Joan N. Feeney, United States Bankruptcy Judge.
The matter before the Court is the Complaint filed by The Patriot Group, LLC (the "Plaintiff" or "Patriot") against Steven C. Fustolo ("Fustolo," the "Defendant," or the "Debtor").
One week after the First Circuit's decision, Patriot, on July 23, 2018, filed a Motion for Reconsideration of Order in Light of Appellate Decision, seeking relief from the Court's January 9, 2017 Order deeming moot the counts pled in its Complaint for denial of the discharge. The Defendant opposed the Motion. On September 6, 2018, this Court entered an order treating Patriot's Motion as a "Motion for Clarification of the Memorandum and Order dated January 9, 2017 (Doc. Nos. 323 and 324) (jointly, the "Rulings") as no reconsideration or relief from the Rulings with respect to Counts I through V and VIII in the Plaintiff's Complaint is warranted under Fed. R. Civ. P. 59 or Fed. R. Civ. P. 60(b), made applicable hereto by Fed. R. Bankr. P. 9023 and Fed. R. Bankr. P. 9024, respectively." This Court stated:
Docket No. 381. Accordingly, as a result of the decision of the United States Court of Appeals for the First Circuit and this Court's order of September 6, 2018, the Court now makes its findings of fact and conclusions of law in accordance with Fed. R. Bankr. P. 7052 with respect to Counts I, II, III, IV, V and VIII of the Complaint.
During the trial, the Court precluded Fustolo from submitting certain evidence. In determining the "Plaintiff's Rule 37 Motion Concerning Defendant Steven C. Fustolo's Spoliation of Purported `Books and Records' and Late Production of Documents," this Court, on May 18, 2016, entered the following order:
(emphasis supplied).
As evident from the procedural matters set forth above, the Debtor's Chapter 7 case and this adversary proceeding have been marked by contention between the Debtor and Patriot. Indeed, the Debtor's bankruptcy case was commenced by the filing of an involuntary petition by Patton Drive, Patriot, and Richard Mayer on May 6, 2013, which the Debtor vigorously contested. On December 16, 2013, this Court, in ruling on cross-motions for summary judgment, refused to dismiss the involuntary petition and entered an order for relief. See
On January 17, 2014, Fustolo filed sworn Schedules, a Statement of Financial Affairs and other required documents. On August 14, 2014, he filed amended Schedules B, D, F, and H and an amended Statement of Financial Affairs. On Amended Schedule B-Personal Property, he listed a "Possible whistleblower recovery" with an unknown value. Throughout the course of this litigation, the so-called "Whistleblower Claims" have been a shorthand reference to claims against Patriot which Fustolo asserts he made to the Internal Revenue Service ("IRS") and the Securities and Exchange Commission ("SEC") based upon what he states in his Post-Trial Memorandum, was a "reasonable belief that there had been a possible violation by Patriot of federal tax law and provisions of the Securities and Exchange Commission statute."
As noted above, Patriot and Patton Drive filed a Complaint against Fustolo on September 30, 2014. The Court summarized their allegations in
On remand, the remaining six counts of the Complaint are now before the Court for determination. The Court now makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052.
On May 19, 2016, the parties filed their Joint Pretrial Memorandum in which they stipulated to the admissibility of certain facts, including the following, which the Court paraphrases. Fustolo is an individual who resides in Winchester, Massachusetts and is married to Elisa Fustolo ("Mrs. Fustolo"). He holds a BS degree in accounting from Bentley College and an MBA from Babson College, and has been a Certified Public Accountant and professional tax advisor since the early 1980s. At all relevant times to this action, Fustolo operated a seminar business, which he organized and at which he teaches, that provides continuing professional education courses geared toward CPAs, attorneys, and other tax and accounting professionals. Fustolo also provides written educational materials to publishers of continuing education treatises and pamphlets.
In March 2007, Fustolo, through business entities he owned and controlled, was seeking to develop property located on Revere Beach Boulevard (the "Revere Beach Property"). On March 29, 2007, Revere Beach Holdings LLC borrowed $12.7 million from Patriot. The note evidencing the debt was secured by a mortgage lien upon the Revere Beach Property. Fustolo personally guarantied the debt. From April of 2007 through August of 2008, Revere Beach Holdings LLC paid Patriot $450,000.00. On or around September 2008, Revere Beach Holdings LLC defaulted on the Patriot loan and made no further payments to Patriot. The loan matured on December 31, 2008.
By document recorded on July 22, 2015, Patriot assigned its bid to Patriot Revere Beach, LLC. John Howe ("Howe") signed the Certificate of Organization of Patriot Revere Beach, LLC as its manager. Patriot Revere Beach, LLC sold the Revere Beach Property in September of 2015 for $4.5 million.
On May 27, 2011, the Middlesex Superior Court, Department of the Massachusetts Trial Court entered a judgment for
The Debtor executed his Schedules and SOFA under penalty of perjury, attesting that he read them and that the information he supplied to complete them was true and correct to the best of his knowledge, information, and belief. On Schedule A-Real Property, the Debtor listed his residence in Winchester, Massachusetts, which he and Mrs. Fustolo own as tenants by the entirety, fee simple interests in five condominium units (units 11, 12, 13, 14, and 15), located on Salem Street in Boston, Massachusetts, and a condominium unit located at 500 Ocean Street, Hyannis, Massachusetts. On both his original and amended Schedule B-Personal Property, he listed three bank accounts at Bank of America ending in 1461, 3923, and 9490.
In addition, on Schedule B, in response to question 13 relating to stocks and interests in incorporated and unincorporated businesses, the Debtor listed numerous stocks and interests in incorporated and
Thus, the status of the Steve C. Fustolo Revocable Trust is unclear based upon the Debtor's statement on Schedule B, as a revocable trust would not be subject to dissolution by the Secretary of State. The Debtor also disclosed that the 32 Park Vale Avenue Trust had "a 1/3 joint venture interest in stones." The Debtor indicated that the value of his interest in that venture was "Unknown."
On Schedule D-Creditors Holding Secured Claims, the Debtor listed obligations on a number of mortgages encumbering property located at 5 High Street, Medford, Massachusetts, although he listed 5 High Street, LLC as being solely owned by the 32 Park Vale Avenue Trust. On Schedule F-Creditors Holding Nonpriority Claims, the Debtor listed credit card debts in excess of $139,000.00 owed to two creditors, as well as numerous other creditors, many with claims which he listed as being in "unknown" amounts. He listed total
On Schedule I: Your Income, the Debtor listed James J. Fox & Company LLP as his employer. He listed his monthly income in the amount of $16,918.00. In an Addendum to Schedule I, the Debtor specifically referenced "Attachment 1: Additional Notes," stating: "All earned income is based upon the 2012 Tax Return." Thus, the Debtor attached to Schedule I a summary of his monthly income, including statements of business income and expenses for 1) James J. Fox & Company LLP, 2) "Lectures/writing," 3) Director's fees, 4) Atlas Garden Supply LLC, and 5) "National Tax Institute/and CPE Meetings," as well as Rental Income (Losses) for Terrace Hall Partners LLC and other entities owned by the 32 Park Vale Avenue Trust. He also listed income and losses for Mrs. Fustolo, including her monthly income of $792.00 from her psychotherapy practice and ($378.00) in rent for 135-137 Salem Street, Boston. According to the information provided by the Debtor, his total net monthly income of $16,918.00 was derived from income of $3,752.00 from James J. Fox & Company LLP, $15,745.00 from Lectures/writing, $417.00 from Director's fees, and $1,057.00 from Atlas Garden Supply, LLC. He reported a loss of $623.00 for National Tax Institute/CPE Meetings, as well as losses from his rental income stream of $3,430.00. Income attributable to Mrs. Fustolo equaled $414.00 after netting the loss from her rental property.
The attachments to Schedule I include statements of gross income comprised of the following, which the Court has compared with the income determined by the Debtor's expert, Kimberley A. Train ("Train"):
Schedule I Train
Lecture/writing $200,435.00 $ 16,800.00
Directorship $ 5,000.00 $ 5,000.00
Royalties $183,635.84
135 Salem Street — Rents $ 56,400.00 $ 33,275.00
115 Salem Street — Rents $ 27,600.00 + $91,424.00 $ 91,424.00
James J. Fox & Company LLP — Distribution $ 45,029.00 $ 55,600.00
Atlas Garden Supply LLC — Distribution $ 12,687.00 $ 13,250.00
Miscellaneous — Other $246,309.00 $ 19,500.00
___________ ___________
$684,884.00 $418,484.84
The Debtor did not separately report royalty income on his statements attached to Schedule I. In addition, he reported two sources of gross income related to 115 Salem Street on his statement attached to Schedule I and reported $246,309.00 related to 5 High Street, LLC, which he represented was owned by the 32 Park Vale Avenue Trust and which the Court has included in the "miscellaneous" category employed by Train for ease of reference.
On Schedule J: Your Expenses, the Debtor listed no dependents and total monthly expenses of $20,322.00. Those monthly expenses included $2,861.00 for "[E]ntertainment, clubs, recreation, newspapers, magazines, and books" and "other" expenses of $2,560.00, comprised of the following: $500.00 for Education courses; $486.00 for Holiday and special events; $500.00 for "Misc professional fees;" $201.00 for Supplies; $173.00 for Computer/internet;
On his SOFA, the Debtor disclosed the following in response to Question 10, "Other transfers":
In response to the instruction to "List all property transferred by the debtor within ten years immediately preceding the commencement of this case to a self-settled trust or similar device of which the debtor is a beneficiary," the Debtor stated "Debtor has numerous LLC's and Trusts as listed on Sch B [sic] and has transferred money into the business entities." He did not list the dates of the transfers, simply stating: "Various," and he did not reveal, as required, "AMOUNT OF MONEY OR DESCRIPTION AND VALUE OF PROPERTY OR DEBTOR'S INTEREST IN PROPERTY."
