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

In re STEVE C. FUSTOLO, Debtor. STEVEN C. FUSTOLO, Appellant, v. THE PATRIOT GROUP, LLC., Appellee.

Civ. Act. No. 19-10343-TSH

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

February 11, 2020

MEMORANDUM AND ORDER ON APPEAL FROM BANKRUPTCY COURT

HILLMAN, D.J.

Nature of the Proceeding

This is an appeal from a final order of the United States Bankruptcy Court for the District of Massachusetts in an adversarial proceeding brought by the Patriot Group, LLC ("Patriot") against Steven C. Fustolo ("Fustolo") granting judgment in favor Patriot and thereby denying Fustolo a discharge.

Background

In his appeal, Fustolo seeks to overturn the bankruptcy court's decision on the grounds that: (i) he was denied due process and the right to a fair trial when the bankruptcy court entered its spoliation/ Rule 37 order; (ii) he was denied due process and the right to a fair trial when Judge Feeney refused to recuse herself; (iii) the evidence did not support a judgment against him on any of the Counts; and (iv) this Court violated his due process right to fairly pursue this appeal by denying his request for an additional time to file his brief. For the reasons set forth below, Fustolo's appeal is denied and the parties' cross-motions for sanctions are denied.

FUSTOLO'S APPEAL

Discussion

In his appeal, Fustolo asserts that the bankruptcy court's decision should be overturned because (i) he was denied due process and his right to a fair trial when the bankruptcy court entered its "spoliation/Rule 37 order"; (ii) he was denied due process and his right to a fair trial when Judge Feeney refused to recuse herself; and (iii) the evidence did not support judgement against him on any of the counts. Fustolo also takes issue with the "short window of time" this Court gave him to file his brief and contends that his due process rights would be violated if the Court does not grant him an additional 60 days to file a revised brief.

Standard of Review

"A district court has jurisdiction to hear an appeal of a decision of a bankruptcy court under 28 U.S.C. § 158(a). A district court reviews a bankruptcy court decision 'in the same manner' as the court of appeals would review a district court decision. Legal conclusions are reviewed de novo, and factual findings are reviewed for clear error. '[C]onsiderable deference' is given to the 'factual determinations and discretionary judgments made by a bankruptcy judge.'" In re Wolverine, Proctor & Schwartz, LLC, 527 B.R. 809, 819 (D. Mass. 2015)(internal citations and citation to quoted case omitted).

Procedural Background

After a six day trial on the claims which remained outstanding, the bankruptcy court found against Fustolo on Counts I (11 U.S.C. § 727(a)(2)(A) which precludes the entry of discharge if debtor with intent to hinder, delay or defraud creditor transferred, removed, or concealed property of estate within one year prior to filing of petition), II (11 U.S.C. §727(a)(2)(B) which precludes entry of discharge if debtor with intent to hinder, delay or defraud creditor transferred property after filing of petition) , III (11 U.S.C. § 727(a)(3) which provides court shall grant debtor discharge unless debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers from which debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under circumstances of case) and V (11 U.S.C. § 727(a)(5)(court shall grant debtor discharge unless debtor has failed to explain satisfactorily any loss of assets or deficiency of assets to meet his liabilities). The court found in his favor on Count IV (11 U.S.C. § 727(a)(4) which provides debtor can be refused discharge if knowingly and fraudulently made false oath relating to a material fact), and did not find it necessary to address Count VIII. Accordingly, the judge denied Fustolo a discharge. In reaching her decision, Judge Feeney determined that Fustolo was not credible. She also made adverse inferences against him as a result of his failure to fully comply with discovery orders and his invocation of his Fifth Amendment right not to incriminate himself. She also made an adverse inference that had he produced the discoverable materials, the information contained therein would have been damaging. With this background, the Court will briefly review the merits of Fustolo's appeal.

Violation of Due Process Right to Fair Trial: Bankruptcy Court's Rule 37 Order

After hearing and based on his actions during the entirety of the proceedings, the judge found that Fustolo had failed to obey a discovery order and that sanctions were warranted pursuant to Rule 37(b)(2). Accordingly, the judge prohibited Fustolo from introducing at trial any document which had not been produced to Patriot prior to his deposition (which the judge had ordered). Fustolo was barred from testifying about any such documents and was prohibited from introducing any document or financial records which had been electronically prepared but were not produced in their electronic format (particularly certain documents that contained disclaimers rendering them unreliable). The judge specifically made no finding as to whether Fustolo intentionally spoliated evidence.

