the obligation and foreclosure proceedings ensued. Patriot obtained a judgment against Fustolo on May 27, 2011 from the Massachusetts Superior Court for Middlesex County in the approximate amount of $20.5 million. On May 6, 2013, Patriot, 50 Thomas Patton Drive, LLC ("Patton Drive") and Richard Mayer, as petitioning creditors, filed an involuntary petition against Fustolo seeking the entry of an order for relief under Chapter 7. Fustolo contested the involuntary petition. On December 16, 2013, the Court entered the order for relief. See In re Fustolo, 503 B.R. 206 (Bankr. D. Mass. 2013), aff'd , Fustolo v. 50 Thomas Patton Drive, LLC, 816 F.3d 1 (1st Cir. 2016). Harold B. Murphy was thereafter appointed the Chapter 7 Trustee (the "Trustee").

On January 17, 2014, Fustolo filed sworn Schedules, a Statement of Financial Affairs and other required documents. On August 14, 2014, he filed an amended Schedule B–Personal Property, in which he listed a "Possible whistleblower recovery" of an unknown value. Throughout the course of this litigation, the so-called "Whistleblower Claims" have been a reference to claims which Fustolo asserts he made to the Internal Revenue Service and the Securities and Exchange Commission based upon a "reasonable belief that there had been a possible violation by Patriot of federal tax law and provisions of the Securities and Exchange Commission statute." See Fustolo's Post-trial Memorandum at p. 16.

Patriot, together with Patton Drive, timely filed a 62–page, eight count Complaint against Fustolo on September 30, 2014, seeking exceptions to the discharge of Fustolo's debt to them and the denial of his discharge pursuant to 11 U.S.C. §§ 523 and 727. Initially, Patriot and Patton Drive were represented by the law firm of Jager Smith P.C. ("Jager Smith"), which filed the Complaint on their behalf. On May 28, 2015, Jager Smith filed a Motion to Withdraw as Counsel to Patriot, which the Court allowed on June 2, 2015, and Patriot retained new counsel. On October 28, 2015, Patton Drive filed a Motion to Dismiss its Claims against Fustolo, consisting of Counts VI and VII, which the Court allowed on November 5, 2015, without prejudice to the rights of Patriot.

Patriot alleged in its Complaint that Fustolo "established and continued to utilize a multi-layered conglomeration of juridical entities and trusts that in relationship to the Debtor's past and present business activities is unnecessarily complex and, upon information belief, intentionally established and utilized to assist the Debtor in concealing his assets from creditors" and promoting fraud. Through the Complaint, Patriot further alleged the existence of numerous transfers by Fustolo to his spouse and his constructive ownership of her deposit accounts; numerous cash transactions within one year of the petition date; and substantial transfers to and from insiders and the entities controlled by him. Patriot also alleged that, as of the petition date, Fustolo was entitled to receive royalties and writing fees from one or more publishers of educational materials for accountants and tax professionals for his authorship of educational materials. The Debtor, however, as alleged by Patriot, instructed the publishers to make payments to entities which were his instrumentalities and alter egos. Patriot alleged that these transfers of royalties constituted actual and/or constructive concealment of Fustolo's property. In addition, it complained of "[u]nauthorized and [n]efarious [p]ostpetition [t]ransfers ... [;] [l]ack of [r]ecords [c]oncerning [a]ssets, [d]ebts and [b]usiness [a]ffairs" as well as false statements and oaths during his bankruptcy case. 50 Patton Drive, LLC v. Fustolo (In re Fustolo), 2015 WL 9595421 at *2–3 (Bankr. D. Mass. Dec. 31, 2015).

Based upon the foregoing allegations, Patriot set forth the following counts: Count I—Objection to Discharge (11 U.S.C. § 727(a)(2)(A) ); Count II—Objection to Discharge (11 U.S.C. § 727(a)(2)(B) ); Count III—Objection to Discharge (11 U.S.C. § 727(a)(3) ); Count IV—Objection to Discharge (11 U.S.C. § 727(a)(4) ); Count V—Objection to Discharge (11 U.S.C. § 727(a)(5) ); and Count VIII—Nondischargeability of Patriot Claim (11 U.S.C. § 523(a)(2) ).²

On November 13, 2014, the Court issued a Pretrial Order (the "Pretrial Order") which, among other things, provided deadlines for the completion of discovery and requirements for filing a joint pretrial memorandum. The Pretrial Order, in part, provided: "The parties are ordered to file ... a Joint Pretrial Memorandum approved by all counsel .., which shall set forth the following: ... (I) The issues of fact which remain to be litigated (evidence at trial shall be limited to these issues)...." Despite the case management procedures set forth in the Pretrial Order, the discovery process in this proceeding was lengthy, complex and the subject of numerous contentious disputes between the parties marked by obvious hostility. The Court conducted hearings and extended the deadlines set forth in the Pretrial Order on several occasions during the lengthy pretrial phase.

On June 15, 2015, Patriot filed a Motion for Partial Summary Judgment (the "Motion for Summary Judgment"), through which it argued that it was entitled to judgment on Count IV of the Complaint (§ 727(a)(4) ) based on Fustolo's knowing and fraudulent false oath in connection with listing the Whistleblower Claims on his Amended Schedule B. Patriot alleged that the Whistleblower Claims did not exist, were never filed with the IRS or SEC, and were concocted by Fustolo to gain leverage over Patriot in his bankruptcy case. Further, it maintained, Fustolo engaged in a campaign of cyber harassment against Patriot as a way to give credence to the Whistleblower Claims. On September 11, 2015, the Court denied the Motion for Summary Judgment, finding that Patriot failed to establish the absence of genuine issues of material fact. See 50 Patton Drive, LLC v. Fustolo (In re Fustolo), 537 B.R. 55, 63 (Bankr. D. Mass. 2015).

As discussed in further detail below, on March 17, 2016, the Court imposed an expeditious trial date as a sanction against Fustolo pursuant to Fed. R. Civ. P. 37 for his failure to comply with the Court's December 31st Order concerning production of documents and materials Fustolo claimed were privileged under the Fifth Amendment to the United States Constitution. Two months later, the Court conducted a six-day trial on the Complaint on May 23, 24 and 26 and June 14, 15, and 23, 2016. The parties filed their post-trial memoranda on August 26, 2016. Patriot asserted in its memorandum that it would be filing a separate motion, pursuant to Fed. R. Civ. P. 15 and Fed. R. Bankr. P. 7015, to amend its Complaint to conform to the evidence to add a claim for denial of discharge under § 727(a)(6), based on Fustolo's willful refusal to comply with the December 31st Order. On September 12, 2016, Patriot filed the Motion to Conform pursuant to Rule 15(b)(2), which allows an unpleaded claim to be considered when it is tried by express or implied consent. Fustolo filed an Objection.

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(a) and (b) and the order of reference from the United States District Court for the District of Massachusetts in District Court Local Rule 201. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J)...