In response to question 18 on the SOFA, relating to "Nature, location and name of business," which the Debtor amended on August 14, 2014, to disclose a 50% ownership interest in D & S Realty Corp., a manager of property located on St. Croix in the U.S. Virgin Islands, the Debtor did not list Fustolo CPE, LLC, which appears to have been formed after May 6, 2013. The primary purpose of the August 14, 2014 amendment was to list on Schedule B, "Possible Whistleblower recovery" with an unknown value.
Howe, a principal of the Plaintiff, testified that he is employed by an asset management company he founded and directs by the name of Old Hill Partners, an affiliate of Patriot, located in Darien, Connecticut. He also testified that Old Hill Partners is in the business of lending money, "like a non-bank bank." Howe founded Patriot in 2002, testifying that he "spun it off" in 2005. Nevertheless, he indicated that he was asked to resume management of Patriot as "non-executive chairman" in 2008 during the financial crisis.
Howe testified that Patriot made a short term, high interest rate loan to Revere Beach Holdings LLC in 2007, although he was not managing Patriot at the time the loan was made. The Secured Promissory Note, dated March 29, 2007, was in the principal amount of $12,700,000.00 and had a maturity date of December 28, 2007 and an interest rate of 14% per annum. Howe testified that the loan matured and was in default in 2008, before he resumed management of Patriot. According to Howe, Patriot, mindful of the financial crisis of 2008, attempted to negotiate with Fustolo
Howe testified that he first met Fustolo at the law offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. after the default when he was attempting to work out the loan. He testified that Patriot's settlement offer to Fustolo was "You give us back the property and we'll let you out of your personal guarantee [sic]."
In 2010, Patriot commenced litigation against Fustolo and certain reach and apply defendants
(emphasis in original).
Howe testified that Patriot commenced foreclosure proceedings and conducted a public auction at which Affinity was the winning bidder. After Affinity defaulted, Howe testified that he learned that Fustolo was the owner of Affinity.
Howe testified that the filing of the involuntary petition against Fustolo was "a last resort," adding that Patriot also obtained a default judgment on January 20, 2011 against Affinity in the sum of $5,150,000.00 plus interest from June 8, 2010 to January 10, 2011 in the sum of $363,933.32, all of which remains uncollected.
With respect to the Whistleblower Claims, which Fustolo set forth on his amended Schedule B, Howe testified that at no time prior to May of 2014 was he aware of any potential claims against Patriot relating to tax fraud or securities laws violations. He also denied being informed by anyone of any such claims. Howe was presented with a letter, dated May 9, 2014, from an attorney, Bruce W. Edmands, Esq. ("Attorney Edmands"), who represented Fustolo, which letter was
Howe denied that Patriot ever submitted a fraudulent tax filing, adding that it has never been investigated by the IRS or the SEC. He also testified that Patriot was not contacted by the IRS or the SEC regarding any possible Whistleblower Claims.
Howe further testified that both he and Patriot were the subject of negative articles posted on the internet and that he first learned about the articles in mid-to-late
As a result of the negative internet posts, Patriot commenced an action in Florida and obtained, by agreement, a permanent injunction against Fustolo. The injunction against Fustolo, issued by Circuit Judge Virginia B. Norton of the Fourth Judicial Circuit for Duval County, Florida on April 14, 2015, provided that Fustolo would take all reasonable actions necessary to contact 39 websites and request that each website remove the "Statements" contained on 290 URLs identified in the injunction. In addition, Fustolo was required to take all reasonable actions necessary to contact internet search engines, Google, Microsoft, Bing, Yahoo, and Search, and request that each search engine remove the URLs on the 290 sites referenced in the injunction.
Kim Hopkins ("Hopkins") testified that, since 2011, she has been employed by Old Hill Partners, an affiliate of Patriot, as a paralegal, working on compliance issues as well as serving as an executive assistant to Howe. She stated: "I do a lot of legal research on the internet and other sort[s] of research depending on deals and other things and I had a — a lot to do with tracking the internet negative campaign against us." She also indicated that she worked with outside counsel and was a notary.
Hopkins testified about a so-called "Wayback Machine," which she described as "a non-profit in San Francisco called archive.org, and they [sic] create a library of the internet, so to speak, with snapshots of websites over time. And they [sic] have a function in that website called the Wayback Machine where you can search any URL and get a snapshot [of a website]." After testing the function with Patriot's websites, which she created and for which she was responsible, she looked at Fustolo's old companies "right around the time after we filed the petition and then I looked at his new company this year to see if they were the same because we contend that it's the same business, a continuation." Specifically, she examined "nti-inc. com" for 2012 and 2013, as well as Fustolo CPE, LLC. She explained the procedure as follows:
Hopkins testified that she was tasked with monitoring internet content concerning Howe and Patriot. She provided the following chronology:
Prior to the entry of the permanent injunction, Patriot and Fustolo executed a Forbearance Agreement, which was conditioned upon Fustolo's execution of an agreed permanent injunction. The Forbearance Agreement provided the following:
Hopkins testified that the agreement was executed to stop Fustolo from posting negative content on the internet and to cause him to take down the existing content. In her words: "Mr. Fustolo was never going to admit what he did and we needed to get the content down."
Fustolo testified that he has been a certified public accountant for more than 30 years and is a partner in the accounting firm of James J. Fox & Company LLP. In addition to auditing and tax work, Fustolo testified that he has an MBA, has lectured on accounting and tax issues, and has written several books and articles on the subject of accounting. He also stated that he has owned and continues to own many businesses, as well as real property. Fustolo testified that he has operated his seminar business since the 1990s. Additionally, he serves on the board of directors of several companies.
Fustolo testified about his attempts to refinance the Patriot loan in 2009, explaining that he discussed refinancing the Revere Beach Property with several lenders including Prosperity International. With respect to the foreclosure sale of the Revere Beach Property, Fustolo admitted that he did not disclose to Patriot his ownership interest in Affinity, the successful bidder at the foreclosure sale, and he admitted that Affinity had no assets other than "Just the — just the efforts to obtain financing." He also admitted that neither he nor Affinity had the funds to finalize the sale and that neither he nor Affinity had satisfied the respective judgments entered against them.
When asked about the final judgment entered on May 27, 2011 and the permanent injunction entered by the Middlesex Superior Court on April 18, 2012, reproduced above, Fustolo testified that he understood that the $84,000.00 cap on his annual income only applied to income received by way of disbursements from the reach and apply defendants and that he was not precluded from collecting income from other sources that would result in personal income exceeding $84,000.00. He admitted, however, that he never documented his ordinary living expenses to Patriot as required by the terms of the preliminary injunction.
With respect to the entities he listed on amended Schedule B, Fustolo conceded that for the entities which he exclusively owned, he controlled their assets and bank accounts and "had the authority and could make the decision to take money out of these companies at any time." In addition, he testified that the income earned by the entities listed on Schedule B flowed
Fustolo testified that CPE Meetings Inc. and National Tax Institute, Inc. were entities that were part of his seminar business and that the 32 Park Vale Avenue Trust held interests in numerous LLCs that he operated over the years "for my — primarily my real estate, either my real estate development or my real estate rental businesses that were held in single-member LLCs."
Fustolo ascribed no value to any of the entities listed on Schedule B, except for Terrance Hall Partners LLC ($2,188), Prospective Hill Limited Partnership in which he held a 12% interest ($5,000+/-), 65 North Margin Street LLC ($25), and the Steven C. Fustolo Revocable Trust ($2,574).
On cross-examination, Fustolo expressed the view that contemporaneously kept records were unnecessary, referencing, without explication, section 170 of the Internal Revenue Code. He testified that he kept his financial records on Excel spreadsheets, which were not produced or which he was not permitted to introduce into evidence.
AMOUNT SOURCE Current Year (2013) Unknown (ytd) $0.00 Previous Year 1 (2012): $45,029.00 James J. Fox & Co. (gross) $-15,200.00 23 Park Vale Avenue (net) $-7,480.00 National Tax Institute/CPE Meetings Inc. (net) $-6,580.00 Terrace Hall Partners LLC (net) $200,435.00 Lectures/writing (gross) Previous Year 2 (2011) $-15,423,518.00 Joint loss from all activities including NOL
In response to Question 2 on the SOFA regarding the amount of gross income received other than from employment or operation of a business, the Debtor disclosed the following:
AMOUNT SOURCE Current Year (2013) $0.00 Unknown (ytd) Previous Year (2012) $12,687.00 Atlas Garden Supply (net) $239,991.00 Capital Gain $-16,519.00 Loss from sale of business property $91,424.00 Rental income from condos (gross) $417.00 Director's fees (net)
When asked why he included net income as opposed to gross income as required on both his original and amended SOFAs, which are identical with respect to Questions 1 and 2, Fustolo responded: "I don't know what the instructions say." He added: "I submitted the numbers off the tax return," adding "I followed the advice of
Fustolo testified that he had no ledgers for the seminar business, or indeed, as noted above, any of the business entities listed on Schedule B, to show revenues. He prepared only trial balances, observing that to ascertain revenues and profits one would have to look at bank statements. In other words, according to Fustolo, there was no way to tell how the businesses were doing at any point in time until a tax return was prepared the following year. Fustolo testified that he produced no electronic records to Patriot for the entities he listed on Schedule B, including the 32 Park Vale Avenue Trust.
Fustolo testified that he had no evidence to contradict an exhibit prepared by Patriot's expert witness, Anne M. Eberhardt ("Eberhardt"), showing that $119,158.30 in cash had been deposited into either his wife's bank accounts or their joint accounts between May 7, 2012 and May 6, 2013.
