Fustolo v. Patriot Grp. LLC (In Re Fustolo)

United States Court of Appeals
For the First Circuit
No. 17-1984
IN RE: STEVEN FUSTOLO,
Debtor.
_____________________
STEVEN FUSTOLO,
Appellant,
v.
THE PATRIOT GROUP LLC,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Leo T. Sorokin, U.S. District Judge]
Before
Torruella, Thompson, and Kayatta,
Circuit Judges.
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.
July 16, 2018
TORRUELLA, Circuit Judge. Following 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.
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,
-2-
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 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
bankruptcy.
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
-3-
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 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).
1 In 2015, Patriot initiated an investigation of Fustolo, which
led the Massachusetts Attorney General to file a criminal matter
against Fustolo in the Massachusetts state court.
-4-
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 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, 2016,2 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
2 While the transcript of this hearing and Patriot's appellate
brief reflect the date of this hearing as March 17, 2015, Patriot's
motion for sanctions was filed on February 16, 2016, and the docket
reflects the hearing took place on March 17, 2016.
-5-
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 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.
-6-
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 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.
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 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.3 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
3 Counts VI and VII related to claims by another creditor that
previously dismissed its claims against Fustolo.
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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 did not.
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.
. . .
-8-
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 Fed. R. Civ. P. 15(b)(2), requesting to include a claim under
§ 727(a)(6) based on Fustolo's violation of the December 31 Order.
Patriot identified several instances that it argued should
constitute Fustolo's implied consent to litigate the additional
claim, including Fustolo's failure to object to: Patriot's
inclusion of "Fustolo's discovery misconduct" as an issue for trial
-9-
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 § 727(a)(6). The Patriot Group, LLC v. Fustolo
(In re Fustolo), 563 B.R. 85 (Bankr. D. Mass. 2017). In light of
its ruling as to the newly asserted claim, the bankruptcy court
found the remaining counts of Patriot's complaint moot. Id. at
113.
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 § 727(a)(6) does
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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
-11-
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
Rule 15(b)(2) states, in relevant part, that "[w]hen an
issue not raised by the pleadings is tried by the parties' express
or implied consent, it must be treated in all respects as if raised
in the pleadings." See Antilles Cement Corp. v. Fortuño, 670 F.3d
310, 319 (1st Cir. 2012) ("Federal Rule of Civil Procedure 15(b)
allows an unpleaded claim to be considered when the parties'
conduct demonstrates their express or implied consent to litigate
the claim."). As the record in this case shows no indication of
Fustolo's express consent, nor do any parties so claim, we look
only to whether Fustolo provided his implied consent.
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
4 Federal Rule of Civil Procedure 15(b) is made applicable in
bankruptcy proceedings pursuant to Bankruptcy Rule 7015. See In
re Rauh, 119 F.2d at 52.
-12-
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
-13-
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 Rule 15(b) serves "to bring the pleadings
in line with issues actually tried and does not permit amendment
to include collateral issues which may find incidental support in
the record").
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 bare minimum . . . a
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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 11 U.S.C. § 727(a)(3),
which allows for a denial when a debtor has "concealed, destroyed,
mutilated, falsified, or failed to keep or preserve any recorded
information, including books, documents, records, and papers, from
which the debtor's financial condition or business transactions
might be ascertained," and 11 U.S.C. § 727(a)(4), which allows for
denial if a debtor has "knowingly and fraudulently, in or in
connection with the case . . . made a false oath or account." In
its motion to conform, Patriot requested that the bankruptcy court
allow it to assert a claim and obtain a judgment against Fustolo
under 11 U.S.C. § 727(a)(6), which provides for denial of discharge
of a "debtor [that] has refused, in the case . . . to obey any
lawful order of the court, other than to respond to a material
question or to testify."
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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
§ 727(a)(6) claim prior to trial, and that the unpleaded claim was
foreseeable as early as March 17, 2016. In re Fustolo, 563 B.R.
at 106-08. The court reasoned that Fustolo "impliedly consented
to the litigation of the unpleaded § 727(a)(6)(A) claim" by filing
the JPM, and "through his silent acquiescence and failure to object
to the introduction of evidence directly relevant to that claim."
Id. at 106, 108. According to the court, Fustolo's acceptance
occurred through: 1) the inclusion of the "discovery misconduct"
issue in the JPM; 2) his failure to object to the court taking
judicial notice of the December 31 Order and accompanying
memorandum, and the transcript of the March 17, 2016 hearing; and,
3) his acquiescence to Patriot's line of questioning about the
December 31 Order. Id. at 108. The court also found the
introduction of the December 31 Order, the accompanying
memorandum, the March 17, 2016 hearing transcript, and Patriot's
questioning of Fustolo were all "more strongly relevant" to a
§ 727(a)(6)(A) claim than alternative explanations offered by
Fustolo. Id. (citing Haught v. Maceluch, 681 F.2d 291, 305 (5th
Cir. 1982)).
