BE Capital Management Fund LP v. Fund.com Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

B.E. CAPITAL MANAGEMENT FUND LP, )
)
Petitioner, )
)
v. ) C.A. No. 12843-VCL
)
FUND.COM INC., )
)
Respondent. )

MEMORANDUM OPINION ADDRESSING EXCEPTIONS TO SPECIAL
MAGISTRATE’S REPORT AND RECOMMENDATION

Date Submitted: May 23, 2024
Date Decided: July 18, 2024

E. Wade Houston, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Special
Magistrate.

Richard I.G. Jones, Jr., Harry W. Shenton, IV, Zachary J. Schnapp, BERGER
MCDERMOTT LLP, Wilmington, Delaware; Attorneys for Thomas Braziel.

LASTER, V.C.
This atypical case does not involve a corporate or commercial dispute between

adversarial litigants. It involves a receivership proceeding for an otherwise defunct

corporation. Those proceeding are usually one-sided, ex parte affairs in which the

proponent of the receivership seeks relief and, if appointed as receiver, carries out

the tasks necessary to fulfill the receivership’s mandate. Rarely does anyone provide

the court with a different view. When issuing rulings in those unilateral proceedings,

the court relies heavily on the good faith of the applicant/receiver and the accuracy

and veracity of the information the court receives.

In this case, the process went off the rails.

From the court’s limited perspective, the initial case for the receivership

seemed (and still seems) sound. And for years, the receivership seemed to be

unfolding well. The court had charged the receiver with liquidating an otherwise

defunct corporation, and the receiver marshalled the company’s assets and addressed

its outstanding claims. When those efforts resulted in the company having positive

value, the receiver moved to terminate the liquidation process so that the company

could continue to operate as a publicly traded investment vehicle. The court approved

the receiver’s request, conditioned on the receiver bringing the corporation into good

standing with the Delaware Secretary of State, becoming current in its securities

filings, and holding a meeting of stockholders to elect a new board of directors.1

1 The court doubts it would make the same ruling today. The receivership in

this case proceeded under Section 226(a)(3) of the Delaware General Corporation Law
(the “DGCL”), which contemplates the appointment of a receiver when the
corporation “has abandoned its business and has failed within a reasonable time to
Years later, the court received a letter from a concerned stockholder. The letter

asserted that the receiver never held the meeting of stockholders that the court

ordered. The letter also asserted that that the receiver had embezzled receivership

funds. The allegations were sufficiently concerning that the court appointed a special

magistrate to investigate what happened and make recommendations on how the

court should proceed.2 The order appointing the special magistrate stressed that “[i]f

there is no substance to the allegations, or if additional proceedings are not

warranted, then the Special [Magistrate] will say so.”3

There was substance to the allegations. After completing his investigation, the

special magistrate prepared a draft report.

The draft report carefully documented what had taken place during the

receivership. Based on those recommended findings, the special magistrate

take steps to dissolve, liquidate or distribute its assets.” 8 Del. C. § 226(a)(3). That
section does not authorize a receivership that revives the defunct corporation. In re
Forum Mobile, Inc., 270 A.3d 878, 889 (Del. Ch. 2022) (“For a custodian appointed
under Section 226(a)(3), therefore, the scope of potential authority is limited to
liquidating the affairs of the abandoned corporation and distributing its assets.”). To
draw on analogies from bankruptcy, a Section 226(a)(3) receivership is like a Chapter
7 liquidation, not a Chapter 11 reorganization.

2 On July 18, 2023, the Court of Chancery amended its rules to change all

references to “Master in Chancery” to “Magistrate in Chancery,” thereby avoiding
potential misunderstandings about a term that many associate with slavery. The
Chancery term derives from English court practice and is not associated with slavery.
Nevertheless, unless a litigant knew that history, the term could be offensive. The
appointment predated that revision. Nevertheless, this decision uses the term
“special magistrate.”

3 Dkt. 79 ¶ 4.

2
recommended the court find the receiver had used funds from the receivership for

personal gain. As a remedy, the special magistrate recommended that the court

require the receiver to repay the amounts he took from the corporation. The special

magistrate further recommended that the receiver immediately repay $2,000,726.93

in restitution, believing that the receiver’s liability for those amounts was clear as a

matter of law.