Fustolo was unable to identify sources of the cash deposits into his accounts but he testified that certain withdrawals related to payments for health insurance premiums to Blue Cross/Blue Shield in the form of cashier's checks. He indicated that he used cashier's checks because he was "running tight on cash." Fustolo did not produce any documents or other evidence to support that claim, merely suggesting that cashier's checks could be confused with cash withdrawals. He testified that if a record of deposits and withdrawals was unnecessary for preparation of tax returns, "it wasn't relevant."
In January 2013, prior to the filing of the involuntary petition, Fustolo was involved, through a joint venture that was part of the 32 Park Vale Avenue Trust, in the purchase of uncut gemstones. He testified that he had a 35% interest in the gemstones, his father had a 40% interest, and Martin Nahigian had a 25% interest. Although the gems cost $100,000.00, Fustolo was not aware of what type of gemstones he purchased (e.g., diamonds, sapphires, etc.). On January 23, 2013, Fustolo caused a wire transfer of $9,000.00 to be made from a Citizens Bank account ending in 2980 in the name of the 32 Park Vale Avenue Trust to Paras Ram Somir ("Somir") as part of the consideration for the uncut gemstones. Somir did not provide the Debtor with a receipt. On the same day, Fustolo caused a wire transfer to be made from the 32 Park Vale Avenue Trust's Century Bank account ending in 5628 in the amount of $48,000.00 payable to an entity known as the G D Humanitarian Foundation in connection with the purchase of the gemstones.
Fustolo testified that he put the gemstones in one of two places. "One is initially I held them in my home and, second, one of the joint venture partners, Martin Nahigian, and my wife put them in a safe deposit box when I was traveling. Those are the two places." Fustolo, however, did not have a safe deposit box, and he later testified that he kept the gemstones under his bed.
Prior to and after the commencement of the bankruptcy case, the Debtor conducted a seminar business through two corporations, National Tax Institute, Inc. and CPE Meetings Inc.
Fustolo testified that he spent at least 20 years developing his seminar business through National Tax Institute, Inc. and CPE Meetings Inc., which at one time or another had several employees. The Debtor testified that he shuttered those businesses for a year and a half because of cash flow problems in 2011 and did not reactivate the seminar business until late 2012.
Fustolo stated that "in 2013 I was registered with NASBA [National Association of State Boards of Accountancy] with multiple
Fustolo was evasive in response to questions about whether he transferred the website content of National Tax Institute, Inc. and CPE Meetings Inc. to Fustolo CPE, LLC in 2013, asking counsel to Patriot "what do you mean by web content?" He added that he did not recall whether he made such a transfer but, nevertheless, admitted there was overlap in the content. He denied that the resort concept promoted by Fustolo CPE, LLC was the same concept that belonged to CPE Meetings Inc. and National Tax Institute, Inc., insisting there was a "different brand" that "was not focused as closely on just tax professionals."
Fustolo described his seminar business as having a niche market. Fustolo's later iteration of the business, "National Tax Institute" or NTI also was registered with NASBA and the IRS, and had identical telephone and fax numbers as the business operated earlier by National Tax Institute, Inc. and CPE Meetings Inc. Notably, National Tax Institute, Inc. and CPE Meetings Inc. in 2012 referred to "National Tax Institute" as NTI in promotional materials and a "Compass Rose" logo next to the word "NTI" was used pre-and postpetition and in 2016.
Fustolo was asked to examine screen shots of brochures used by his seminar business in 2012 and 2013. Those were attached to the Affidavit of Christopher Butler ("Butler"), the Office Manager at the Internet Archive
Attached to Butler's affidavit are screen shots of the first page of the website used by National Tax Institute, Inc., www.nti-inc.com, on May 5, 2012, October 7, 2012, October 25, 2012, and November 19, 2012. These pages are virtually identical, reference "2012/2013 Conference Schedule Coming Soon," and state the following: "We combine the worlds of resort travel and education into innovative programs that distinguish NTI as the undisputed leader in first-class resort CPE conference vacations." In addition to the 2012 web pages, there are pages, including screen shots of pages from January 28, 2013, February 8, 2013, June 16, 2013, July 29, 2013, September 7, 2013, and September 20, 2013, several of which were used postpetition after May 6, 2013. These pages contain the same URL, i.e., www.nti-inc.com, and are virtually identical to the screen shots from 2012, although they contain references to "NTI," instead of National Tax Institute. The screen shots contain the same photograph of a luxury resort with palm trees and a swimming pool and contain statements about first-class conference vacations, and headings, such as "PERFECTING THE ART OF RESORT CPE."
In addition to those Internet Archive URLs, there were additional screen shots of web pages for various dates between January 28, 2012 and May 24, 2012 and for June 9, 2013, July 30, 2013, September 27, 2013, and October 30, 2013 with information on the "About Page" regarding "NTI," under the header, "National Tax Institute." The "About Page" used both pre- and postpetition, contained the same telephone numbers (888-515-3674 ext. 1 for conferences and 888-515-3674 ext. 2 for self-study), fax number (888-552-9749), and email addresses (conferences@nticpe.com or selfstudy@nticpe.com).
Fustolo CPE, LLC's website for 2016 contained the same logo and the same heading as that used by National Tax Institute, Inc., "PERFECTING THE ART OF RESORT CPE." On its "About Page," Fustolo CPE, LLC used the same paragraph referencing its status as the "undisputed leader in first-class resort CPE conference vacations." Indeed, the information was identical to what was used in early 2013, including telephone and fax numbers, and conference registration information. The only difference in the materials for 2013 and 2016 was the absence of a direct reference to National Tax Institute; in the 2016 pages there were only references to "NTI." In addition, there was overlap in the identity of speakers; the same speakers were listed in 2013 and 2016, although in 2016 there were two additional speakers listed.
Fustolo denied that the websites and brochures were essentially the same, although he admitted there was overlap in
As noted above, at the very end of 2013, Fustolo began using a bank account for Fustolo CPE, LLC and using substantially the same web content as that used by National Tax Institute, Inc. and CPE Meetings Inc. Fustolo testified that he wound down National Tax Institute, Inc. and CPE Meetings Inc. because of substantial judgments against them obtained by resort hotels where the seminars were held. Although Fustolo challenged the assertion that Fustolo CPE, LLC used the same web content as National Tax Institute, Inc. and CPE Meetings Inc., he did not convincingly rebut the obvious similarities. Moreover, he admitted that he solely owned and controlled all three entities and that he did not produce any corporate minutes to Patriot. He also admitted that Fustolo CPE, LLC did not pay National Tax Institute, Inc. or CPE Meetings Inc. for use of the logo or for the content of the brochures. He testified that there were no licensing agreements or intellectual property agreements between the corporate entities and Fustolo CPE, LLC. He stated: "Nothing was transferred," and "[t]here were no agreements." He added: "I did use the Resort CPE concept in the new brand as I have done for 25 years under seven or eight different brands." He also admitted that he never sought permission from the Chapter 7 trustee to utilize the marketing materials used by National Tax Institute, Inc. or CPE Meetings Inc. in the latest iteration of his seminar business. In terms of compensation, Fustolo testified that "Fustolo CPE, LLC is a one member LLC, so taking a salary is impossible, so I would take funds out of the entity as needed as draws."
Fustolo described himself as the sole owner and decision maker for the three entities involved in his pre- and postpetition seminar business. He admitted that there were no outside directors of the corporations, and he was the sole officer for both corporations and the only member of Fustolo CPE, LLC. At the time he filed his original and amended Schedule B, he ascribed no value to his stock in either National Tax Institute, Inc. or CPE Meetings Inc., and he did not produce copies of corporate meeting minutes to Patriot. He also testified that the two corporations were thinly capitalized and their debts exceeded their assets. In addition, as noted above, Fustolo testified he withdrew monies from the companies when he saw fit. In sum, he took money, not a salary, from the two corporations to repay personal loans or as draws.
Fustolo admitted that he produced a draft of a letter about the Whistleblower Claims for Attorney Edmands to edit and send to Attorney Fencer, Patriot's counsel at the time. In the letter, reproduced above, Attorney Edmands stated that Fustolo previously had informed Patriot of his
Fustolo's Rule 2004 examination took place on August 27, 2014, thirteen days after he filed his amended Schedule B. He invoked his Fifth Amendment rights at that time, while claiming an inability to respond to other questions. At trial, he also invoked the Fifth Amendment as to his asserted disclosure to Patriot of his intention to report tax fraud to the IRS. Fustolo stated that he provided Attorney Edmands with a copy of a so-called "Form 211," but did not present him with any evidence of his asserted tax or securities fraud claims against Patriot, stating: "I didn't hire him for that purpose." According to Fustolo, Attorney Edmands did not conduct an independent investigation about the Whistleblower Claims. Fustolo also testified that he amended Schedule B to add the Whistleblower Claims on the advice of his counsel. When asked, both at his Rule 2004 examination and at trial, Fustolo did not state any facts to support his Whistleblower Claims even though in the letter sent to Patriot by Attorney Edmands there was a representation that Fustolo had informed Patriot of his intention to notify the IRS of its alleged tax fraud. Fustolo simply referenced the forms he filed with the IRS and SEC, adding "whatever was in the original filing were the facts." He invoked the Fifth Amendment, or, alternatively, stated he could not recall, when asked what those facts were or about when and to whom at Patriot he disclosed his claims. In addition, he admitted that he never produced copies of what he filed with the IRS or SEC, testifying: "One of the lawyers that I consulted with back prior to filing. He advised me not to keep a copy." Fustolo testified that he could not remember the name of the lawyer, adding that he did not retain that attorney and never obtained any written documentation from that attorney regarding the advice he provided.