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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 Rule
15(b)(2) allows for amendments to pleadings "at any time, even
after judgment." Id. at 108-09 (quoting Fed. R. Civ. P. 15(b)(2))
(quotation marks omitted). The court next found that Fustolo
would not suffer any undue prejudice as he "had a full and fair
opportunity to address his compliance with the December 31st Order
at trial," and because the court could not imagine "what additional
evidence Fustolo could offer" as to this claim. Id. at 109.
Finally, after conducting an analysis under § 727(a)(6), the
bankruptcy court concluded that Patriot had "show[n] by a
preponderance of the evidence that Fustolo willfully and
intentionally refused to obey a lawful order of this Court," which
warranted denial of his discharge. Id. at 113.
In this appeal, Fustolo disputes the contention that he
was put on notice about a potential § 727(a)(6) claim, and argues
that the pre-trial filings, Patriot's request for judicial notice,
and his testimony all related to the existing § 727(a)(3) or
§ 727(a)(4) claims and ongoing discovery disputes. He avers that
these pieces of evidence at most constituted "incidental evidence,
which created nothing more than an inferential suggestion of a
possible § 727(a)(6) claim." Fustolo faults the bankruptcy court
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for utilizing the "most strongly relevant" test to find implied
consent, and employing a "double standard" by imputing Fustolo's
notice of a potential § 727(a)(6) claim in March 2016 while failing
to require Patriot to justify its delayed amendment until September
2016. Patriot's delay, he claims, was unfairly prejudicial as it
precluded him the opportunity to consider the need for additional
evidence.
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 § 727(a)(6) claims, but
simply failed to do so. As for why it waited until after trial
to request amendment, Patriot points to discovery and trial
preparation, and its desire to prevent Fustolo from seeking further
postponement.
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
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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 Rule 15(b) . . . in light of
the notice demands of procedural due process." (quoting Jiménez v.
Tuna Vessel "GRANADA", 652 F.2d 415, 422 (5th Cir. Unit A July
1981)) (quotation marks omitted)).
The bankruptcy court found that Fustolo was put on notice
of the infiltration of a § 727(a)(6)(A) claim in the JPM, through
the court's allowance of the judicial notice request, during
Patriot's opening statement, and when Patriot questioned him at
trial. We disagree, and find that none of these instances clearly
indicated Patriot's intention to litigate a § 727(a)(6) claim such
that Fustolo could have "understood that the evidence was aimed at
an unpleaded issue." Galindo, 793 F.2d at 1513; see also Doral
Mortg., 57 F.3d at 1172. We explain our reasoning.
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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, relevant to and actionable under Patriot's
§ 727(a)(3) claim. Assuming "discovery misconduct" refers to
Fustolo's refusal to provide Patriot non-privileged documents
required by the December 31 Order, that contention was addressed
at the March 17, 2016 hearing on Patriot's motion for sanctions,
during which the bankruptcy court found it "inescapable that they
have not been produced intentionally or have been deleted."
Moreover, Patriot argued in its second Rule 37 motion -- filed
only nine days prior to filing the JPM -- that Fustolo's invocation
of the Fifth Amendment when asked to produce financial documents
referenced in the December 31 Order should lead to an inference of
spoliation. Thus, this "discovery misconduct" was relevant to
whether Fustolo concealed, destroyed, or failed to preserve books
and records under Patriot's existing § 727(a)(3) claim, and,
because it was not solely relevant to the § 727(a)(6) claim, was
insufficient for a finding of implied consent.
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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 § 727(a)(3) claim.
At the March 17 hearing, the bankruptcy court announced its belief
that Fustolo's defiance and "changes of position" as to why he was
not providing emails were in "furtherance of a scheme to delay
this litigation and legitimate discovery," and not as a result of
the reasons that Fustolo previously stated to court. In its post-
trial proposed findings of fact and conclusions of law, Patriot
pointed to Fustolo's invocation of the Fifth Amendment privilege
in relation to its § 727(a)(3) claim, and further argued that
Fustolo's contrary representations about the emails supported an
inference that he destroyed them. Additionally, the documents
which Patriot alleges that Fustolo failed to provide to the
bankruptcy court through his Protocol violation were the same
documents that Patriot alleged were destroyed in its subsection
(a)(3) claim.
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At the very least, the statements in the JPM were
sufficiently broad as to not reasonably be perceived as germane
exclusively to a new § 727(a)(6) claim rather than a pleaded issue.
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 § 727(a)(6) claim. The bankruptcy court focused
on Patriot's request for judicial notice of the December 31 Order
and accompanying memorandum, and the transcript of the March 17,
2016 hearing, finding that they were "more strongly relevant to a
§ 727(a)(6)(A) claim than the theory espoused by Fustolo." Id.
at 108. In the bankruptcy court's memorandum accompanying the
December 31 Order, the court exclaimed its disbelief of Fustolo's
contentions that his email provider deleted his emails, and laid
out the underpinnings of a spoliation inference when it stated
that "[i]f he is unable to produce emails, it can only mean that
he deleted them." This, as well as the bankruptcy court's
previously-mentioned "inescapable" conclusion at the March 17,
2016 hearing that Fustolo intentionally withheld or deleted emails
are undoubtedly pertinent to Patriot's § 727(a)(3) claim, and
Fustolo's presumed destruction of emails are actionable as such.
