Fustolo v. Patriot Grp. LLC (In Re Fustolo)Fustolo v. Patriot Grp. LLC (In Re Fustolo)
Martin P. Desmery, with whom Travis J. McDermott and Partridge Snow & Hahn, LLP were on brief, for appellant.
Jack I. Siegal, with whom Gordon & Rees Scully Mansukhani was on brief, for appellee.
I. FACTUAL AND PROCEDURAL BACKGROUND
We 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).
On September 30, 2014, Patriot and another petitioning creditor filed an adversary complaint requesting denial of Fustolo‘s discharge in bankruptcy pursuant to
In 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 against self-incrimination.1
On December 31, 2015, the bankruptcy court issued an order (the “December 31 Order“) for Fustolo to produce nonprivileged 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
After 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
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.
During 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
In a 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
Trial 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
bankruptcy process, violated this Court‘s orders, [and] failed to preserve evidence.” The bankruptcy court immediately asked whether Patriot had a claim under
On June 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 you?
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, do you know whether you complied with that order?
FUSTOLO: Sir, I relied on my counsel who believed that -- that compliance had been adhered to.
. . .
COUNSEL: Are you telling the Court right now under oath that you supplied all the documents withheld on the Fifth Amendment privilege to the Court?
FUSTOLO: Sir, I relied on my counsel for that, so whatever they said we complied with, we complied with.
At no point did Fustolo‘s trial counsel object to any of these questions. Moreover, Fustolo‘s counsel did not address the December 31 Order during his cross-examination of Fustolo. At the close of evidence, the bankruptcy court requested that the parties submit post-trial briefs in lieu of closing arguments, structuring their briefs “along the lines of the claims for relief that are set forth in the counts on the plaintiff‘s complaint.” The court again read aloud the counts in Patriot‘s complaint, and gave the parties approximately two months to submit their post-trial briefs.
Both parties filed their post-trial briefs on August 26, 2016. In the last pages of Patriot‘s brief, it moved to amend its complaint to conform to the evidence presented at trial pursuant to
in the JPM; Patriot‘s request for judicial notice of the December 31 Order; and Fustolo‘s above-quoted testimony at trial. Patriot subsequently filed a Motion to Conform the Pleadings to the Evidence on September 12, 2016, and Fustolo filed his opposition on September 28.
On January 9, 2017, the bankruptcy court allowed Patriot‘s motion to conform and entered judgment in its favor and against Fustolo, denying Fustolo a discharge of his debt owed in bankruptcy under
On January 24, 2017, Fustolo filed his Notice of Appeal and Statement of Election to have his appeal of the bankruptcy court‘s January 9 order heard before the district court rather than the Bankruptcy Appellate Panel. The district court affirmed the bankruptcy court on September 6, 2017, and Fustolo timely appealed.
II. THE UNPLEADED CLAIM
On appeal, Fustolo advances two arguments before this Court: that the bankruptcy court abused its discretion in granting Patriot leave to amend its complaint, and that
not apply to his assertion of his Fifth Amendment right against self-incrimination. The decision whether to grant or deny an amendment is within the discretion of the trial court, see Foman v. Davis, 371 U.S. 178, 182 (1962), and we review its determinations of implied consent for an abuse of that discretion, Premier Capital, LLC v. Crawford (In re Crawford), 841 F.3d 1, 6 (1st Cir. 2016). This standard is “generally deferential,” although a “material error of law is invariably an abuse of discretion.” Charbono v. Sumski (In re Charbono), 790 F.3d 80, 85 (1st Cir. 2015) (citing Berliner v. Pappalardo (In re Sullivan), 674 F.3d 65, 68 (1st Cir. 2012)).
“Notwithstanding the fact that we are the second-in-time reviewers, we cede no special deference to the district court‘s determinations.” In re Crawford, 841 F.3d at 6 (quoting Gannett v. Carp (In re Carp), 340 F.3d 15, 22 (1st Cir. 2003)). Accordingly, we directly review the bankruptcy court‘s order. In re Charbono, 790 F.3d at 84-85.
