Patriot Grp. v. Fustolo (In re Fustolo), Case No. 13-12692-JNF

• Decision Date: 04 February 2019
• Docket Number: Adv. P. No. 14-1193,Case No. 13-12692-JNF
• 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

597 B.R. 1

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 February 4, 2019

Howard P. Blatchford, Jr., Jager Smith PC, Michael J. Fencer, Casner & Edwards, LLP, Jonathan Horne, Murtha Cullina LLP, David Himelfarb McCarter & English, 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.

Evan Fray-Witzer, Ciampa Fray-Witzer, Martin P. Desmery, William R. Moorman, Jr., Partridge Snow & Hahn, LLP, Boston, MA, Travis McDermott, Partridge Snow & Hahn LLP, Providence, RI, David M. Nickless, James L. O'Connor, Jr., Susan H Christ, 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 Complaint filed by The Patriot Group, LLC (the "Plaintiff" or "Patriot") against Steven C. Fustolo ("Fustolo," the "Defendant," or the "Debtor").¹ The Court conducted a six-day trial commencing on May 23, 2016 and concluding on June 23, 2016. At the trial, six witnesses testified and 37 exhibits were admitted into evidence. Both before, during, and after the trial, the parties filed numerous discovery-related motions with respect to proposed trial exhibits and the testimony of witnesses. In addition, on September 12, 2016, 17 days after the filing of the parties' post-trial submissions, Patriot filed a Motion to Conform the Pleadings to the Evidence (the "Motion to Conform"), which the Debtor opposed. Through its Motion, Patriot sought 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 (the "December 31st Order").²

On January 9, 2017, this Court granted Patriot's Motion to Conform and issued a decision in which it concluded that, pursuant to Fed. R. Civ. P. 15(b)(2), made applicable to the proceeding by Fed. R. Bankr. P. 7052, it was required to treat Patriot's claim under 11 U.S.C. § 727(a)(6)(A) as if it were raised in the Complaint, and that Fustolo's refusal to obey the December 31st Order warranted denial of his discharge under § 727(a)(6)(A). The Court also determined that the remaining counts in the Complaint were moot. See The Patriot Grp., LLC v. Fustolo (In re Fustolo), 563 B.R. 85, 113 (Bankr. D. Mass. 2017).³ The United States District Court for the District of Massachusetts affirmed this Court's January 9, 2017 decision on September 6, 2017, see Fustolo v. The Patriot Grp., LLC, No. 17-CV-10128-LTS, 2017 WL 3896667 (D. Mass. Sept. 6, 2017), but the United States Court of Appeals for the First Circuit, on July 16, 2018, reversed this Court's order granting the Motion to Conform. While concluding that "Fustolo did not receive adequate notice of an unpleaded claim, and did not provide his implied consent," the First Circuit remanded for further proceedings. See Fustolo v. The Patriot Grp., LLC, 896 F.3d 76, 90 (1st Cir. 2018).

One week after the First Circuit's decision, Patriot, on July 23, 2018, filed a Motion for Reconsideration of Order in Light of Appellate Decision, seeking relief from the Court's January 9, 2017 Order deeming moot the counts pled in its Complaint for denial of the discharge. The Defendant opposed the Motion. On September 6, 2018, this Court entered an order treating Patriot's Motion as a "Motion for Clarification of the Memorandum and Order dated January 9, 2017 (Doc. Nos. 323 and 324) (jointly, the "Rulings") as no reconsideration or relief from the Rulings with respect to Counts I through V and VIII in the Plaintiff's Complaint is warranted under Fed. R. Civ. P. 59 or Fed. R. Civ. P. 60(b), made applicable hereto by Fed. R. Bankr. P. 9023 and Fed. R. Bankr. P. 9024, respectively." This Court stated:

The Court clarifies that it did not, and did not intend to, dismiss, dispose of, or adjudicate the remaining counts of the Plaintiff's Complaint, namely Counts I through V and VIII (the "Remaining Counts") through the Rulings. Rather, the Court merely determined that it was unnecessary to adjudicate the Remaining Counts as to do so would be superfluous because the Court entered judgment in favor of the Plaintiff on the added claim under 11 U.S.C. § 727(a)(6) pursuant to the Plaintiff's Motion to Conform the Pleadings to the Evidence (Doc. No. 308). The Court's Rulings that the Remaining Counts were moot reflects the Court's determination that they no longer presented a justiciable controversy because issues involved in their resolution were academic in light of the denial of the Debtor's discharge. See generally Black's Law Dictionary 909 (5th ed. 1979). See e.g.,JP Morgan Chase Bank v. Koss (In re Koss), 403 B.R. 191, 215 (Bankr. D. Mass. 2009) (after denying the debtor's discharge for false oath under 11 U.S.C. § 727(a)(4)(A), the Court "dismissed as moot" the remaining §§ 523 and 727 counts in the complaint). To the extent the Court is required to "correct" the record, it has authority to do so pursuant to Fed. R. Civ. P. 60(a).