Fustolo further testified as follows: "My testimony is that I supplied documents to Mr. Fencer related to the whistleblower [claims] but I'm just not sure what they were. There were piles of documents." Although Fustolo testified he filed the Whistleblower Claims in May of 2014, several months later at his Rule 2004 examination he testified that "All the information on that claim is in there. I have to have that information in front of me to refresh my memory." He also responded to a question as to what provision in the Dodd-Frank Act Patriot allegedly violated by stating "I haven't looked at that in an awful long
With respect to the Form 211, the IRS sent Fustolo a letter on July 21, 2014 in which it stated: "We received your Form 211 with the information you furnished and have assigned the above claim number(s). We will evaluate the information you provided to determine if an investigation is warranted and an award is appropriate." On October 20, 2015, the IRS sent him another letter stating "We considered the additional information you provided and determined your claim still does not meet our criteria for an award. Our determination remains the same despite the information contained in your latest letter."
On May 22, 2014, the SEC acknowledged receipt of "the information that you submitted under the SEC's Whistleblower Program." Fustolo testified that he spoke with Jane Norberg, the Deputy Chief, Office of the Whistleblower, on March 11, 2015, stating that she called him to inform him that the SEC would not pursue his claim. He further testified that he did not say anything about the claim during the call.
In addition to Fustolo's invocation of his Fifth Amendment rights noted above, at trial, Fustolo was asked a series of questions about several so-called "Milestone" entities. He invoked his Fifth Amendment privilege in response to whether he had membership interests in those entities, and whether those entities had bank accounts into or from which he deposited or withdrew cash, although his expert, Train, in Exhibit 4 to her report, listed two bank accounts at Century Bank in the names of Milestone International Group LLC and Second Milestone LLC. In addition, he invoked his Fifth Amendment privilege when asked if those entities were created to shield income from his seminar business and to evade creditors.
Fustolo also was asked about his testimony that AOL deleted his emails and whether, despite this Court's December 31st Order to produce the emails for in camera inspection, he withheld the production of those emails based upon his assertion of his Fifth Amendment privilege. He admitted that following his deposition he submitted an errata sheet pursuant to which he changed his answers to questions 33 times, asserting his Fifth Amendment rights when he had not previously done so, and, alternatively, providing answers when he had previously asserted the privilege. Fustolo also refused to answer questions about a so-called Carbonite account, which backs up material on computers, again invoking the Fifth Amendment.
The Debtor testified that he never intentionally destroyed or concealed books and records. He also testified that he did not falsify any records. In addition, he testified that it was his belief that there was a potential whistleblower recovery, stating: "[At] [t]he time they were filed I had reasonable belief that there was a possible violation of tax law and SEC statute. [sic]" Nevertheless, he admitted invoking his Fifth Amendment privilege during his deposition when asked if he destroyed documents, specifically electronic versions of trial balances, cash disbursements, and expenditures for CPE Meetings Inc., although
Fustolo also testified about the receipt of so-called 1099s (i.e., IRS Form 1099-MISC) in 2012 relating to royalties. He indicated that his royalty income was reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), as part of his joint 2012 income tax return relating to "Consulting/teaching" and on Schedule E, Supplemental Income and Loss. He reported royalty income of $16,800.00 on Schedule C and $183,635.00 on Schedule E.
Harold B. Murphy, Esq., the Chapter 7 Trustee of the Debtor's bankruptcy estate (the "Trustee"), testified that he conducted an initial meeting of creditors pursuant to 11 U.S.C. § 341(a) and, thereafter, conducted two additional examinations. He requested that the Debtor supply him with documents pertaining to the various entities he listed on Schedule B. The Trustee testified that he determined that most of the entities in which Fustolo held an interest had no value to the bankruptcy estate with certain exceptions. Moreover, with respect to Fustolo's seminar business and receipt of royalty income, the Trustee stated:
In addition, the Trustee testified that he filed a complaint, which he subsequently amended against Mrs. Fustolo and the Debtor (Adv. P. No. 14-1222). In his amended complaint, filed on December 16, 2014, he averred the following:
In addition to affirming his belief in the accuracy of the allegations he made, the Trustee expressed his view that there were inadequate records to substantiate the extraordinary use of cash by the Debtor and his spouse. Accordingly, he filed an
The Trustee also testified that he was in possession of the gemstones listed by the Debtor on Schedule B, that he was having difficulty obtaining an appraisal for them, and that it did not appear to him that the gemstones were valuable.
As noted above, the Trustee testified that "the vast majority" of the interests of the Debtor in the entities listed on Schedule B had no value to the bankruptcy estate. When the Trustee was questioned about the Debtor's income from royalty payments and income from his seminar business, the following colloquies took place:
Former counsel to the Plaintiff, Attorney Michael Fencer, testified about Patriot's efforts to obtain discovery in this adversary proceeding. In particular, he testified about the filing of the Motion to Compel on behalf of the Plaintiffs due to Fustolo's failure to comply with discovery requests which this Court granted.
Attorney Fencer also testified that he received an unsigned tax return for Fustolo and his spouse for the 2013 tax year, admitting that he did not confirm whether the return, in fact, was filed with the IRS. He also indicated that many records obtained through discovery from Fustolo contained disclaimers as to their completeness or accuracy. Attorney Fencer stated that he did not receive documents that, in his view, would have established the separate legal identity of the entities listed by the Debtor on Schedule B arising out of the "complicated corporate structures where incorporators or corporate managers would like the law to respect the separate legal identity of the individual entities."
The following tables summarize and compare the bank accounts owned by the Fustolos and the Debtor's business entities that were evaluated by the parties' experts. Although not a debtor, the experts for both the Plaintiff and the Defendant analyzed transactions involving bank accounts in Mrs. Fustolo's name in addition to the Fustolos' joint bank accounts and those owned solely by the Debtor or his business entities. Consideration of Mrs. Fustolo's bank accounts was required to understand the numerous transactions among Fustolo's personal and business accounts, particularly where the couple filed joint tax returns.
The first table, in column one, contains a listing of the personal bank accounts evaluated by the Debtor's expert witness, Train. Train did not distinguish between accounts opened or used by the Fustolos, individually or jointly, during the pre- and postpetition periods. The four remaining columns contain a listing of the pre- and postpetition accounts evaluated by the Plaintiff's expert, Eberhardt. She distinguished between accounts used pre- and postpetition by the Debtor and those owned individually by Mrs. Fustolo and those she jointly owned with the Debtor for both cash deposits and cash withdrawals. The "+" sign next to an account indicates a bank account listed by the Debtor on Schedule B. An asterisk indicates an account in the name of an entity other than the Debtor
The second table, in column one, contains Train's list of all the bank accounts she determined were used for the Debtor's numerous business entities through 2013. The remaining two columns contain only the Debtor's seminar business accounts into which there were inflows, as defined by Eberhard in her report, both pre- and postpetition.
Train/Personal Eberhardt/Mrs. Fustolo's Eberhardt/Mr. Fustolo's Eberhardt/Mrs. Fustolo's Eberhardt/Mr. Fustolo's
Bank Accounts Prepetition Prepetition Postpetition Postpetition
Accounts Accounts Accounts Accounts
BofA 9490+ 9490 9490
Joint
BofA 9376 9376 9376
Elisa Fustolo
BofA 3923+ 3923 3923
Joint
BofA 1461+
Century 8433 8433 8433
Elisa Fustolo
Citizens 1492 1492
Steve Fustolo [sic]
Citizens 5484 5484 5484
Elisa Fustolo
Belmont 1750 1750 1750
Steven C. Fustolo
Belmont 9827 9827
Steven C. Fustolo
Citizens 2999* 2999
135-137 Salem
Street LLC
Century 5628* 5628
32 Park Vale
Avenue Trust"
Citizens 2980* 2980
Park Vale Avenue
Trust [sic]
Winchester 5565
Elisa Fustolo
Northern Bank
5901
Elisa Fustolo
Santander 5840
Elisa Fustolo
Citizens 6153*
Park Vale Avenue
Trust [sic]
Train/Business Accounts Eberhardt/Prepetition Seminar Eberhardt/Postpetition Seminar Business Accounts Business Accounts Century 5628 Century 5520 Century 5636 5636 5636 National Tax Institute, Inc. Century 8210 Century 3843 Century 5601 Belmont 0494 Belmont 0834 0834 Fustolo CPE, LLC Belmont 6492 6492 6492 NTI LLC Belmont 6502 6502 6502 CPE Meetings Inc. Citizens 2999 Citizens 5125 Citizens 5133 5133 5133 CPE Meetings Inc. Citizens 5875 Citizens 2980 Citizens 0888 Citizens 2964 2964 2964 National Tax Institute, Inc. Citizens 2875 2875 2875 National Tax Institute, Inc. Citizens 5486 Citizens 8219 8219 8219 CPE Meetings Inc. Citizens 5344 Citizens 5443 Citizens 5141 CPE Meetings Inc. Citizens 6153 Park Vale Avenue Trust [sic] Citizens 1188 Citizens 5494 Citizens 5427 Citizens 5451 Citizens 6153 Citizens 1354 Brookline 2703 and 2711 Fustolo CPE, LLC
Eberhardt, Senior Director at Gavin/Solmonese, testified on behalf of Patriot, in her capacity as a financial fraud investigator, a profession that requires an examination of books and records, accounting systems, and bank statements to ascertain whether financial fraud has occurred. Eberhardt indicated that Gavin/Solmonese is a "financial advisory firm that offers assistance to companies in distress and to creditor committees," as well as "financial advisory ... services for forensics and litigation and valuation services." Prior to her role at Gavin/Solmonese, Eberhardt was a senior manager at Grant Thorton, a global accounting firm, for approximately 15 years. Eberhardt has an MBA and specializes in the study of statistics, as well as advanced data analyses of large databases. She is both a certified fraud examiner and a certified anti-money laundering specialist. With respect to her certification as an anti-money laundering specialist, she explained
Eberhardt testified about what Patriot asked her to do in advance of her testimony as an expert witness. She explained:
She testified that she reviewed bank statements for 44 accounts and approximately 9,000 transactions. She stated:
Eberhardt explained that she grouped the joint bank accounts held by Fustolo and Mrs. Fustolo together with Mrs. Fustolo's accounts.