The special magistrate explained that the corporation could have additional

claims for restitution, as well as affirmative claims against the receiver that went

beyond restitution, such as an action for disgorgement of the profits the receiver

generated using the corporation’s funds. To avoid any appearance of conflict, the

special magistrate declined to pursue those additional claims and recommended that

the court appoint a successor receiver who could decide how to proceed. The draft

report also recommended that the receiver show cause why he should not have to pay

the special magistrate’s expenses.

Under this court’s procedures, a party can take exceptions to a draft report.

The receiver did so, presenting a host of exceptions. The special magistrate addressed

them in a final report and a supplemental submission.

A special magistrate’s final report does not constitute a judicial decision. If a

party takes exceptions to the final report, as the receiver did, then a constitutionally

appointed judicial officer must review the report de novo.

To the receiver’s credit, he largely acknowledged the accuracy of the special

magistrate’s recommended factual findings. He also accepted aspects of the special

3
magistrate’s recommended remedy by agreeing to provide restitution and to pay the

costs of the special magistrate’s investigation.

The receiver continues to press four exceptions. First, he disputes the

recommended finding that he acted wrongfully when causing the company to claim a

net operating loss in the amount of $8.725 million on its tax returns. Second, he

asserts that certain statements in the final report improperly draw inferences based

on his invocation of the Fifth Amendment privilege against self-incrimination. Third,

he contends that when evaluating potential bad-faith fee-shifting under the American

Rule, the report’s analysis violated his Sixth Amendment right to a jury trial by

noting that his conduct satisfied the elements for potential crimes. Finally, he claims

that the recommended amount of restitution that he should pay immediately is too

high. Rather than a payment of $2,000,726.93, he proposes a payment of

$1,850,726.93.

This decision reviews the final report de novo. The court overrules the first

exception. After a de novo review of the record, the court agrees that the receiver

lacked a reasonable basis to claim a net operating loss in the amount of $8.725

million.

The court overrules the second exception. The special magistrate cited the

receiver’s invocation of his Fifth Amendment privilege against self-incrimination to

explain the presence of gaps in the record. In a civil trial, a court may also consider

whether a particular invocation of the Fifth Amendment is warranted by the

possibility that a question could lead to self-incrimination. The special magistrate

4
provided an example of a question where, in his view, the question could not lead to

self-incrimination and yet the receiver still invoked the privilege. After a de novo

review of the record, the court finds that the special magistrate did not improperly

draw inferences based on the receiver’s invocation of the privilege. Regardless, the

court has not drawn any inference. Nor has the court purported to convict the receiver

of any crimes.

The court overrules the third exception. Evaluating bad faith fee-shifting

requires determining whether a party has acted in a grossly egregious manner. When

the record evidence suggests that a party’s actions could satisfy all the elements of a

crime, that tends to support a conclusion that bad faith fee shifting in warranted. The

special magistrate analyzed the receiver’s conduct from that standpoint. The special

magistrate did not and could not recommend convicting the receiver of a crime. Nor

is this court convicting anyone of a crime by adopting the receiver’s recommendation.

The court sustains the receiver’s last exception in part. Whether the special

magistrate correctly calculated the amount of immediately payable restitution

depends on whether the receiver’s father-in-law and brother-in-law acted wrongfully

when they provided funds that the receiver co-mingled and co-invested with company

funds. The special magistrate recommended a finding that treated the receiver’s in-

laws as wrongdoers, but the court does not believe that the evidence is sufficiently

clear to make that determination at this stage. The receiver has proposed a reduced

amount for immediate repayment in the amount of $1,850,726.93, which is $150,000

less than the special magistrate’s award. But the receiver’s proposal overcorrects by

5
$94,337.06. Correcting the receiver’s overstatement results in the amount being

$1,945,063.99. The court adopts that amount. If the successor receiver seeks to

pursue additional restitution, then the court can revisit the dispute over the in-laws’

involvement.

The court otherwise adopts the special magistrate’s report and

recommendation in full. This decision removes the receiver, and a new receiver will

be appointed. The court thanks the special magistrate for his outstanding work.

I. FACTUAL BACKGROUND

The court draws the facts from the underlying record, which the court has

reviewed de novo. That record consists of over 23,000 documents that the special

magistrate obtained during his investigation, plus deposition testimony from the

receiver and two other witnesses.4 When the final report contains a recommended

finding of fact, and when the receiver has not challenged the recommended finding,

then the court has adopted the finding when supported by the record. When the

receiver has contested a recommended finding of fact, the court has made its own

determinations.

