Carbon Inv. Partners, LLC v. Bressler (In re Bressler)

• Decision Date: 29 April 2020
• Docket Number: Case No. 18-13098 (MG),Adv. Proc. No. 19-01317 (MG)
• Parties: In re: LEE ALEXANDER BRESSLER, Debtor. CARBON INVESTMENT PARTNERS, LLC and CARBON MASTER FUND, L.P., Plaintiffs, v. LEE ALEXANDER BRESSLER, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

In re: LEE ALEXANDER BRESSLER, Debtor.

CARBON INVESTMENT PARTNERS, LLC and CARBON MASTER FUND, L.P., Plaintiffs, v. LEE ALEXANDER BRESSLER, Defendant.

Case No. 18-13098 (MG)

Adv. Proc. No. 19-01317 (MG)

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

April 29, 2020

NOT FOR PUBLICATION

Chapter 7

MEMORANDUM OPINION GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

APPEARANCES:

KLESTADT WINTERS JURELLER SOUTHARD & STEVENS LLP

Attorneys for the Plaintiffs

200 West 41st Street, 17th Floor

New York, NY 10036

By: Tracy L. Klestadt, Esq.

Christopher J. Reilly, Esq.

and

BRAUN HAGEY & BORDEN LLP

Attorneys for the Plaintiffs

7 Times Square, 27th Floor

New York, NY 10036

By: Jonas Noah Hagey, Esq.

SILVERMAN ACAMPORA LLP

Attorneys for the Defendant

100 Jericho Quadrangle, Suite 300

Jericho, NY 11753

By: Ronald J. Friedman, Esq.

David J. Mahoney, Esq.

MARTIN GLENN UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is the motion of Carbon Investment Partners, LLC and Carbon Master Fund, L.P. (collectively, "Carbon" or the "Plaintiffs") for summary judgment with respect to the First, Second, Third and Fourth Causes of Action in Carbon's complaint, dated July 9, 2019 (the "Complaint," ECF Doc. #1), against Lee Alexander Bressler (the "Debtor" or "Bressler"), to deny the Debtor's discharge pursuant to 11 U.S.C. §§ 727(a)(4)(A), 727(a)(2)(B), 727(a)(4)(d), 727(a)(3) and 727(d). ("Carbon's Motion," ECF Doc. # 9.) Carbon also submitted a Statement of Undisputed Facts. ("Carbon's Statement of Undisputed Facts," ECF Doc. # 10.) Carbon's Motion is supported by a declaration of Carbon's attorney, Tracy Klestadt. ("Klestadt Decl.," ECF Doc. # 11.) Debtor opposes Carbon's Motion ("Debtor's Opposition," ECF Doc. # 16) and submitted a counterstatement of disputed facts. ("Debtor's Counterstatement of Disputed Facts," ECF Doc. # 15.) Mr. Bressler submitted a declaration in support of the Debtor's Opposition. ("Bressler Decl.," id., Ex 1.) Carbon submitted a reply brief. ("Reply," ECF Doc. # 17.)

For the reasons discussed below, the Motion is GRANTED.

I. BACKGROUND

The Court assumes familiarity with this Court's previous opinions in this case.¹ Facts are repeated to the extent appropriate to explain this ruling.

On October 12, 2018 (the "Petition Date"), Bressler filed a voluntary chapter 7 petition. ("Petition," Case No. 18-13098 ("Main Case"), ECF Doc. # 1.) Bressler is a former portfolio manager and Chief Investment Officer of an Oklahoma-based hedge fund, Carbon Master Fund I, LP (the "Fund"). ("Arbitration Award," Klestadt Decl., Ex. F, at 2.)

On March 30, 2018, Carbon filed an arbitration proceeding (the "AAA Arbitration") against Bressler, asserting that Bressler committed fraud and breached his fiduciary duty by executing speculative and unauthorized stock and option trades. On December 7, 2018, this Court modified the automatic stay "to permit the AAA Arbitration to proceed until such time as a written award is rendered which decides its outcome . . . ." ("Lift Stay Order," Main Case, ECF Doc. # 38.)

The hearing on the merits in the arbitration was conducted March 18 through March 22, 2019. (Arbitration Award at 1.) The Arbitrator issued the Arbitration Award on April 30, 2019. (Id. at 24.) The Arbitration Award sustains Carbon's claims, finding by clear and convincing evidence that Bressler breached his fiduciary duties to Carbon and committed actionable fraud in his dealings with Carbon. (Id. at 5.) Those findings are supported by evidence that Bressler opened secret accounts to conceal unauthorized trades secured by Carbon's funds, and that the unauthorized trades exceeded Carbon's total assets under management by up to 3,000%. (Id. at 12-16.) When the trades proved unsuccessful, not only did they wipe out the Fund, but theyresulted in a multi-million-dollar deficiency. (Id. at 16.) The Arbitrator awarded Carbon approximately $16.8 million, including approximately $12.7 million in compensatory damages and $2.5 million in punitive damages. (Id. at 5.) On June 7, 2019, the Oklahoma County District Court confirmed the Arbitration Award and granted judgment in conformity therewith. ("Order and Judgment," Main Case, ECF Doc. # 132, Exs. A-B.)