Eberhardt testified about the Debtor's seminar business and the multiple accounts he used with respect to that business. She indicated that she "looked at the
Eberhardt performed the same analysis for accounts she considered to be joint accounts or accounts in Mrs. Fustolo's name, including accounts ending in 9490, 9376, 3923, 8433, 5484, and 2999. The prepetition cash deposits into those accounts between May 7, 2012 and May 6, 2013 totaled $119,158.30. If deposits into the Citizens Bank account ending in 2999 are excluded, the cash deposits total $106,098.30 for that period. The postpetition cash inflows for those accounts, as well as accounts ending in 5565, 5901, and 5840, totaled $305,921.83 for the period between May 7, 2013 and December 17, 2015. The cash withdrawals for the period between June 6, 2013 and December 28, 2015 totaled $63,939.13.
Eberhardt performed the same analysis for accounts she considered to be Fustolo's personal accounts, namely bank accounts ending in 1750, 2980, and 5628. She calculated that the prepetition cash deposits for the period between July 10, 2012 and April 23, 2013 totaled $49,035.00.
For the postpetition period between May 18, 2013 and December 22, 2015, the cash inflows into accounts ending in 1492, 5628, 2980, 1750, 6153, and 9827, all of which Eberhardt considered to be Fustolo's personal accounts, totaled $55,667.39. The postpetition cash withdrawals from those accounts for the period between August 16, 2013 and December 22, 2015 totaled $59,244.32.
She explained, using an example, as follows: "[d]uring the prepetition period if there was an outflow that was a large amount greater than $4,000, which was my threshold that said withdrawal, I didn't want to necessarily assume it was cash if I didn't have any supporting documentation, so I called that unknown. That would be a withdrawal." In her report, she set forth unknown inflow transactions, totaling approximately $54,500.00 with respect to the Fustolos' accounts (i.e., $42,000.00 for the Fustolos' joint accounts and $12,500.00 for Fustolo's accounts).
Eberhardt also testified that she was unable to ascertain the couple's financial condition from their personal bank statements for the prepetition period owing to the absence of adequate books and records to determine the sources of funds into their accounts. She added that they had no accounting system in place, such as QuickBooks, and that there were no receipts or invoices. She stated that she would have expected "some sort of accounting package, some sort of accounting software package," as "books and records are the foundation of any business. They help a business person run their business. They help them know what's coming, what's going out. They help them prepare tax returns. They help — they help them understand if they're making money or if they're losing money." In sum, given the number of accounts and the movement of funds among the accounts, Eberhardt testified that she would have expected more records to have been kept by Fustolo.
Eberhardt also testified that she did not review the Fustolos' joint tax returns for 2012 or 2013. Nevertheless, she concluded, based upon her analysis of their bank accounts, that the Fustolos made postpetition payments unrelated to ordinary household expenditures, including approximately $93,000.00 in payments on account of credit cards, which were all in Mrs. Fustolo's name, as well as $21,400.00 in prepetition payments to the Woodland Golf Club.
Eberhardt also was unable to categorize outflow transactions totaling approximately $39,000.00 between May 6, 2012 and May 6, 2013 because of insufficient information. For the postpetition period, the unexplained inflow transactions totaled $188,000.00 for Mrs. Fustolo's accounts and the joint accounts, and $159,000.00 for Fustolo's accounts. The unexplained postpetition outflow transactions totaled approximately $47,000.00 and $177,000.00, respectively. In addition, in her report, Eberhardt identified $118,000.00 in checks made payable to Fustolo from his seminar
The Defendant's expert witness, Train, testified that she was employed at DiCicco, Gulman & Company, LLP, was a certified public accountant, and was accredited in business valuations. In addition, she stated that she has a MA in finance from the Carroll School of Management at Boston College and had spent her career engaged in forensic accounting. She indicated that in this adversary proceeding she "was asked to assess whether or not the bank records comported with ... [the Debtor's]... his personal financial — his personal tax returns that were filed on behalf of Mr. and Mrs. Fustolo for calendar years 2012 and 2013."
Train testified that Fustolo's income from his publications and other writings was reported to the IRS pursuant to Form 1099s for inclusion on his tax returns, while his income from his incorporated seminar businesses was reported on his personal income tax return as well. Train testified that she determined Fustolo's gross income as follows:
Train, as did Eberhardt, excluded any transfers from one account to another to avoid duplication. She testified that she "compared the income and distributions that were reported on Mr. and Mrs. Fustolo's Form 1040, their personal return, and compared it to the summations of the deposits" that she could create from the couple's various bank statements. Thus, she tabulated gross income in the total amount of $418,484.84 from the income tax return for 2012 and income in the total amount of $431,767.00 from the tax return for 2013.
Train testified that she was able to account for 94.1% of the deposits into the Fustolos' nine bank accounts when compared with their 2012 personal income tax return, although she admitted that she was unable to account for some deposits. She compared deposits of $310,413.15 into personal accounts, to which she added $62,202.43 from business accounts, and adjusted that total for deposits made in 2013 that were attributable to 2012 income in the sum of $20,970.72, for a grand total of $393,586.30, which she calculated was $24,898.54 or 5.9% less than the Fustolos' reported income of $418,484.84 in 2012.
Similarly, Train was able to reconcile gross income and deposits with a certainty of 91% for 2013. For 2013, she reconciled total income of of $431,767.00 with personal bank deposits of $468,426.67, plus business bank account deposits of $113,352.00, less adjustments for duplication of $191,477.00, deposits of $20,970.72 for 2012 income deposited in 2013, plus $23,966.84 in deposits that occurred in 2014 that related to 2013 income. Thus, she compared total deposits, as adjusted, of $393,297.79 to the Fustolos' reported gross income for 2013 of $431,767.00, concluding that there was a difference of $38,469.21 or 8.9%.
Train concluded that, during the period between May 7, 2012 and May 6, 2013, $449,518.47 was disbursed from the nine bank accounts held by the Fustolos. Cash withdrawals for which there was no documentation accounted for $29,981.00 or 6.7% of the total disbursements. From May 7, 2013 through December 31, 2013, total disbursements in the sum of $285,891.68 were made from the couple's bank accounts. Cash withdrawals for which there was no documentation accounted for $10,886.99 or 3.8% of total disbursements. With respect to the $29,281.00 in unaccounted for cash withdrawals, Train admitted that she could not account for that sum, stating "If I ... [were] ... able to achieve 100 percent accuracy on the deposit analysis then, yes, I still would not be able to tell you how that $29,000 was ultimately — what was the ultimate dispensation of that $29,000 in 2012 that was withdrawn from the bank accounts." She also testified: "I don't know the ultimate disposition of that $29,000. I don't know how that money was ultimately spent by either Mr. or Mrs. Fustolo. But in my experience when I've seen some individuals or businesses try to hide money it tends to not get deposited into the bank in the first place."
2012 Income 2013 Income Schedule I
Consulting/Teaching $ 16,800.00 $ 23,399.00 $200,435.00
Directorship $ 5,000.00 $ 5,000.00 $ 5,000.00
Royalties $183,635.84 $243,218.00
135 Salem Street — Rents $ 33,275.00 $ 20,125.00 $ 56,400.00
115 Salem Street — Rents $ 91,424.00 $ 70,275.00 $119,024.00
James J. Fox & Company LLP — Distribution $ 55,600.00 $ 35,000.00 $ 45,029.00
Atlas Garden Supply LLC — Distribution $ 13,250.00 $ 14,750.00 $ 12,687.00
Miscellaneous — Other $ 19,500.00 $ 20,000.00 $246,309.00
___________ ___________ ___________
$418,484.84 $431.767.00 $684,884.00
Train further testified that Fustolo took rents from his real estate companies and deposited them into bank accounts for different business entities to meet their business needs. For example, Train observed that Fustolo deposited rental checks into an account at Century Bank ending in 5520 owned by Fustolo Development Company, adding that the rental checks were "monies related to a business that flow[ed] through onto his personal tax return." She also noted that there were instances where income attributable to one of Fustolo's businesses was deposited into accounts belonging to other businesses. For example, Exhibit 10 to her report contains seven instances where funds were transferred from an account in the name of CPE Meetings Inc. to the Debtor's personal account ending in 1750, totaling $37,000.00.
Train included in her report transfers of funds among Fustolo's business and personal accounts, including a $16,000.00 transfer from the 32 Park Vale Avenue Trust's Century Bank account ending in 5628 to Fustolo's personal account at Belmont Savings Bank ending in 1750; four transfers totaling $26,500.00 from Fustolo's personal account at Belmont Savings Bank ending in 1750 to Mrs. Fustolo's personal accounts ending in 8433 and 5484; and seven transfers totaling $37,000.00 from CPE Meetings Inc.'s Belmont Savings Bank account ending in 6502 to Fustolo's personal account at Belmont Savings Bank ending in 1750.
Train testified that understanding Mrs. Fustolo's financial condition was necessary to understanding the Debtor's financial condition. She opined that more than bank statements or tax returns would be needed to fully understand the financial condition of Fustolo's businesses, although she expressed no opinion as to whether the Debtor's record keeping was sufficient. In her Report, she opined the following:
Patriot seeks denial of the Debtor's discharge pursuant to 11 U.S.C. § 727(a)(2)(A) and (B), 727(a)(3), (a)(4), and (a)(5). It also seeks to except its debt from the Debtor's discharge pursuant to 11 U.S.C. § 523(a)(2)(A). The Court shall
In this regard, it is worthwhile to consider the credibility of Fustolo because his testimony about a variety of topics, most importantly his record keeping and accounting for cash deposits and withdrawals from personal and business bank accounts, has a bearing on his entitlement to a discharge. In view of Fustolo's three decade career as a CPA, lecturer, author, businessman, and real estate investor, the Court would have expected, just like Eberhardt testified that she would have expected, the Debtor to have organized financial records or a system or systems in place to account for his various sources of income and expenses associated with his various endeavors and intertwined corporations, trusts, and limited liability companies. The Court infers from the Debtor's failure to fully comply with discovery orders to produce records, coupled with his invocation of the Fifth Amendment, that, had he complied with his responsibilities to produce discoverable materials, his records would have revealed information adverse to his interest in obtaining a Chapter 7 discharge. See
The Debtor did not properly answer SOFA Questions 1 and 2. He did not state his gross income received from all sources as required by those questions. Instead, he stated both net and gross income from various sources in contravention of the requirements of the SOFA and his disclosure duties of as a debtor. Fustolo's response that he did not know what the instructions required was unconvincing and incredible. The Debtor, as a sophisticated businessman and CPA, must know the difference between net and gross income and, thus, responded untruthfully to Questions 1 and 2, deliberately obscuring his gross income.