Fustolo's argument that the judge's order violated his right to a fair trial and forced him into a dilemma to choose between violating his Fifth Amendment rights or harm his ability to defend himself is meritless. First, he cites no legal authority in support of this argument. He also fails to document how he complied with the bankruptcy court's discovery orders (he simply suggests that some documents had been delivered to Patriot's former counsel), and fails to specify what documents and other evidence he was prohibited from presenting to the court. Other than conclusory generalizations such he was prohibited from "delivering a full-throated defense," he fails to specify how he was prejudiced by the judge's ruling. The Court will note that Judge Feeney's order was thorough and set out the factual and legal basis for her ruling and nothing in Fustolo's submissions supports a finding that she erred in making her findings of fact or that she abused her discretion when she entered her order prohibiting him from offering certain evidence at trial.

Failure of Judge Feeney to Recuse Herself

Judge Feeney denied Fustolo's motion for recusal without significant discussion, finding that it was a transparent attempt to delay the trial and avoid sanctions. More specifically, she found that her impartiality could not be reasonably questioned and that recusal was unwarranted. Fustolo contends that Judge Feeney's recusal was warranted based on her ordering him to produce documents before his deposition which in his words, "placed his Fifth Amendment rights in jeopardy."

Federal Rule of Bankruptcy Procedure 5004(a) provides that disqualification of a bankruptcy judge shall be governed by 28 U.S.C. § 455, which in turn requires recusal where the judge's "impartiality might reasonably be questioned," see 28 U.S.C. § 455(a), and where the judge actually "has a personal bias or prejudice concerning a party." See 28 U.S.C. § 455(b)(1). Under § 455(a) "disqualification is appropriate only if the facts provide what an objective, knowledgeable member of the public would find to be a reasonable basis for doubting the judge's partiality." U.S. v. Voccola, 99 F.3d 37, 41 (1^st Cir.1996). I will note that rather than citing to an official transcript or official court records/evidence in support of many of his statements and proffers regarding Judge Feeney's alleged bias, Fustolo cites to the memorandum he filed in the bankruptcy court in support of his request that Judge Feeney recuse herself. In that memorandum he purports to quote statements made by the judge during hearings. For reasons which should be obvious, citation to Fustolo's unsworn memorandum are not proper record evidence. Additionally, even if I were to give credence to the "evidence" cited by Fustolo in support of his arguments, neither the statements allegedly made by Judge Feeney nor her rulingsestablish any type of bias—instead, it is clear that she attempted to craft a ruling that satisfied both Fustolo's discovery obligations and preserve his Fifth Amendment rights.

" 'The disqualification decision [under § 455] must reflect not only the need to secure public confidence through proceedings that appear impartial, but also the need to prevent parties from too easily obtaining the disqualification of a judge, thereby potentially manipulating the system for strategic purposes.' " In re Bulger, 710 F.3d 42, 47 (1^st Cir.2013) (quoting In re Allied-Signal Inc., 891 F.2d 967, 970 (1^st Cir.1989) (emphasis in original)). Because I find that Judge Feeney's appearance of impartiality cannot reasonably be questioned, I also find that she did not have an actual personal bias or prejudice concerning the parties. See In re Martinez-Catala, 129 F.3d 213, 220 (1^st Cir.1997) (finding discussion of plaintiffs' 455(b)(1) argument unnecessary because 455(a) "covers the same ground and reaches even further"). "[A] judge must avoid yielding in the face of unfounded insinuations." In re U.S., 158 F.3d 26, 35 (1^st Cir. 1998). On the record before me, I find that Judge Feeney did not abuse her discretion by refusing to recuse herself. See In re Bulger, 710 F.3d at 45 (on appeal, court enquires only whether lower court judge abused his/her discretion in declining to recuse; abuse of discretion will be found only reasonable reading of record fails to support conclusion that judge's impartiality was not subject to question).

Whether Bankruptcy Court Decision was against Weight of Evidence

Fustolo asserts that the bankruptcy court's order must be overturned because the there is insufficient evidence to support a finding against him on Counts I-III and V. More specifically, h...