United States District Court, D. Massachusetts
IN RE STEVEN C. FUSTOLO, DEBTOR
THE PATRIOT GROUP, LLC, Appellee/Creditor. STEVEN C. FUSTOLO, Appellant/Debtor,
Sorokin, United States District Judge.
Steven C. Fustolo appeals a bankruptcy court's January 9,
2017, Order entering judgment in favor of Appellee/Creditor
The Patriot Group, LLC (“Patriot”). For the
reasons that follow, the Order is AFFIRMED.
Events Preceding the Order Under Review
2011, Patriot obtained a state court judgment against Fustolo
of over $20 million. Doc. 19-2 at 3. On May 6, 2013, Patriot
and other creditors filed an involuntary bankruptcy petition
against Fustolo. Id. at 3-4. On September 30, 2014,
Patriot filed a complaint against Fustolo seeking a denial of
discharge of his debt in bankruptcy, under numerous sections
of the Bankruptcy Code, including 11 U.S.C. § 727(a)(3),
which allows for such denial if the debtor has, without
justification, “concealed, destroyed, mutilated,
falsified, or failed to keep or preserve any recorded
information . . . from which the debtor's financial
condition or business transactions might be ascertained,
” and § 727(a)(4), which allows for denial of
discharge if the debtor “knowingly and fraudulently, in
or in connection with the case[, ] made a false oath or
account.” Id. at 4; see also Appendix
(Doc. 16-1; hereinafter “A.”) at 103.
December 31, 2015, in response to a motion Patriot filed to
compel production of documents, the bankruptcy court issued
an Order (“December 31st Order”) for Fustolo to
produce non-privileged emails and financial statements to
Patriot. Doc. 19-1 at 15-16. Moreover, in response to
Fustolo's argument that being compelled to produce
certain documents would violate his Fifth Amendment right
against self-incrimination, the bankruptcy court ordered him
to “provide the Court for its in camera
inspection only . . . copies of all emails and documents he
asserts are protected, ” along with a log explaining
why production of each document would be incriminating.
Id. The bankruptcy court stated that it would then
determine whether Fustolo had properly invoked his Fifth
Amendment privilege. Id. at 17. The court further
stated that Fustolo's in camera submissions
would “not constitute a waiver of his Constitutional
right against self-incrimination.” Id.
filed two requests to extend his time to comply with the
December 31st Order, both of which Patriot opposed. A. 17. In
support of one of these requests, Fustolo stated he
“ha[d] personally commenced the process necessary to
fully comply with this court's order.” Doc. 19-2 at
17. The bankruptcy court allowed each request. A. 17. On
January 26, 2016, the bankruptcy court ordered that Fustolo
would have until February 1, 2016, to comply. Id.
Nevertheless, Fustolo did not file his in camera
submission until February 5, 2016. Id. at 20.
late in camera submission did not comply with the
December 31st Order: Fustolo told the bankruptcy court he
would not submit, even in camera, certain materials
he had been ordered to produce, again invoking his Fifth
Amendment right against self-incrimination. Doc. 19-2 at 19.
Moreover, the log accompanying the records Fustolo submitted
was “not in compliance” with the Order.
Id. at 18.
February 16, 2016, Patriot filed a motion for sanctions for
failure to obey the December 31st Order and for alleged email
spoliation. See id. at 20; A. 18. Fustolo opposed
the motion, and on March 17, 2016, the bankruptcy court held
a hearing on it. Doc. 19-2 at 21.
hearing, Fustolo's lawyer agreed with the bankruptcy
court's description of the sequence of events, i.e.,
“two motions to extend time, which were granted, . . .
followed by an in-camera submission that said
‘We're not complying with the order[.]'”
Doc. 19-3 at 31. The lawyer said Fustolo was “asserting
his Fifth Amendment right over the act of production of
[certain] documents.” Id. The bankruptcy court
asked why it had gone through “a painstaking effort to
protect” Fustolo's Fifth Amendment rights
“with an in-camera submission, ” only to have
Fustolo refuse to comply. Id. Fustolo's lawyer
answered: “The only reason I'm aware of is the
overriding concern that Your Honor is the finder of fact in
this case and that by producing documents to Your Honor,
whether they're reviewed in camera or not, would
implicate his Fifth Amendment rights.” Id.;
see also id. at 32 (lawyer noting Fustolo's
“concern” about “the potential for an
the hearing, the bankruptcy judge “dictate[d] [her]
ruling” allowing the motion for sanctions.