Fustolo's demeanor during the trial was calculated. When asked about matters relating to his loan from Patriot, his memory of details was excellent as he was able to recall specific incidents from 2008 and 2009. When asked about other matters, such as the Whistleblower Claims, however,
With respect to Count I under 11 U.S.C. § 727(a)(2)(A), which precludes the entry of a discharge if the debtor, with intent to hinder, delay, or defraud a creditor, has transferred, removed, or concealed property of the estate within one year before the date of the filing of the petition, a plaintiff must establish the following: "(1) transfer or concealment of property (2) that belonged to the debtor (3) less than a year before the bankruptcy petition (4) with actual intent to hinder, delay, or defraud a creditor." See
Patriot points to the Debtor's numerous prepetition transfers of cash to Mrs. Fustolo, between May 7, 2012 and May 6, 2013, totaling $119,158.30, based upon
Patriot also contends that the transfers totaling approximately $100,000.00 of the Debtor's property to purchase gemstones fall within the scope of § 727(a)(2)(A). Patriot notes that Fustolo submitted no evidence as to the value of the gemstones and did not even know what kind of gemstones he acquired. Moreover, according to Patriot, he introduced no documentation relating to the transactions,
The Debtor contends that he regularly provided Mrs. Fustolo with funds from his income to pay household bills and other household expenses. In addition, he contends that the gemstones were acquired by the 32 Park Vale Avenue Trust and two other individuals and that the 32 Park Vale Avenue Trust's interest in the gemstones was listed on Schedule B. He also contends that the funds to purchase the gemstones came from the bank accounts of the 32 Park Vale Avenue Trust and the Steven C. Fustolo 2004 Revocable Trust, not his personal accounts and that the beneficiary of the Steven C. Fustolo 2004 Revocable Trust is the 32 Park Vale Avenue Trust. He also contends that Patriot introduced no evidence that the 32 Park Vale Avenue Trust and the Steven C. Fustolo 2004 Revocable Trust were the alter egos of Fustolo or that said entities should be "collapsed" or disregarded. He opposes denial of his discharge for having made fraudulent transfers within the meaning of 11 U.S.C. § 727(a)(2)(A).
The Court concludes that the Debtor's discharge should be denied under 11 U.S.C. § 727(a)(2)(A) because the Debtor transferred cash in the amount of $42,000.00 from his personal bank account at Belmont Savings Bank ending in 1750 to the G D Humanitarian Foundation with
There was ample indicia of fraudulent intent associated with the Debtor's suspicious acquisition of the gemstones with funds from his personal bank account. The Debtor's failure to list the Belmont Savings Bank account ending in 1750 on Schedule B, coupled with his incredible testimony that he was unaware of what types of gemstones he purchased from a humanitarian organization, that he was unaware from whom he obtained a bill of sale,
The Debtor contends that Patriot failed to produce evidence that the gemstones were not worth approximately $100,000.00 or that he attempted to conceal their acquisition. Those arguments do not withstand scrutiny. In the first place, the Debtor, in his Schedules executed under penalty of perjury, stated that the value of the uncut gemstones was "[u]nknown." The Trustee also testified that he was having difficulty obtaining an appraisal of the gemstones, and he stated his belief that they had little value. Moreover, while the Debtor did not attempt to conceal the gemstones, he did not list the bank account ending in 1750 from which he transferred the sum of $42,000.00 to the G D Humanitarian Foundation on either his original or amended Schedule B, and he either hid the gemstones under his bed or put them in a safe deposit box that did not belong to him. The Court concludes that the burden shifted to the Debtor to establish by way of competent evidence that money from his bank account was not the source of the funds and that the value of the gemstones was greater than the amount of money he transferred to acquire an interest in them. The Debtor did not satisfy that burden.
To warrant denial of discharge under § 727(a)(2)(B), a plaintiff must establish that the debtor, with intent to hinder, delay and defraud a creditor, transferred property of the estate after the filing of the petition. Patriot's count under § 727(a)(2)(B) is predicated upon proof that the contents of the websites and brochures belonging to National Tax Institute, Inc. and CPE Meetings Inc., as well as good will, were assets of the Debtor and that, upon the filing of the bankruptcy petition, those assets became property of his bankruptcy estate which he then transferred to Fustolo CPE, LLC with intent to hinder, delay, and defraud creditors. Thus, in the first instance, Patriot had to produce evidence from which this Court could determine that the assets of the two corporations, which revolved around promoting the "Art of Resort CPE," were in fact the Debtor's property that became property of his bankruptcy estate, and then establish that there was a transfer of that property after the petition date.
In
As this Court observed in
As noted above, in the circumstances of this case, Patriot is not attempting to obtain satisfaction of its judgment from the assets of National Tax Institute, Inc., CPE Meetings Inc., or Fustolo CPE, LLC. Rather, it seeks a determination that the assets of National Tax Institute, Inc., CPE Meetings Inc. were the Debtor's assets that became estate property upon the filing of the bankruptcy petition, as well as a determination that the Debtor transferred those assets postpetition to Fustolo CPE, LLC with fraudulent intent, thus warranting denial of his discharge. According to the court in
In
458 F.3d at 32-33.
458 F.3d at 34-35. Although the court in
Massachusetts courts employ the alter ego doctrine to determine whether a principal of a corporation is its alter ego using the
To support Count II, Patriot relies upon Fustolo's sole ownership and control of CPE Meetings Inc. and National Tax Institute, Inc. for the proposition that their assets were, in fact, both his personal property prepetition and property of the bankruptcy estate and that he transferred that property postpetition to Fustolo CPE, LLC. It maintains that the twelve factors used by the courts in
1) There was common ownership and pervasive control because Fustolo was the 100% owner, sole officer, director, and manager of CPE Meetings Inc. and National Tax Institute, Inc. and controlled both businesses, as well as their operations and their bank accounts.
2) There was confused intermingling and siphoning of the assets of the two corporations as Fustolo, prepetition, deposited funds into his wife's accounts from the bank accounts of those businesses. It adds that Fustolo did not maintain any records of his company's expenses and used his wife's credit cards to pay purported company expenses, with no records or reconciliations. Patriot also points to Fustolo's own expert's evidence of intermingling of assets by and among Fustolo, National Tax Institute, Inc. and his other businesses, and the absence of corporate accounting records (manual or electronic). Finally, Patriot notes that Eberhardt and Train both acknowledged significant unexplained and undocumented cash transactions involving Fustolo's accounts (including $41,000.00 in cash withdrawals), some of which came from his seminar business.
3) National Tax Institute, Inc. and CPE Meetings Inc. were thinly capitalized and insolvent and Fustolo admitted that there were no outside investors or paid-in capital for the two corporations. In addition, Fustolo testified about the existence of a significant judgments against the two corporations, and he valued both entities at $0 on his original and amended Schedule B.
4) Fustolo did not cause the corporations to observe corporate formalities or keep corporate records.
5) Fustolo used his businesses to promote fraud. Patriot notes that National Tax Institute, Inc. did not pay dividends; rather Fustolo took money from that and other companies when he saw fit, ignoring the April 2012 Superior Court permanent injunction that limited the expenses of National Tax Institute, Inc. and the other reach and apply defendants to $7,000.00 per month and required Fustolo to document expenses to Patriot.
Patriot also argues that the preponderance of the evidence establishes that Fustolo and National Tax Institute, Inc. were inextricably intertwined as Fustolo operated that corporation prepetition in all practical respects as a sole proprietorship and respected no corporate formalities. It further contends that the personal services exception set forth in 11 U.S.C. § 541(a)(6) is unavailing, citing
Patriot further argues that the postpetition transfer of the assets of National Tax Institute, Inc. to Fustolo CPE, LLC was
Patriot relies upon the Affidavit of Christopher Butler to authenticate the screen images obtained via the Internet Archive and its Wayback Machine, and a comparison of the content of brochures and websites from 2012 and 2013 and 2016. Because National Tax Institute, Inc. and CPE Meetings Inc. continued to operate postpetition, generating significant revenues (i.e., $1.97 million between May 8, 2013 and the end of 2015), Patriot contends that that transfer was fraudulent, referencing numerous badges of fraud, including the absence of any consideration for the transfer.
The Debtor, pointing to the failure of any party to seek the appointment of a trustee during the "gap period" or to seek an injunction restraining his use of any income during the gap period, complains that Patriot did not allege in the Complaint or the Joint Pretrial Memorandum that Fustolo CPE, LLC was an extension or alter ego of National Tax Institute, Inc. or CPE Meetings, Inc. Indeed, he states: "Fustolo did not agree to try a count seeking piercing of the corporate or entity veil" and "Patriot did not allege in the complaint or pre-trial memorandum that Fustolo CPE, LLC was an extension or alter ego of National Tax Institute, Inc. or CPE Meetings Inc. that was created to receive a transfer of estate assets to defraud creditors." He asserts that he has generated, and continues to generate, income from written courses and materials that he prepares each year and supplies to continuing education providers and that, in 2013, he had no employees working for him in the seminar business, although his wife traveled with him. He also contends that the Trustee did not consider "income generated by Fustolo in the conduct of seminars to be estate property and is not pursuing recovery of funds generated by the seminar business," adding that the Trustee considered the common stock of the two entities to have no value.