When engaging in our review, we keep in mind that “the district courts retain the inherent power to do what is necessary and proper to conduct judicial business in a satisfactory manner.” Rodríguez v. Doral Mortg. Corp., 57 F.3d 1168, 1171 (1st Cir. 1995) (quoting Aoude v. Mobil Oil Corp., 892 F.2d 1115, 1119 (1st Cir. 1989)). Further, while motions to amend a complaint to conform
to the evidence at trial are liberally allowed, Noonan v. Rauh (In re Rauh), 119 F.3d 46, 52 (1st Cir. 1997), such amendments must conform to the prescripts of due process, see Nelson v. Adams USA, Inc., 529 U.S. 460, 465 (2000).
We begin with a discussion of the applicable rule governing amendments of pleadings.
A. Rule 15(b)(2)4
Implied consent occurs by either “treating a claim introduced outside the complaint ‘as having been pleaded, either through [the party‘s] effective engagement of the claim or through
his silent acquiescence‘; or by acquiescing during trial ‘in the introduction of evidence which is relevant only to that issue.‘” Id. (alteration in the original) (emphasis added) (quoting Doral Mortg., 57 F.3d at 1172); see also Conjugal P‘ship of Jones v. Conjugal P‘Ship of Pineda, 22 F.3d 391, 400-01 (1st Cir. 1994) (“One sign of implied consent is that issues not raised by the pleadings are presented and argued without proper objection by opposing counsel.” (quoting Matter of Prescott, 805 F.2d 719, 725 (7th Cir. 1986))).
Engagement or acquiescence to the litigation of an unpleaded claim may occur through a party‘s failure to object once it becomes clear that the asserted claim is being incorporated into the pleadings. See, e.g., Antilles Cement, 670 F.3d at 319-20 (finding that appellants “effectively conceded” that new claim had been “incorporated into the complaint” by discussing the claim at the first scheduling conference, failing to object to the claim‘s listing in the scheduling order, engaging in discovery pertaining to the new claim, briefing the issue, and arguing contesting the claims merits). However, “[t]he introduction of evidence directly relevant to a pleaded issue cannot be the basis for a founded claim that the opposing party should have realized that a new issue was infiltrating the case.” DCPB, Inc. v. City of Lebanon, 957 F.2d 913, 917 (1st Cir. 1992), superseded on other grounds, as
recognized in Lamboy-Ortiz v. Ortiz-Vélez, 630 F.3d 228, 243 n.25 (1st Cir. 2010). It is “the defendant‘s inalienable right to know in advance the nature of the cause of action being asserted against him,” Doral Mortg., 57 F.3d at 1171, and thus “[i]t is not enough that an issue may be inferentially suggested by incidental evidence in the record; the record must demonstrate that the parties understood that the evidence was aimed at an unpleaded issue,” Galindo v. Stoody Co., 793 F.2d 1502, 1513 (9th Cir. 1986); see also Kenda Corp., Inc. v. Pot O‘Gold Money Leagues, Inc., 329 F.3d 216, 232 (1st Cir. 2003) (citing Galindo for this proposition); Monod v. Futura, Inc., 415 F.2d 1170, 1174 (10th Cir. 1969) (stating that
Finally, while the court has the discretion to allow late amendments, it may do so only if the non-moving party will not suffer undue prejudice. Campana v. Eller, 755 F.2d 212, 215 (1st Cir. 1985); see also In re Rauh, 119 F.3d at 52 (amendment should not be allowed if opposing party demonstrates “unfair prejudice” (citing DCPB, 957 F.2d at 917)); DCPB, 957 F.2d at 917 (“It is axiomatic that amendments which unfairly prejudice a litigant should not be granted.“). “At a
defendant must be afforded both adequate notice of any claims asserted against him and a meaningful opportunity to mount a defense.” Doral Mortg., 57 F.3d at 1172. Lack of prejudice, however, does not “compel a determination that the amendment is appropriate.” Kenda Corp., 329 F.3d at 232 (quoting United States v. Davis, 261 F.3d 1, 59 (1st Cir. 2001)).