4 Citations in the form “[Name] Dep.” refer to witness testimony from a
deposition transcript. Citations in the form “Ex. — at —” refer to the exhibits to the
Report with the page number designated by the last three digits of the production
stamp or by an internal page number. If an exhibit used paragraph numbers, then
references are by paragraph. If an exhibit is a video or audio recording or a transcript
of one, then references are by time.

6
A. The Company’s Beginnings

The corporation at the center of this case (the “Company”) started life as one

of many entities that Imran Husain formed and took public to sell to market

manipulators. In his own words, Husain “drafted phony business plans for the

companies, purporting that the companies had actual plans to engage in business.”

Ex. 263 at 5. After taking the shell companies public, Husain retained a majority

stake that he could sell to someone who wanted the publicly traded vehicle.

In 2004, Husain’s spouse formed the Company under the name Eastern

Services Holdings, Inc. Later that year, the Company merged with a Nevada

corporation that purported to offer verbal tax consultation and analysis to casinos. In

2006, the Company completed an IPO.

After the IPO, Husain indirectly held 71.8% of the outstanding common stock.

Despite its purported casino-advisory business, the Company was merely a shell with

a public listing. Its balance sheet for the period ended September 30, 2007, recorded

total assets of $10,429 (literally; not expressed in thousands) and liabilities of

$115,087. The Company had zero revenue.

In December 2007, Jason Galanis acquired Husain’s controlling interest.

Earlier that year, Galanis had entered into a consent judgment with the SEC that

barred him from acting as an officer or director of any public company for five years.

Acting through intermediaries, Galanis merged two dubious entities with and

into the Company. Through the merger, the Company acquired the website address

www.fund.com (the “Website Address”). To help the Company capitalize on the value

of that asset, the Company changed its name to Fund.com Inc.
7
According to Galanis, one of the constituent entities that merged with the

Company had purchased the Website Address for nearly $10 million. The Website

Address certainly had some value, but Galanis appears to have manufactured the $10

million figure through fraudulent transactions. By all indications, that valuation was

an order of magnitude beyond what an arm’s length buyer might pay.

Galanis used the Website Address and its fabricated asset value to portray the

Company as a worthy investment. The Company now described itself as “a

development stage company that intends to operate an internet-based investment

fund marketplace and online community.” Ex. 23 at 3.

In summer 2008, the Company announced that it had raised $450,000 from a

private placement with Westmoore Capital Group, Series II. One of Galanis’s

associates ran that entity. Using the purported capital infusion, the Company

announced a series of investments. One of them was a legitimate purchase of 60% of

the equity in a startup provider of actively managed exchange-traded funds (the “ETF

Provider”). Ex. 29; Ex. 27 §§ 1.1(b), 1.2(b).

In September 2009, the Company disclosed that it had amended its certificate

of incorporation to increase its authorized capital stock from 120 million to 320

million shares. The Company also announced that it had obtained a revolving line of

credit from Galanis’s affiliates. The Company pledged substantially all its assets,

including the Website Address, to secure the revolver.

The Company’s various announcements attracted market interest and drove

up the value of the stock. Behind the scenes, Galanis paid kickbacks to financial

8
advisors to get them to invest their client portfolios in the Company. At its height,

the Company’s stock price reached $570 per share. Meanwhile, Galanis and his

associates sold approximately 110,000 shares at an average price of $230 per share

for aggregate proceeds exceeding $25 million.

During the first half of 2010, the Company missed two deadlines for filing its

quarterly reports on Form 10-Q. The stock price collapsed. In August, the Over-The-

Counter-Bulletin Board delisted the Company. That fall, the Company completed a

120:1 reverse stock split. Even after the split, the Company’s stock traded for as little

as six cents per share.

Also during 2010, a dispute arose between the Company and the ETF Provider.

After the Company’s problems, the ETF Provider had no interest in the Company

remaining an investor and sought to cancel the Company’s equity stake. The

Company resisted and, in 2012, the dispute turned into a lawsuit.

B. The Investment Fund Invests In The Company.

Petitioner B.E. Capital Management Fund LP (the “Investment Fund”) is a

Delaware limited partnership. Thomas Braziel co-founded the Investment Fund with

a partner who provided investment capital. Braziel’s co-founder was not involved

with the Company.