The Debtor emphasizes that he was required to and did rewrite his materials in the summer and fall of 2013 to comply with new standards, such that the CPE materials could not be sold by providers after January 1, 2014. He asserts that Patriot failed to submit "a calculation of the amount of royalties accounts receivable that is [sic] an estate asset," insisting that Fustolo CPE, LLC was "a new and different seminar business than that previously conducted." He argues:
In the first instance, the Court unequivocally rejects the Debtor's assertion that he did not agree to try a count seeking to pierce the corporate or entity veils and also rejects his waiver argument with respect to the absence of motions seeking either the appointment of a trustee or an injunction during the gap period. While the Debtor, through mistake or inadvertence, may not have foreseen evidence submitted by Patriot pertinent to issues under § 727(a)(2)(B) prior to the submission of the Joint Pretrial Memorandum, he should not have been surprised or unprepared to address that evidence. Indeed, as noted in footnote 2, the Court in its December 31, 2015 decision, 2015 WL 9595421, at *2, an order entered well before the beginning of the trial on May 23, 2016, specifically addressed Patriot's assertions relative to the fraudulent transfer of non-royalty property of the estate. Moreover, the Court takes judicial notice that in the Joint Pretrial Memorandum, executed by counsel to the Plaintiff and the Defendant, Patriot identified the following issue for trial:
Accordingly, Fustolo's argument that he did not agree to a trial of an alter ego or veil piercing claim in the context of this Count is frivolous. Similarly, the absence of evidence relative to the 32 Park Vale Avenue Trust and the Steven C. Fustolo 2004 Revocable Trust is irrelevant to Patriot's claim under § 727(a)(2)(B) as National Tax Institute, Inc. and CPE Meetings Inc. were not owned by the 32 Park Vale Avenue Trust. The Debtor was the alter ego of National Tax Institute, Inc. and CPE Meetings Inc., not the 32 Park Vale Avenue Trust or the Steven C. Fustolo 2004 Revocable Trust, which is not specifically listed on either the original or
The Court concludes that Fustolo exercised pervasive control over the two corporations, which he admitted were thinly capitalized. Moreover, he did not keep adequate records, such as ledgers, receipts, or other documents for either corporation, except for trial balances which he used to prepare tax returns. The Debtor did not produce articles of incorporation for the two corporations, any corporate minutes or other evidence that corporate formalities were observed to rebut Patriot's evidence. In addition, the Debtor admitted that he withdrew monies from the companies when he saw fit. He did not produce records of disbursements or produce evidence of any loans he made to the corporations that would justify transfers of money to him.
With respect to the issue of commingling of funds, the Court notes that the Debtor's Schedule J reflects the transfer of monthly income in the sum of $700.00 to CPE Meetings Inc. for "Internet and email costs." In addition, Train documented transfers totaling $37,000.00 from an account in the name of CPE Meetings Inc. to an account in the Debtor's name. (See Exhibit 10 to her report) As noted above, the Debtor testified that when he took money from his corporations he did so either as loan repayments or draws. Although he disclosed on his original and amended Schedule B sizeable shareholder loans of over $1.4 million to National Tax Institute, Inc. and CPE Meetings Inc., he failed to produce any documentation for loans made to the corporations.
National Tax Institute, Inc. and CPE Meetings Inc. generated substantial cash, although the Debtor reported "nonpassive losses from Schedule K-1" for those entities on a Schedule E to his joint 2012 federal income tax return, and he reported profits on a Form 8582 ("Passive Activity Loss Limitation") of approximately $14,000 for them in 2013. The Debtor, however, testified that he kept no books and records relating to income and losses, limiting the documentation he kept to "trial balances" that he created to prepare income tax returns.
Despite the Debtor's testimony to the contrary, this Court concludes that the Debtor utilized the property of National Tax Institute, Inc. and CPE Meetings Inc., namely its niche concept, the content of the website and brochures, including format, and descriptions regarding topics, speakers, registration, and phone numbers, as well as goodwill both pre- and postpetition, and then transferred that
As noted by the First Circuit in
The Court also concludes that it is not bound by the testimony of the Trustee as to whether the Debtor's seminar businesses involved postpetition services which are excepted from property of the estate under 11 U.S.C. § 541(a)(6). First, the Trustee's testimony was equivocal. Secondly, his answer was in response to questions that did not specifically reference National Tax Institute, Inc. or CPE Meetings Inc. Moreover, the Trustee, in his complaint, asserted that the Debtor and his spouse "employed multiple bank accounts and safe deposit boxes in Elisa's name as part of an elaborate and intentional scheme to conceal the debtor's income and assets from creditors and the Trustee." Accordingly, the Debtor cannot rely upon the testimony of the Trustee to establish that any income he received from the two corporate entities was solely for personal services, particularly where the Debtor admitted that he could not identify the sources of the cash that was deposited into his bank accounts, Mrs. Fustolo's bank accounts, or their joint bank accounts. Unlike the Debtor's royalty income from the preparation of educational materials for various publishers in the field of taxation for which he received 1099s, National Tax Institute, Inc. and CPE Meetings Inc. had assets and operations incident to the niche business of resort CPE, including telephone numbers for registrations and self-study courses, a stable of speakers, and presumably a valuable customer list as evidenced by James Douglas's testimonial, "14 years in a row and still going strong." See generally
Finally, the Court concludes that several badges of fraud exist establishing that the
Section 727(a)(3) provides that the court shall grant the debtor a discharge, unless "the 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, unless such act or failure to act was justified under all of the circumstances of the case[.]" 11 U.S.C. § 727(a)(3). As this Court observed in
Patriot emphasizes that Fustolo was a highly sophisticated businessman, the owner of 39 businesses, and a professional tax advisor and CPA with numerous active business bank accounts. It also complains that Fustolo's "complex web" of companies and bank accounts made it difficult for it to determine Fustolo's financial condition and his business transactions.
Patriot further argues that the Debtor failed to keep and preserve financial records to explain cash deposits and withdrawals and hundreds of thousands of dollars that he funneled through his numerous accounts. Indeed, it observes that the Debtor's expert recognized that funds were commingled among personal and business accounts. It points out that the Debtor produced no documentary information or business records of any kind to explain his financial condition, only referencing IRS Code Section 170, which applies to charitable gifts, to improperly justify his sole reliance on tax returns and bank statements and his position that he was under no obligation to keep or maintain other records. Patriot also notes that the 2013 tax return was unsigned and undated and was entitled, as a consequence, to little or no weight.
Patriot emphasizes Train's testimony and her inability to explain what happened to the cash Fustolo and his spouse withdrew from their accounts prepetition, as well as the significant number of transactions reflected on the bank statements that could not be explained without additional records. It also points to Attorney Fencer's testimony that financial records produced by Fustolo in discovery contained disclaimers as to their completeness and/or accuracy, adding that he did not receive documents from Fustolo that in his view would have established the separate legal identity of the entities listed on Schedule B.
The Debtor, recognizing an issue as to the adequacy of his books and records, states that "[a] debtor can prevail even if a failure to preserve records was unjustified under the circumstances, as required by discharge exception [sic], if the failure to preserve records did not affect the trustee's administration of the bankruptcy estate," citing
The Debtor also maintains that "Patriot did not prove that the native versions were important in lieu of the paper versions submitted to the Plaintiff and the PDF versions supplied to Mr. Fencer, then attorney for the Trustee and Plaintiff, and that the lack of native versions adversely impacted Trustee's ability to administer the estate." He also contends that "Patriot did not prove that after Fustolo supplied Mr. Fencer paper versions of various requested documents, that Mr. Fencer, on behalf of the Trustee, requested from Fustolo native electronic versions of the documents in order to administer the estate."
The Court concludes that the Debtor failed to keep and preserve adequate books and records. The expert testimony and reports, as evidenced by the Court's summaries of their contents, instead of shedding light on the Debtor's financial affairs, merely highlights their complexity and the large number of unexplained cash transactions. Neither expert examined the Debtor's Schedules and SOFA and attempted to explain how or from what sources the Debtor would have been able to lend certain of his business entities over $9 million or why the Debtor's statements of gross income attached to Schedule I appear unrelated to the income reported on his 2012 and 2013 tax returns, which returns may or may not have been accurate. Moreover, the experts used different time periods and methodologies, reflecting the different purposes for which they were hired. The reports themselves, however, raise as many questions as they answer.
There is no dispute that the Debtor's laptop was lost in 2014 and that this Court entered an order on May 18, 2016, as modified on June 22, 2016,
The Debtor was required to produce documents in discovery to Patriot. He failed to do so in a timely and proper manner, and this Court entered the May 18, 2016 order, reproduced above, as a result. Even though Attorney Fencer testified that he turned over all documents he obtained from the Debtor to Patriot's current counsel, documents that he testified were laced with qualifications as to completeness and accuracy, the only inferences that can be drawn from a failure to comply with discovery orders in this adversary proceeding are that the documents did not exist, or that they would reveal information that would be more prejudicial to the Debtor's defense in this action than any discovery sanctions that this Court could and did impose.
Train identified nine bank accounts belonging to the Fustolos, either individually or jointly, including one that Eberhardt determined was opened postpetition (Belmont Savings Bank account ending in 9827) and one that Eberhardt did not include, namely a Bank of America account ending in 1461, which the Debtor listed on Schedule B. Train also reviewed other bank accounts that may have been opened postpetition. Train did not consider two postpetition accounts at Brookline Savings Bank (accounts ending in 2703 and 2711) that Fustolo began to use and used extensively after December 5, 2014, although her analysis ceased at the end of December 31, 2013.
