IN RE: STEVEN FUSTOLO, Debtor.
THE PATRIOT GROUP LLC, Appellee. STEVEN FUSTOLO, Appellant,
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS [Hon. Leo T. Sorokin, U.S. District Judge]
P. Desmery, with whom Travis J. McDermott and Partridge Snow
& Hahn, LLP were on brief, for appellant.
I. Siegal, with whom Gordon & Rees Scully Mansukhani was
on brief, for appellee.
Torruella, Thompson, and Kayatta, Circuit Judges.
TORRUELLA, Circuit Judge.
trial on The Patriot Group, LLC's ("Patriot")
adversary complaint requesting denial of the discharge in
bankruptcy of Steven Fustolo's ("Fustolo")
debt, the bankruptcy court allowed Patriot's motion to
amend its pleadings and denied Fustolo's discharge
pursuant to the newly added claim. Fustolo seeks reprieve
from his encumbrance, imploring us to reverse the bankruptcy
court's judgment and remand the case for reconsideration
in light of the issues pleaded in Patriot's complaint.
Because we find that the allowance of this belated amendment
fails to satisfy the prescripts of due process underlying
Rule 15(b)(2) and was therefore an abuse of discretion, we
grant Fustolo's request.
FACTUAL AND PROCEDURAL BACKGROUND
begin by charting the course of this case, as supportably
summarized by the district court and undisputed by the
parties. See Fustolo v. The Patriot
Group, LLC (In re Fustolo), No.
17-cv-10128-LTS, 2017 WL 3896667, at *1-5 (D. Mass. Sept. 6,
2017). After obtaining a $20.5 million dollar judgment
against Fustolo from the Massachusetts Superior Court two
years earlier, Patriot and two other petitioning creditors
filed a contested involuntary petition for relief under
Chapter 7 of the Bankruptcy Code in May 2013 against Fustolo.
On December 16, 2013, the bankruptcy court allowed the
petition for relief. 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).
September 30, 2014, Patriot and another petitioning creditor
filed an adversary complaint requesting denial of
Fustolo's discharge in bankruptcy pursuant to 11 U.S.C.
§ 727(a)(2)(A), (a)(2)(B), (a)(3), (a)(4), (a)(5), and,
in the alternative, that the court declare Fustolo's debt
non-dischargeable pursuant to 11 U.S.C. § 523(a)(2),
(a)(4). Among other things, the complaint alleged that
Fustolo engaged in fraudulent transactions as to both
creditors; deliberately created a corporate web to conceal
fraudulent activities; made substantial pre-petition
transfers to his wife; made unexplained cash transactions
within one year of the involuntary petition; made substantial
transfers to insiders and affiliates; concealed, destroyed,
or failed to keep business records from which the creditors
could ascertain the financial condition of Fustolo's
business transactions; and made false statements during
November 2015, Patriot filed a motion to compel Fustolo to
provide emails and financial records that Patriot alleged
were being wrongfully withheld. In a contested hearing on
Patriot's motion, Fustolo argued that his emails had been
deleted by his email account provider and were therefore
irretrievable, and that, in any event, many of them were
protected from production by the Fifth Amendment's right
December 31, 2015, the bankruptcy court issued an order (the
"December 31 Order") for Fustolo to produce
non-privileged emails and financial account statements to
Patriot, and in consideration of Fustolo's Fifth
Amendment rights, to "provide the Court for its in
camera inspection only . . . copies of all emails and
documents he asserts are protected under the Fifth Amendment,
along with two separate item by item indexes" (the
"Protocol"). The bankruptcy court stated that it
would determine whether the privilege had been properly
invoked, and added that submission of the emails and
financial statements "shall not constitute a waiver of
[Fustolo's] Constitutional right against
self-incrimination." In the court's accompanying
memorandum, it noted that Fustolo's contention about the
email provider's deletion of emails was "devoid of
merit," and that if Fustolo was "unable to produce
emails, it can only mean that he deleted them." 50
Patton Drive, LLC v. Fustolo (In
re Fustolo), No. 13-12692-JNF, 2015 WL 9595421, at *4
(Bankr. D. Mass. Dec. 31, 2015).
being granted two extensions of time to comply with the
December 31 Order, on February 5, 2016, Fustolo filed a
motion to impound submission regarding his assertion of the
Fifth Amendment, in which he stated that he was not complying
with the December 31 Order by refusing to submit emails.