In light of the Opinion issued by the United States Court of Appeals for the First Circuit on July 16, 2018, through which it "REVERSE[D] the bankruptcy court's order and REMAND[ED] for further proceedings consistent with this opinion" and "[took] no position as to the merits of any remaining claims and [left] such further analysis to the bankruptcy court[,]" this Court will adjudicate the Remaining Counts on the merits.

Docket No. 381. Accordingly, as a result of the decision of the United States Court of Appeals for the First Circuit and this Court's order of September 6, 2018, the Court now makes its findings of fact and conclusions of law in accordance with Fed. R. Bankr. P. 7052 with respect to Counts I, II, III, IV, V and VIII of the Complaint.

During the trial, the Court precluded Fustolo from submitting certain evidence. In determining the "Plaintiff's Rule 37 Motion Concerning Defendant Steven C. Fustolo's Spoliation of Purported ‘Books and Records’ and Late Production of Documents," this Court, on May 18, 2016, entered the following order:

Upon consideration of the Plaintiff's Rule 37 Motion (# 196), the Defendant's Objection, the arguments of counsel at the hearing held on May 17, 2016, the Court's orders dated December 31, 2015 and March 17, 2016, the Defendant's failure to comply with the December 31, 2015 order, and the entire record of proceedings in this adversary proceeding, the Court finds that the Defendant has not obeyed a discovery order and that sanctions are warranted under Rule 37(b)(2). The Motion is allowed in part and denied in part. Pursuant to Fed. R. Civ. P. 37(b)(2)(A)(ii), the Court prohibits the Defendant from introducing at trial any document, whether in electronic or paper form, which was not produced to the Plaintiff prior to the Defendant's deposition as ordered by the Court in the December 31, 2015 order. Moreover , the Defendant is prohibited from introducing into evidence at trial any documents or financial records which were electronically prepared and were produced in printed or paper form to the Plaintiff where the Defendant did not produce those documents in their electronic format, particularly, where certain documents produced contain disclaimers ("Steven Fustolo takes NO RESPONSIBILITY for the accuracy of the enclosed balance sheet, which he has created solely for the benefit of and as a courtesy to the Chapter 7 trustee, without representation as to its accuracy.") rendering them unreliable. In addition, the Court prohibits the Defendant from testifying about or introducing any documents which were not produced to the Plaintiff prior to his deposition , as ordered in the December 31, 2015 order. The Court makes no finding with respect to whether the Defendant intentionally spoliated his electronic books and records.⁴

(emphasis supplied).

II. BACKGROUND

As evident from the procedural matters set forth above, the Debtor's Chapter 7 case and this adversary proceeding have been marked by contention between the Debtor and Patriot. Indeed, the Debtor's bankruptcy case was commenced by the filing of an involuntary petition by Patton Drive, Patriot, and Richard Mayer on May 6, 2013, which the Debtor vigorously contested. On December 16, 2013, this Court, in ruling on cross-motions for summary judgment, refused to dismiss the involuntary petition and entered an order for relief. See In re Fustolo, 503 B.R. 206 (Bankr. D. Mass. 2013), aff'd, 2015 WL 4876075 (D. Mass. Feb. 17, 2015), aff'd , 816 F.3d 1 (1st Cir. 2016).

On January 17, 2014, Fustolo filed sworn Schedules, a Statement of Financial Affairs and other required documents. On August 14, 2014, he filed amended Schedules B, D, F, and H and an amended Statement of Financial Affairs. On Amended Schedule B–Personal Property, he listed a "Possible whistleblower recovery" with an unknown value. Throughout the course of this litigation, the so-called "Whistleblower Claims" have been a shorthand reference to claims against Patriot which Fustolo asserts he made to the Internal Revenue Service ("IRS") and the Securities and Exchange Commission ("SEC") based upon what he states in his Post-Trial Memorandum, was 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."⁵

As noted above, Patriot and Patton Drive filed a Complaint against Fustolo on September 30, 2014. The Court summarized their allegations in In re Fustolo, 2015 WL 9595421 at *2–3. 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 for filing a Joint Pretrial Memorandum. The discovery process in this proceeding...