A. Carbon's Motion and Statement of Undisputed Facts

Carbon argues that Debtor should be denied a discharge because Bressler purposely failed to maintain and disclose financial information by intentionally destroying the contents on his laptop computer. As found by the Arbitrator, and not disputed by Bressler, Bressler intentionally deleted files on his laptop computer post-petition, and thus failed to keep or preserve adequate records. The deletion of files prevented the chapter 7 trustee (the "Trustee") and Plaintiffs from ascertaining the Debtor's financial condition. (Carbon's Motion at 5.)

On March 22, 2019, the Arbitrator issued his "Ruling On Carbon Parties' Renewed Motion for Sanctions." ("AAA Sanctions Ruling," Klestadt Decl., Ex. C.)

The AAA Sanctions Ruling made the following findings of fact:

a. Debtor was ordered to deliver his Laptop to Carbon's forensic expert no later than March 4, 2019, for the following purpose: "Mr. Bressler is directed to make the subject laptop available to Carbon's forensic consultant for the purpose of imaging the hard drive, and then conducting an examination to verify that no responsive documents reside there and to determine whether responsive documents have been deleted. . . . Bressler previously refused to make his Laptop available for forensic imaging and represented on multiple occasions the Laptop was not used for work and contained no responsive documents or information. As stated above, Bressler was nevertheless ordered to turn the Laptop over for forensic examination on March 4, 2019.

b. Bressler was the only person who had possession of the Laptop on March 3, 2019.

c. On March 3, 2019 at 8:50 p.m., a trial version of the computer cleaning tool known as "CCleaner" was downloaded to Bressler's Laptop. Oneminute later, the full version of CCleaner was run on the Laptop. As of the time the Laptop was turned over by Bressler on March 4, 2019, CCleaner was no longer present on the Laptop. This indicates CCleaner was uninstalled or otherwise deleted prior to Bressler turning the Laptop over on March 4, 2019 for forensic examination. Forensic examination indicates CCleaner was not installed on the Laptop prior to March 3, 2019, and was not regularly run on the Laptop.

d. CCleaner is described as a "system optimization, privacy and cleaning tool" that "removes unused files from your system" and "also cleans traces of your online activities." CCleaner's utility is described as follows: "When you delete a file, Windows removes the reference to that file, but doesn't delete the actual data that made up the file on your hard drive. Over time, this data will be overwritten as Windows writes new files to that area of the drive. This means that, given the right software, someone could reconstruct all, or parts of files that you've deleted. For privacy and security reasons, you can set CCleaner to wipe the free areas of your hard disk so that deleted files can never be recovered." See https://www.ccleaner.com.

e. As of 5:04 p.m. on March 3, 2019, a Windows profile titled "LeeBressler" existed on the Laptop. Such profile was subsequently deleted before the Laptop was turned over on March 4. Deletion of the profile resulted in the loss of all documents within that profile (My Documents, Downloads, Desktop and other folders). A new profile titled "lee" was created at 5:14 p.m. on March 3, 2019.

f. Carbon's forensic expert ran search terms previously approved by the Arbitrator on the imaged version of the Laptop that was turned over by Bressler on March 4, 2019. Those searches indicate over 124,000 fragments of destroyed files include search terms (including, but not limited to, "Jeffries," "Lakani," "Carbon," "Nagel," and "Bradford"). "Carbon" was Bressler's employer at all relevant times. "Nagel" and "Bradford" were Bressler's former colleagues at Carbon. "Jeffries" was the Carbon Fund's prime broker, a key player in this and separate proceedings involving these parties. "Lakani" is the name of one of Bressler's main contacts at Jeffries.

g. Bressler's spoliation in the context of the Laptop was intentional and in direct violation of Discovery Orders and the District Court Injunctive Order.

(AAA Sanctions Ruling at 4-5.)²

The Plaintiffs argue that the AAA Sanctions Ruling is expressly incorporated into the Order and Judgment finding Debtor liable for fraud and breach of fiduciary duty. (See Arbitration Award at 5.) As noted, the AAA Sanctions Ruling found that Bressler willfully and intentionally erased his laptop computer on March 3, 2019, before its production in the AAA Arbitration as ordered by the Arbitrator. Bressler has never denied his improper conduct. The destruction of the records in conjunction with the Debtor's complicated financial situation, and his failure to disclose assets, has made it impossible for the Trustee and Carbon to ascertain the Debtor's true financial condition. (Carbon's Motion ¶ 8.) Further, Plaintiffs argue that the Debtor is precluded from relitigating the AAA Sanctions Ruling and the Order and Judgment findings that he intentionally destroyed evidence. (Id. at 7-9

B. The Debtor's Opposition and Counterstatement of Disputed Facts

The Debtor contests several of Plaintiffs' statements of undisputed facts. The Debtor responds to Plaintiffs' claim that the Debtor forensically destroyed files on his laptop computer, and intentionally deleted or forensically destroyed computer files. (Debtor's Counterstatement of Disputed Facts ¶¶ 2-3 (citing Carbon's Statement of Undisputed Facts ¶¶ 8-9).) The Debtor further disputes that he failed to disclose "an on-hire stock award, a bank account and ownership interests in a limited liability company," and that prior to the Petition Date, the Debtor had received an award of Microsoft common stock having a...