Patriot subsequently filed a motion for sanctions against
Fustolo pursuant to Fed.R.Civ.P. 37 for failing to comply
with the December 31 Order and for alleged email spoliation.
The bankruptcy court held a hearing on Patriot's motion
on March 17, 2016,  at which Patriot requested as sanctions:
that the bankruptcy court set an expeditious trial date; that
Fustolo be required to submit to a deposition; and an order
that Patriot was "not going to get dumped on with emails
on the eve of trial." In response, Fustolo again
responded that production of emails and documents for in
camera inspection would violate his Fifth Amendment
rights in light of the "overriding concern that [the
bankruptcy court] is the finder of fact in this case."
The court made clear at the hearing that it had "gone to
great lengths to protect Mr. Fustolo's right to invoke
the Fifth Amendment," but that Fustolo had "refused
to comply . . . without legitimate reason." In addition,
the court found that Fustolo failed to comply with the
December 31 Order by deleting emails that he had not claimed
to be privileged or refusing to provide them to Patriot, and
by failing to comply with the Protocol. See id.
Accordingly, the court granted Patriot's motion for
sanctions, prohibited Fustolo from presenting any emails not
previously produced, and scheduled the trial to commence on
May 23, 2016.
his deposition, Fustolo provided to Patriot paper print outs
of what he claimed were his "books and records,"
but refused to produce the electronic spreadsheets from which
the information was derived, repeatedly invoking the Fifth
Amendment right against self-incrimination. Fustolo further
invoked his Fifth Amendment right when asked if he
intentionally deleted his electronic spreadsheets. On May 10,
2016, Patriot again moved for sanctions pursuant to
Fed.R.Civ.P. 37, seeking a pretrial ruling that Fustolo had
spoliated the electronic financial records, and a court order
barring Fustolo from introducing into evidence any documents
or financial records not produced in their original
electronic format. On May 18, 2016, the bankruptcy court
granted Patriot's motion in part and denied it in part,
prohibiting Fustolo from introducing any evidence not
provided prior to his deposition, but refraining from making
a finding as to whether Fustolo intentionally spoliated his
books and records.
Joint Pretrial Memorandum ("JPM"), Patriot included
"Fustolo's discovery misconduct in this proceeding,
including but not limited to Fustolo's spoliation of
evidence" among its "fact issues for trial."
Fustolo did not file an objection to the inclusion of this
issue. Three days before trial, Patriot filed a request for
the bankruptcy court to take judicial notice of several
documents, including: 1) the December 31 Order; 2) the
December 31 accompanying memorandum; 3) the transcript of the
March 17, 2016 hearing; 4) the court's May 18, 2016 order
on Patriot's motion for a spoliation inference. The court
allowed the request with no objection from Fustolo.
started on May 23, 2016. The court began by reciting the
allegations in the complaint: that Patriot had an objection
to discharge of Fustolo's debt under 11 U.S.C. §
727(a)(2)(A) as Count I, § 727 (a)(2)(B) as Count II,
§ 727 (a)(3) as Count III, § 727 (a)(4) as Count
IV, and § 727 (a)(5) as Count V; and that Patriot
further alleged that Fustolo's debt was non-dischargeable
under § 523(a)(2)(A) as Count VIII. The parties
confirmed that there were no amendments. In Patriot's
opening statement, Patriot's counsel offered that the
evidence would "show that Mr. Fustolo ha[d] repeatedly
abused the bankruptcy process, violated this Court's
orders, [and] failed to preserve evidence." The
bankruptcy court immediately asked whether Patriot had a
claim under § 727(a)(6), and counsel stated that Patriot
14, 2016, the fourth of six days of trial, during
Fustolo's testimony, Patriot's counsel questioned him
about his compliance with the December 31 Order. The
following exchange took place:
COUNSEL: In December of 2015 the Court entered an order in
which you were to provide the Court in camera documents that
you contend you were withholding based on the Fifth Amendment
privilege. Do you recall that?
FUSTOLO: I do, yes.
COUNSEL: You never produced those documents to the Court, did
FUSTOLO: My attorney supplied them to the Court, yes.
COUNSEL: I don't believe that you followed - 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. Sir, ...