Through its general partner, B.E. Capital Partners LLC (the “General

Partner”), Braziel controlled the Investment Fund. He described it as “an event-

driven investment partnership, with a focus on sourcing, analyzing, and purchasing

unlisted distressed credit and special situations equity.” Ex. 192.

9
Braziel thought the Company’s stock was trading at a fraction of the value of

its two real assets: the Website Address and the disputed equity interest in the ETF

Provider. In February 2013, he caused the Investment Fund to begin buying shares

of the Company’s common stock. As he later explained in a YouTube video, the

Investment Fund “sat on the bid for like two years and basically ended up owning

like 20% of the Company at a $100,000 valuation, so literally it was a $20,000

investment.”5

C. The Sale Of The Website Address And A Settlement With The ETF
Provider

In 2014, Galanis and two of his associates—Devon Archer and Hugh

Dunkerley—sought to transfer the Website Address to a new entity for use in a crowd-

funding scheme. They created a new entity named Fund Alliance Corporation that

purported to buy the Website Address for $1.5 million.

In 2015, the Company settled its litigation with the ETF Provider. Subject to

exceptions not relevant here, the settlement called for the Company to receive

$700,000 up front, another $3.8 million in three installment payments, and 6% simple

interest on the unpaid balance running from the date of the first installment. Once

the ETF Provider completed the payments, the Company’s interest in the ETF

Provider would be canceled.

5 The Acquirers Podcast, Priority Position: Thomas Braziel on distressed
activism with Tobias on The Acquirers Podcast, YouTube (Sept. 13, 2019),
http://www.youtube.com/watch?v=FDMhvyFwzcA&t=22m33s [hereinafter, Braziel
YouTube Interview]. See generally id. at 18:55–28:06 (Braziel YouTube Interview’s
full segment on Company’s history and receivership).

10
The upfront payment went to the Company’s litigation funder. The first

installment payment of $1.3 million went to the Company’s counsel and Galanis’s

affiliates. That left $2.5 million that the Company could expect to receive.

D. Braziel Secures Appointment As Receiver.

In October 2016, the Investment Fund filed this action. The petition sought to

have Braziel appointed as a liquidating receiver for the Company under Section

226(a)(3) of the DGCL. That statute authorizes a court to appoint a receiver when

“the corporation has abandoned its business and has failed within a reasonable time

to take steps to dissolve, liquidate or distribute its assets.” 8 Del. C. § 226(a)(3).

When the Company did not respond to the petition, the Investment Fund

moved for a default judgment. The motion emphasized that Braziel was a qualified

person who had studied the rules governing receivers of Delaware corporations.

By order dated November 29, 2016, the court entered a default judgment and

appointed Braziel as a receiver. The order charged Braziel with liquidating the

Company and distributing its net assets to its investors. The order did not authorize

Braziel to conduct business through the Company.

E. Braziel’s Initial Efforts As Receiver

When Braziel took over as receiver, the Company had not filed annual reports

with or paid franchise taxes to the State of Delaware since 2011. On paper, the

Company owed over $8 million to Galanis’s affiliates. The Company had few formal

records, and Braziel had to reconstruct its history by pooling information from former

service providers and former directors.

11
During these early stages, Braziel’s personal interests aligned with the tasks

he was expected to perform as receiver. Braziel could generate a sizeable return for

the Investment Fund by creating value through the liquidation process. Braziel acted

vigorously to do just that.

On December 15, 2016, Braziel opened a bank account for the receivership with

WSFS Bank in Wilmington, Delaware (the “WSFS Account”). On December 22, he

moved for an order requiring that the Company’s creditors make any claims against

the receivership estate by April 14, 2017. The court approved the order and set a bar

date for asserting claims. Galanis and his associates failed to assert timely claims,

which prevented them asserting any claims based on their purported $8 million in

debt. Braziel disallowed claims for two other potential creditors for another $1.5

million.

Braziel also improved the terms of the settlement with the ETF Provider. The

settlement called for the ETF Provider to make another payment of $1.5 million by

January 31, 2017. When the ETF Provider could not pay on time, Braziel negotiated

for an extra $100,000, plus accelerated interest payments.