In her report, Eberhardt states that she is a Certified Fraud Examiner and a Certified Anti-Money Laundering Specialist. Train, in her report, states that she is a CPA with an Accreditation in Business Valuation and has a MA in Finance, specializing in forensic accounting. Both are well qualified professionals. Their reports, however, are both flawed. Eberhardt included accounts belonging to entities other than Fustolo when she concluded that he deposited cash into personal accounts in the sum of $49,035.00. Train relied upon the joint tax returns filed by the Debtor and his spouse, one of which was unsigned and undated. In other words, she presumed that the tax returns filed by the Fustolos accurately reported their income. Moreover, despite her efforts, Train could not entirely reconcile the deposits into the couple's bank accounts with their tax returns, and she could not document $29,981.00 in cash deposits that were made during the prepetition period between May 7, 2012 and May 6, 2013. Moreover, her computations of Fustolo's gross income for 2012 and 2013 cannot be reconciled with the gross income that can be computed from the statements of gross income that he attached to Schedule I.
The Debtor is a sophisticated businessman and CPA, yet he was unable to adequately explain the sources of cash deposited into his wife's bank accounts. He cynically rejected the need for contemporaneously
The Debtor's expert calculated his gross income for calendar year 2012 in the amount of $418,484.84.
As noted above, the Debtor relies upon the decision in
The parameters of § 727(a)(4) are set forth in the frequently cited decision of
With respect to Count V under § 727(a)(4), Patriot, citing
The Debtor emphasizes that he filed Whistleblower Claims with the IRS and SEC and received acknowledgements; that he had a reasonable belief that there were possible violations, that he did not retain a copy of Form 211 or the Whistleblower Claims based upon advice of counsel, and that his listing of a "[p]ossible whistleblower recovery" was for the reward and not the claims themselves.
The issue posed by Count V is whether the Debtor knowingly and fraudulently made a false oath on his amended Schedule B, which requires the listing of "all personal property of the debtor of whatever kind," by including as personal property a "[p]ossible whistleblower recovery" as "a contingent and unliquidated claim." The Court concludes that Patriot produced overwhelming circumstantial evidence that the "[p]ossible whistleblower recovery" was a false claim. The Debtor either invoked his Fifth Amendment privilege or was unable to recall salient facts about the Whistleblower Claims, including the identity of the individual at Patriot to whom he reported the claims. His selective memory about the Whistleblower Claims, including the evidence upon which the claims were based and the statutory bases for the claims, stood in contrast to his remarkably clear memory about the origins of his loans with Patriot years earlier. In addition, his testimony that he employed Attorney Edmands for the sole purpose of writing the May 2014 letter which he personally drafted provides evidence of his fraudulent intent, particularly as he did not request Attorney Edmands to evaluate the merits of the claims. His testimony that he was advised not to keep copies of his submissions to the IRS and SEC by an attorney whose name he could not recall and did not engage also was suspicious. The weight of the evidence compels the conclusion that the Whistleblower Claims were fabricated for an improper purpose. To the extent that the burden shifted to the Debtor to substantiate the Whistleblower Claims, his demeanor and invocation of the Fifth Amendment was such that he did not rebut the falsity of the "[p]ossible whistleblower recovery" listed on
The Court observes that cases involving the omission of assets from a debtor's schedules are legion. The converse is not the case. In other words, in this instance, although the Court has concluded that Fustolo's claims against Patriot and Howe are utterly bogus, the inclusion of the claim was not material. As the court observed in
Although the Court concludes that denial of the discharge is unwarranted under § 727(a)(4) regarding the Whistleblower Claims, the Debtor failed to list on Schedule B a bank account at Belmont Savings Bank ending in 1750 which was held in his name. In addition, the gross income he reported on Schedule I and on the SOFA differed markedly from the income compiled by Train from the Debtor's tax returns. As Patriot did not rely upon those representations in support of Count IV, this Court shall enter judgment against Patriot and in favor of the Debtor on Count IV with the caveat that the Court finds the Debtor's testimony about the existence of Whistleblower Claims to have been both incredible and false.
In
Patriot contends that Fustolo withdrew approximately $41,000.00 in cash from his personal accounts between May 16, 2012 and May 4, 2013 and that he cannot account for those withdrawals as he has no records, documentation, or other explanation on an itemized basis. As this Court observed above, Eberhardt examined prepetition cash withdrawals from Fustolo's account ending in 1750, and from two other accounts which, according to Train, were in the name of the 32 Park Vale Avenue Trust and the Park Vale Avenue Trust, respectively (i.e., accounts ending in 2980, and 5628). If the deposits into those accounts are excluded, the total of cash for which there is no accounting, using Eberhardt's analytical method, is $32,652.63. According to Patriot, Train could not account for approximately $29,000.00 in cash withdrawals and neither could the Debtor. Patriot concludes as follows:
The Debtor argues that Patriot failed to demonstrate that there was any loss of assets. He also asserts that there was no evidence to support the conclusion that the purchase of the gemstones resulted in a loss of assets; that cash deposits were used for purposes other than household bills, and that "Patriot failed to demonstrate that, except for a de minimis amount of cash withdrawals, cash disbursements and withdrawals from Fustolo's personal accounts were accounted for and explained." (emphasis supplied). The Debtor also argues that Patriot's schedule of cash withdrawals for which there was no accounting; i.e., $40,629.89, included withdrawals that were not from the Debtor's accounts. Fustolo asserts that Patriot failed to allege that the 32 Park Vale Avenue Trust and the Steven C. Fustolo 2004 Revocable Trust were alter egos of Fustolo or that they should be collapsed. Fustolo also contends that his lack of assets was directly attributable to the failed Revere Beach project in which he invested "four to five million" of his own money. In addition, he contends that he satisfactorily explained cash transactions by reconciling cash deposits with tax returns, including Form 1099s and K-1s, based upon Train's report, adding that "[t]he Chapter 7 Trustee has not located any assets not listed on the bankruptcy schedules."
The Court concludes, as did Train, that the Debtor failed to satisfactorily explain $29,981.00 in disbursements out of total disbursements of $449,518.47 between May 7, 2012 and May 6, 2013. If Eberhardt's analysis is adjusted to exclude bank accounts belonging to the 32 Park Vale Avenue Trust, there is no accounting for as much as $32,652.63. While the Debtor describes this amount as de minimis, the Court disagrees. Although de minimis is a relative term, this amount of unaccounted for cash is not insubstantial under any definition. In the context of a Debtor who makes his living as a CPA and lecturer on tax and accounting matters, the Debtor engaged in numerous cash transactions and failed to maintain adequate records to account for the loss of assets at his peril. He could not account for significant amounts of cash deposited into his wife's accounts and, as noted above, the discrepancies between Train's determination of Fustolo's gross annual income from his 2012 and 2013 tax returns and what he reported under penalty of perjury on the statements of his gross income attached to Schedules I cannot be ignored.
Fustolo asserts that the account ending in 1750 belonged to the Steven C. Fustolo 2004 Revocable Trust. For the reasons set forth above, the Court rejects that proposed finding. The bank account statements which are among the trial exhibits plainly show the name on the account is "Steven C. Fustolo," and the Debtor's expert included that account in her analysis as being an account belonging to the Debtor, not a trust.
As a CPA and an individual who earns substantial income from promoting his expertise as an accountant and tax adviser, Fustolo must be held to a higher standard than a less sophisticated debtor. Fustolo and his spouse had "substantial dealings in cash while keeping no records," as set forth in the Trustee's complaint. By electing
The Court also rejects Fustolo's argument that, because the Trustee did not locate any assets not listed on his bankruptcy schedules, he has satisfied his burden under § 727(a)(5). As the court noted in
The Court concludes that Eberhardt's expert testimony shifted the burden to the Debtor to explain the unaccounted for cash withdrawn prepetition from his bank accounts. Neither he nor Train could satisfactorily explain that loss. As the court in
In view of the foregoing, the Court shall enter an order granting a judgment in favor of Patriot and against the Debtor on Counts I, II, III, and V and a judgment in favor of the Debtor and against Patriot on Count IV. In view of the Court's decision to enter an order denying the Defendant/Debtor a discharge with respect to Counts I, II, III, and V, consideration of Count VIII, pursuant to which the Plaintiff seeks to except its damages from discharge under 11 U.S.C. § 523(a)(2)(A), is unnecessary.
2015 WL 9595421 at *1. This Court also observed:
As noted by the Court in its 2017 decision, "Fustolo did not comply with the submission requirements of the December 31st Order as he untimely produced only bank records with a deficient index." 563 B.R. at 97. He "also did not comply with the December 31st Order with respect to the production of nonprivileged AOL emails and documents to Patriot." Id.
Subsequently, on March 17, 2016, the Court granted Patriot's Motion for Sanctions and denied the Debtor's Motion for Stay or Protective Order Concerning His Deposition. Portions of the transcript from the March 17, 2016 hearing are reproduced in the Court's 2017 decision.
563 B.R. at 97-98.
Trial Transcript, June 23, 2016, p. 88.
Fustolo also testified extensively about his efforts to obtain financing for the Revere Beach Property in 2008 and 2009, identifying "Prosperity International" and its principal, Barry Funt, as a potential source of funding suggested by Patriot.
With respect to National Tax Institute, Inc., he testified that it had $1.6 million in debts owed to hotels. Nevertheless, on Schedule J, the Debtor reported distributing $700.00 to CPE Meetings, Inc. for internet and email costs.
Black's Law Dictionary, 1348-49 (5
The Court overruled Fustolo's objection to the admissibility of Butler's Affidavit, particularly because he stated that he had the Affidavit and documents in advance of the trial with ample time to review them. Moreover, counsel did not raise hearsay or authentication objections or issues relative to the Internet Archive.
463 B.R. at 79.
525 B.R. at 909 (emphasis supplied). In
818 F.2d at 110.