B. The January 9, 2017 Order
We refocus our lens on the plaint before us. Amongst the claims that Patriot pleaded in its complaint were requests for denial of discharge of Fustolo‘s debt under
As previously noted, the bankruptcy court allowed Patriot‘s request for amendment and judgment on the unpleaded claim, finding that Fustolo had been put on notice of a possible
Further, while acknowledging the belated timing of Patriot‘s motion to conform, the bankruptcy court pointed out that Patriot raised the issue in its post-trial brief, and that
for utilizing the “most strongly relevant” test to find implied consent, and employing a “double standard” by imputing Fustolo‘s notice of a potential
Patriot, on the other hand, maintains the accuracy of the bankruptcy court‘s discretionary decision, asserting that evidence of Fustolo‘s Protocol violation was relevant only to the unpleaded claim. Therefore, says Patriot, because Fustolo was on fair notice of the possible new claim and engaged on the merits at trial without objection, he impliedly consented to its addition. Patriot also contests any alleged prejudice to Fustolo as it posits that he had the opportunity to address the
C. Fair Notice
“Under the Civil Rules, notice of a claim is a defendant‘s entitlement, not a defendant‘s burden.” Doral Mortg., 57 F.3d at 1172. When evidence presented is relevant to a claim
actually pleaded, and not solely to a new issue, the non-moving party is not provided adequate notice that the new claim is being litigated. See DCPB, 957 F.2d at 917. Simply put, one cannot give implied consent to litigate a claim for which he or she is not provided notice. See Nickless v. Conley (In re Byers), 312 B.R. 22, 25 (Bankr. D. Mass. 2004) (“The bounds of implied consent ensure that an opposing party receives fair notice of the claims against it which it must defend.“); see also Triad Elec. & Controls, Inc. v. Power Sys. Eng‘g, Inc., 117 F.3d 180, 193-94 (5th Cir. 1997) (“[T]rial of unpleaded issues by implied consent is not lightly to be inferred under
The bankruptcy court found that Fustolo was put on notice of the infiltration of a
1. The JPM
The bankruptcy court found that including “discovery misconduct” as a factual issue for trial in the JPM “was a clear warning to Fustolo” that his failure to comply with the December 31 Order would be a triable issue. Fustolo, 563 B.R. at 107. But, the discovery misconduct alleged in the JPM included spoliation of evidence,
Patriot points to Fustolo‘s violation of the Protocol as an independent act of “discovery misconduct” at issue for which Fustolo was provided notice through the JPM. Apart from his refusal to turn over non-privileged documents, this violation involved Fustolo‘s failure to provide the court with emails and financial records that he asserted were shielded from production by the Fifth Amendment in order for the court to conduct an in camera inspection. Yet, this too cannot amount to adequate notice as this transgression also related to Patriot‘s
At the very least, the statements in the JPM were sufficiently broad as to not reasonably be perceived as germane exclusively to a new
2. Request for Judicial Notice
Nor did Patriot‘s request for the court to take judicial notice of certain court documents provide adequate notice of the inclusion of a
3. Patriot‘s Opening Statement
We turn next to Patriot‘s opening statement at trial, at which Patriot‘s counsel proclaimed that “the evidence will also show that Mr. Fustolo has repeatedly abused the bankruptcy process, violated this Court‘s orders, failed to preserve evidence and based on the totality of all of the evidence we will ask your Honor to deny Mr. Fustolo a discharge with prejudice.” The bankruptcy court found that this statement, and the court‘s subsequent inquiry about the existence (or lack thereof) of a subsection
Fustolo again raises this argument on appeal, adding for support Patriot‘s limited request for relief as sanctions for Fustolo‘s disobedience of the December 31 Order. We need not delve into the merits of this argument as we find that Patriot‘s
opening statement did not provide adequate notice of a trial on the failure-to-obey-a-lawful-court-order subsection
what he expects to prove . . . .” (alteration in original) (quoting United States v. Freeman, 514 F.2d 1184, 1192 (10th Cir. Cir. 1975))).