Braziel also filed a lawsuit in New York to recover the Website Address from

Fund Alliance. Braziel alleged that the Company was insolvent when Fund Alliance

bought the Website Address and that the court should rescind the transaction as a

fraudulent conveyance.

F. Braziel Begins Misusing Company Funds

Once the Company had money, Braziel’s interests and the Company’s interests

began to diverge. Braziel soon began using the Company’s funds to benefit himself.
12
In November 2017, the Company received the settlement payment of $1.5

million. Over the next eight months, Braziel caused the Company to wire a total of

$121,000 to his personal checking account in eighteen installments. Braziel never

disclosed the transfers to the court or his attorneys.

Approximately six months later, on June 21, 2018, Braziel settled the New

York action against Fund Alliance. Under the settlement agreement, the Company

agreed to re-acquire the Website Address for $750,000.

Braziel routed the founds through the General Partner and took $50,000 for

himself along the way. To fund the transaction, the Company transferred $800,000

to the General Partner. The General Partner then paid $750,000 to Fund Alliance.

The General Partner simply kept the additional $50,000.

The General Partner’s records show that the additional $50,000 went to

Braziel. The General Partner made an initial distribution to Braziel in the amount of

$28,800, followed by fourteen smaller payments in amounts ranging from $300 to

$7,000 and totaling $21,200.

G. The Belmond Investment

Braziel next decided to use the Company’s money to fund high-risk, high-

reward investments. Using a combination of money he extracted from the Company,

plus some funds received from family members, Braziel invested in common stock

and call options on the stock of Belmond, Ltd., a Bermudian hotelier. Between July

12 and 18, 2018, the Company wired $315,000 to Braziel’s checking account. On July

17, Braziel opened a brokerage account with Interactive Brokers, LLC (the “First

13
Brokerage Account”). On July 18 and 19, Braziel moved $270,000 from his checking

account to the First Brokerage Account.

Starting on July 18, 2018, Braziel used the funds in the First Brokerage

Account to buy and sell common stock and call options for Belmond’s stock. Between

October 2 and 3, 2018, Braziel moved the Belmond options and common stock to a

new brokerage account with Fidelity Investments (the “Second Brokerage Account”).

By that point, the value of the options had grown to $493,775, representing a gain of

83% on the Company’s contribution of $270,000.

H. Braziel Moves To Discontinue The Liquidation

Having seen that he could use the Company’s assets to make investments,

Braziel filed a motion on October 16, 2018, that asked the court to discontinue the

liquidation and approve the Company’s re-emergence as a publicly traded investment

vehicle. In his motion, Braziel argued that “cause for liquidation no longer exists”

because he had “recovered, for stakeholders’ benefit, the Company’s principal assets,

namely all . . . settlement proceeds outstanding as of his appointment . . . and the

fund.com [Website Address] . . . .” Dkt. 73 ¶ 8.

Braziel’s application failed to mention that he had misappropriated $441,000

from the Company and held the Website Address through the General Partner, an

entity he owned personally. Braziel’s application also failed to mention that he had

14
already started pitching the Company as a vehicle to buy remnant assets and

bankruptcy claims.6

Braziel proposed bringing the receivership to a close by (i) calling a meeting of

stockholders within 180 days to elect new directors, (ii) bringing the Company into

good standing with the Delaware Division of Corporations, and (iii) bringing the

Company current on its SEC reporting. By order dated October 17, 2018, the court

granted Braziel’s application (the “Discontinuation Order”).7

I. Braziel Sells The Belmond Investment And The Website Address.

Two months after the entry of the Discontinuation Order, Braziel’s investment

in Belmond paid off. The bulk of the position consisted of out-of-the-money call

options expiring on December 21. Just in time, on December 14, LVMH Moët

Hennessy—Louis Vuitton SE announced an acquisition of Belmond’s public equity at

6 See Ex. 183 (Oct. 9, 2018) (“Fund.com/BE Capital would market and source

remnant assets via ABI conferences / and as part of our general US based BK claim
sources process.”); id. (proposing that Company contribute $400,000 to majority-
owned alternative entity that would operate “de novo remnant asset business”); Ex.
186 (Oct. 12, 2018) (“Do you want to help build Fund.com Inc.? We have about 2/2.5m
in NAV and will be kicking the entity out of receivership soon/setting up a Board//and
raising maybe 2-10 m to turn it into a publicly traded holding company.”); Ex. 187
(Oct. 18, 2018) (“We had a great meeting with [potential counterparty] yesterday. He
really wants to work on Fund.com with us and thinks he can raise 10-20m for the
shell and in turn start issuing as Super voting A shares for 20% of the entity, so we
can control and can use for illiquid assets. Thoughts? Can we still launch the liquid
strategy with you and put the GP in Fund.com for income?”).

