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In re Fustolo

United States District Court, D. Massachusetts

September 6, 2017

THE PATRIOT GROUP, LLC, Appellee/Creditor. STEVEN C. FUSTOLO, Appellant/Debtor,


          Leo T. Sorokin, United States District Judge.

         Appellant/Debtor 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.

         I. BACKGROUND

         A. Events Preceding the Order Under Review

         In May 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.

         On 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. (footnote omitted).

         Fustolo 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.

         Fustolo's 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.

         On 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.

         At the 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 adverse inference”).

         After 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.

         The 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 judgment.” Id.

         In the 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.

         On the fourth day of trial, June 14, 2016, [1] 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.

         Trial 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 ...

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