In light of this repeated confirmation that no
4. Fustolo‘s Testimony
Finally, we reach Patriot‘s examination of Fustolo on trial day four. The bankruptcy court found that Fustolo‘s failure to object to Patriot‘s line of questioning “constitute[d] acquiescence at trial in the introduction of evidence which was more
express disavowal of such a claim that is not itself recanted until months after the trial.
Accordingly, Fustolo‘s testimony was not relevant only to the unpleaded issue and therefore cannot be construed to imply consent.
D. Prejudice
While a lack of consent constitutes sufficient grounds for denying amendment, see In re Rauh, 119 F.3d at 52 (“A post-trial motion to conform the judgment to the evidence should not be allowed . . . unless the opposing party expressly or impliedly agreed to try the matter in question.“), there remains another reason why the bankruptcy court‘s judgment allowing the motion to amend must be reversed. Patriot‘s request to amend its pleadings was first noted two months after trial in its post-trial brief, and a formal Motion to Conform the Pleadings to the Evidence was not filed until almost three months after the trial‘s conclusion. “We think that prejudice is an almost inevitable concomitant in situations where, as here, the late amendment attempts to superimpose a new (untried) theory on evidence introduced for other purposes.” DCPB, 957 F.2d at 917 (citing Grand Light & Supply Co., Inc. v. Honeywell, Inc., 771 F.2d 672, 680 (2d Cir. 1985)). When considering the prejudice to the non-moving party, the appellate court may consider “whether the movant has shown any
justification for its delay in moving to amend.” Id. at 917-18 (finding prejudice where motion to amend was not based on new facts or a newly decided case); see also Campana, 755 F.2d at 216 (finding no justification for the delay in moving to amend where motion to amend was made in response to a jury question).
Here, Patriot‘s justification for its delay is not based on any newly discovered facts or changes in the law. While the bankruptcy court imputed the knowledge of a possible
Furthermore, “[k]nowledge heightens the need for prompt action.” DCPB, 957 F.2d at 918. Before this court, Patriot proffers that it did not move to amend its complaint between March 17, 2016, and the commencement of trial because it did not want to give Fustolo an opportunity to seek further delay. But, a desire
to avoid a trial delay cannot justify precluding the opposing party an opportunity to react to the new claim cannot justify a delay in moving to amend. Moreover, as noted in one of the bankruptcy court‘s orders that Patriot included in its request
Patriot further states that it was “busy finishing discovery . . . [and] preparing for trial,” as a reason for the delayed motion to amend, and notes both parties’ counsel‘s previously scheduled vacations in relation to its delayed post-trial filing. But, Patriot‘s busyness cannot justify the injection at the eleventh hour of a new theory of discharge denial based on previously-available facts -- Fustolo‘s failure to comply with the bankruptcy court‘s December 31 Order. See DCPB, 957 F.2d at 918; see also Stonkus v. City of Brockton Sch. Dep‘t, 322 F.3d 97, 101 (1st Cir. 2003) (“Most attorneys are busy most of the time
and they must organize their work so as to be able to meet the time requirements of matters they are handling or suffer the consequences.“).
Because we find that Fustolo did not have fair notice of the unpleaded claim and was prejudiced by its addition, we hold that the bankruptcy court‘s allowance of Patriot‘s motion to conform its pleadings under
III. CONCLUSION
“The truth-seeking function of our adversarial system of justice is disserved when the boundaries of a suit remain ill-defined and litigants are exposed to the vicissitudes of trial by ambush.” Doral Mortg., 57 F.3d at 1172. Here, for the reasons stated above, Fustolo did not receive adequate notice of an unpleaded claim, and did not provide his implied consent. We therefore REVERSE the bankruptcy court‘s order and REMAND for further proceedings consistent with this opinion. We take no position as to the merits of any remaining claims and leave such further analysis to the bankruptcy court.