7 The court made one modification. Because the Company was technically void

until it restored its good standing with the Secretary of State, the court required that
Braziel take that step first. Dkt. 74. The court would want meaningful briefing before
granting the same relief today. See n. 1, supra.

15
$25 per share. Braziel sold the call options for $936,344.77, generating a gain of

$832,464.61. In total, the value of the Belmond Investment amounted to

approximately $1,494,337.06.

Braziel also sold the Website Address. In December 2018, a third party agreed

to buy the Website Address for $1.5 million. After a 15% sales commission, the

Company netted $1.275 million, resulting in a gain of $525,000 over the $750,000 the

Company paid to re-acquire the Website Address in 2017.

Braziel helped himself to the proceeds. Between December 20, 2018, and

February 13, 2019, the Company wired $1.65 million to Braziel’s checking account.

Braziel spent $347,786.43 on a sapphire ring and a pair of emerald-and-diamond

earrings from Lorraine Schwartz, $61,355.31 on a German watch, and over $400,000

on luxury hotel stays, apparel, art, and other fineries.

Braziel invested the rest of his takings in bankruptcy claims, cryptocurrency,

leveraged loans, and high-risk equities. Many of these investments produced outside

gains. Despite having obtained the gains using Company funds, Braziel did not share

the gains with the Company. One of the potentially valuable claims that the Company

possesses against Braziel is an action to force him to disgorge the profits he generated

from using the Company’s funds to make successful investments.

J. Tax Issues

The Discontinuation Order required that Braziel bring the Company current

in its SEC filings. To achieve that goal, Braziel had to bring the Company current in

its tax filings.

16
In August 2019, Braziel caused the Company to retain Fisher Weis, LLC to

prepare its historical and receivership-era tax returns. Braziel had not previously

hired a tax preparer.

Problems quickly emerged. Fisher Weis asked for the Company’s bank

statements from December 2016 through the present to “reconcile the cash balance.”

Ex. 255 at ’114. Braziel provided Fisher Weiss with falsified records in the form of a

spreadsheet titled “Bank Account - Trial Balance_2016 to Current” (the “Modified

Trial Balance”).

When Fisher Weis pressed Braziel for account statements, Braziel claimed

that the bank had not authorized him to hand them over. That excuse would not hold

up, so Braziel manufactured alternative versions of the account statements that

tracked the Modified Trial Balance.

While working with Fisher Weis, Braziel learned that the Company might owe

significant amounts to the Internal Revenue Service and the Delaware Division of

Revenue. Braziel adopted a tax avoidance strategy that principally relied on the

Company claiming an $8.725 million net operating loss (the “NOL”) from its sale of

the Website Address. To substantiate the NOL, Braziel started with the $10 million

purchase price for the Website Address that Galanis had fabricated. Then he added

the commission for selling the Website Address to a third party. Then he subtracted

the ultimate sale price of $1.5 million ($10,000,000 + $225,000 - $1,500,000 =

$8,725,000). Braziel also told Fisher Weis that the Company had sold the Website

Address in 2017, one year before it actually did.

17
The Company used the NOL to offset gains in 2017 of $2.1 million. For that

year, the Company paid only $1,544 in federal income taxes. A tax preparer later

determined that the NOL deprived the IRS of over $485,000.

Braziel knew from his investigation into the Company that the $10 million

purchase price for the Website Address was not a legitimate number. It was a figure

that Galanis had fabricated to support a pump-and-dump scheme, and it was an order

of magnitude higher than what the Website Address had actually sold for in three

subsequent transactions. Braziel nevertheless used the $10 million figure.

Fisher Weis continued working on the Company’s taxes until 2020, when

Braziel decided to find a lower cost provider. In April 2020, the Company began using

Frankel Loughran Starr & Vallone LLP (the “Frankel Firm”). Around the same time,

the Company re-achieved its good standing with the Delaware Secretary of State.

Although the Frankel Firm charged less, its partners asked tough questions.