Id. at 40. The bankruptcy judge found that Fustolo
“ha[d] chosen not to obey” the December 31st
Order “in refusing to comply with it and in refusing to
comply with the protocols that I had established.”
Id. at 42. She further stated: “The Court is
mindful that [Fustolo] may well be in contempt of court, but
that is not before me today. That issue may be raised by
Patriot or by the Court at a later date.” Id.
The bankruptcy court found Fustolo had violated the December
31st Order by failing to produce certain non-privileged
emails to Patriot, either “intentionally” or
because they had been deleted, and by “refus[ing] to
comply with the terms” of the Order that provided for
in camera submission. Id. at 43-44. The
judge stated that the in camera “framework and
the protocol were based on well-settled case law and [she]
designed it to protect [Fustolo's] rights against
self-incrimination, ” but Fustolo had instead
“unilaterally determined that he wasn't
complying.” Id. at 44. The court said it was
not Fustolo's “call” whether to comply with
the December 31st Order, and that his failure to comply was
“in furtherance of a scheme to delay this litigation
and legitimate discovery.” Id. at 44-45.
Court imposed all of Patriot's requested sanctions,
including an accelerated trial date of May 23, 2016, and an
order prohibiting Fustolo from presenting at trial any emails
that he had not already produced. Id. at 45. The
court found Patriot's requested sanctions “more
than reasonable and, indeed, . . . far less drastic than
sanctions that may well be warranted under the circumstances
of this case.” Id. Specifically, the Court
noted that “Patriot d[id] not seek a default
parties' Joint Pretrial Memorandum, Patriot stated that
“Fustolo's discovery misconduct in this proceeding,
including but not limited to Fustolo's spoliation of
evidence, ” would be among the “fact issues for
trial” A. 205-07. On May 23, 2016, the first day of
trial, Patriot's counsel said during his opening
statement that the evidence would “show that Mr.
Fustolo has repeatedly abused the bankruptcy process,
violated this Court's orders, [and] failed to preserve
evidence.” Id. at 391. The bankruptcy judge
then asked counsel whether Patriot had a “count under
Section 727(a)(6)” of the Bankruptcy Code, which allows
for the denial of discharge in bankruptcy when the debtor has
“refused . . . to obey any lawful order of the court,
other than an order to respond to a material question or to
testify.” Id.; 11 U.S.C. § 727(a)(6)(A).
Patriot's counsel responded, “No. We don't have
an (a)(6) claim, Your Honor.” A. 391.
fourth day of trial, June 14, 2016,  Patriot's attorney asked
Fustolo if he recalled that in December 2015, “the
Court entered an order in which you were to provide the Court
in camera documents that you contend[ed] you were withholding
based on the Fifth Amendment privilege.” Id.
at 628. Fustolo answered that he recalled the Order.
Id. Patriot's attorney replied, “You never
produced those documents to the Court, did you?”
Id. at 629. Fustolo answered, “My attorney
supplied them to the Court, yes.” Id.
Patriot's attorney then explained that under the December
31st Order, “there was a protocol that you were
supposed to follow in terms of providing documents withheld
on Fifth Amendment grounds, as well as a log of
documents.” Id. Following this explanation,
the attorney asked, “Sir, do you know whether you
complied with that order?” Id. Fustolo
answered, “Sir, I relied on my counsel who believed
that - that compliance had been adhered to.”
Id. A bit later, Patriot's attorney asked
Fustolo whether he was “telling the Court right now
under oath that [he] supplied all documents withheld on the
Fifth Amendment privilege to the Court[.]” Id.
at 630. Fustolo responded that he “relied on my counsel
for that, so whatever they said we complied with, we complied
with.” Id. This entire exchange occurred
without objection from Fustolo's trial counsel.
concluded on June 23, 2016, with counsel for both sides
stating that they intended to file post-trial memoranda. Doc.
19-2 at 30. The parties filed their memoranda on August 26,
2016. A. 37. “In its post-trial memorandum, Patriot
indicated that it would seek, by separate motion, pursuant to
Fed.R.Civ.P. 15(b)(2) and Fed.R.Bankr.P. 7015, to conform the
pleadings to the evidence to allow it to assert a claim ...