Regardless of whether the evidence contained within the
judicially-noticed items are "more strongly relevant" to a
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§ 727(a)(6) claim, Haught, 681 F.2d at 305 (quoting Wallin v.
Fuller, 476 F.2d 1204, 1210 (5th Cir. 1973)), they are not relevant
only to such a claim, see DCPB, 957 F.2d at 917. Therefore, the
failure to object to the request for judicial notice cannot
constitute implied consent.
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 (a)(6) claim
put Fustolo "on notice at the very outset of the trial of the
possibility of a § 727(a)(6)(A) claim." In re Fustolo, 563 B.R.
at 106. Fustolo argued before the bankruptcy court that Patriot's
denial of the existence of an (a)(6) claim constituted a waiver,
an argument that the court rejected. See id.
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
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opening statement did not provide adequate notice of a trial on
the failure-to-obey-a-lawful-court-order subsection (a)(6)(A)
claim. The bankruptcy court reasoned that Patriot's accurate
response about the absence of a § 727(a)(6) cause of action did
not nullify the notice provided by Patriot's opening statement
because later evidence, particularly his testimony, introduced at
trial pertained to the unpleaded claim. Id. at 106-07. But, the
bankruptcy court did not account for Patriot's failure to raise a
request for amendment of its pleadings during the two trial days5
following Fustolo's testimony, and the court's own recitation at
the trial's conclusion of the claims litigated, and Patriot's
affirmation of those claims. Additionally, Patriot's inclusion
of the court-order violation in its opening statement, combined
with its disavowal of the existence of an (a)(6) claim immediately
following, supports the conclusion that Fustolo's violation of
court orders was relevant to the extant claims. Cf. United States
v. Ciampa, 793 F.2d 19, 25 (1st Cir. 1986) (finding trial judge's
interruption of opening statement alluding to evidence "of only
collateral relevance" was justified); United States v. Hershenow,
680 F.2d 847, 858 (1st Cir. 1982) ("The function of the defendant's
opening statement is to enable him to inform the court and jury
5 The trial was held on non-consecutive days.
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what he expects to prove . . . ." (alteration in original) (quoting
United States v. Freeman, 514 F.2d 1184, 1192 (10th Cir. 1975))).
In light of this repeated confirmation that no
§ 727(a)(6) claim was to be or had been litigated, and the
ambiguity related to the "violat[ion] of this Court's orders" noted
in part II(C)(1) supra, Patriot's opening statement did not provide
adequate notice of the claim raised in Patriot's motion to amend.
Patriot's lack of objection did not constitute implied consent.
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 strongly relevant to the issue of Fustolo's noncompliance
with the December 31st Order." Fustolo, 563 B.R. at 108.
Patriot's counsel's questions and Fustolo's answers addressed
Fustolo's compliance, or non-compliance, with the December 31
Order. But, again, the substance of the unchallenged testimony
is pertinent to other claims already presented. While the
testimony also relates to a possible § 727(a)(6) claim, stray
references that arguably point to a new claim cannot easily
generate a finding of acquiescence when they are accompanied by an
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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
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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 § 727(a)(6)
claim on Fustolo as early as the March 17, 2016, Patriot too must
be held to the same standard of foreseeability in this analysis.
We do not intend to imply that a plaintiff must move to amend
immediately after the non-movant is put on notice of a new claim;
for that matter, Rule 15(b)(2) explicitly contemplates that a
motion to amend can occur "even after judgment," which, by its
nature, occurs after the non-moving party had notice of the new
claim through evidence introduced at trial. Nonetheless, a moving
party must provide a sufficient justification to excuse its delay.
See DCPB, 957 F.2d at 917-18; Campana, 755 F.2d at 216.
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
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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 for judicial
notice, the court had set an expeditious trial date as a sanction
for Fustolo's violation of the December 31 Order, militating the
concern of future substantial delays. Between the March 17, 2016
sanctions hearing and the beginning of trial, the bankruptcy court
denied Fustolo's motion to continue trial on March 24, 2016,
Fustolo's motion for reconsideration of that denial on April 8,
2016, and Fustolo's motion to continue a hearing on May 16, 2016,
Patriot's justification, a confession of sandbagging, is
unpersuasive in light of the March 17, 2016 sanction imposed.
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
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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 Fed. R. Civ. P. 15(b)(2) was an abuse
of discretion. Finding the bankruptcy court's allowance of
Patriot's motion to amend improper, we need not reach the merits
of Fustolo's claim that § 727(a)(6) does not apply to his assertion
of his Fifth Amendment right against self-incrimination.
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.
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