One partner discovered that the Company had misstated the date of the Website

Address sale in its 2017 return, and he concluded that the Company’s 2017 and 2018

federal tax returns were “not correct.” Ex. 316. The Frankel Firm also advised that

the NOL was “likely not good.” Id.

The Frankel Firm recommended amending the Company’s 2017 and 2018

returns, but Braziel declined. The Frankel Firm ultimately filed the Company’s 2019

tax returns, but refused to work with Braziel again.

K. The Goldberg Letter

Lyn Goldberg is a longtime stockholder of the Company who spent part of his

career as a federal prosecutor. Goldberg bought shares of Company stock believing
18
that it was a way to invest in the ETF Provider. After meeting Braziel in 2014, they

communicated regularly about Company-related matters.

Goldberg’s trust in Braziel began to wane after the entry of the Discontinuation

Order. As more and more time passed without Braziel convening a meeting of

stockholders, Goldberg began to wonder what Braziel was doing. By fall 2020,

Goldberg had become sufficiently frustrated that he sent Braziel a lengthy email

quoting an American Jurisprudence passage on fraud, questioning the lack of

information Braziel provided to the stockholders, and stressing Braziel’s failure to

hold a stockholder’s meeting. Braziel replied, “Hey Lin [sic] - if you are unhappy you

can always sell your shares in the open market. All of your accusations are baseless.”

Ex. 330 at ’687.

When Braziel did not make any changes in response to Goldberg’s email,

Goldberg warned Braziel that he intended to write the court. See Ex. 341. Braziel still

did nothing.

As promised, Goldberg sent the court a letter dated December 20, 2021. The

letter accused Braziel of “embezzl[ing] three million dollars from the shareholders,”

investing those funds for his personal benefit, failing to hold a meeting of

stockholders, and withholding from the court his plan to use the Company as a vehicle

for risky investing. Dkt. 78, Attach. at 1, 6, 9–10.

L. The Special Magistrate’s Investigation

By order dated January 11, 2022, the court appointed the Special Magistrate

to investigate Goldberg’s allegations and issue a report and recommendation. The

court gave the Special Magistrate the following charge:
19
The Special [Magistrate] is charged with investigating the allegations
in the ex parte submission. As part of that effort, the Special
[Magistrate] shall determine if the meeting of stockholders
contemplated by the [Discontinuation Order] took place. The Special
[Magistrate] also shall determine whether the motion to discontinue
liquidation was improvidently granted based on a failure by Braziel to
disclose material information regarding his plans for the Company,
taking into account that the liquidation proceeding was a one-sided, ex
parte affair under which petitioner’s counsel had a heightened ethical
duty of disclosure when making submissions to the court. The Special
[Magistrate] shall determine whether Braziel has engaged in self-
dealing transactions involving the Company. The Special [Magistrate]
shall evaluate whether Braziel used the court’s processes such that the
receivership proceeding resulted in an unfair outcome for the Company
and its stockholders.

After conducting his investigation, the Special [Magistrate] shall submit
a report to the court. The report shall contain a recommendation as to
whether further action should be taken. The Special [Magistrate] will
use his independent judgment. The Special [Magistrate] is not required
to recommend additional proceedings. If there is no substance to the
allegations, or if additional proceedings are not warranted, then the
Special [Magistrate] will say so.

Dkt. 79 ¶¶ 3–4 (citation and paragraph numbering omitted).

That same day, Braziel began contacting stockholders individually and asking

to buy their shares. The Special Magistrate believes he hoped to acquire a majority

of the shares so that he could approve a dissolution of the Company by written

consent and render the receivership moot. In those conversations, Braziel did not

disclose that the court had appointed a Special Magistrate, and he offered different

valuations to different stockholders.

Braziel also tried to conceal his self-dealing. Braziel already had created

falsified versions of the Company’s bank records to support positions taken in the

Company’s tax returns for 2017 and 2018. Now, he sought to modify the bank account

statements for 2020 and 2021.
20
To restore the funds that he had taken, Braziel caused two investment vehicles

to sell investments and make payments to the Company. He also communicated with

the Company’s transfer agent, bank personnel, and his counsel in an effort to mask

his self-dealing and demonstrate that his actions had been above board.

On January 13, 2022, Braziel emailed the Special Magistrate to deny

Goldberg’s allegations and promise a prompt liquidation. Braziel wrote as follows:

I must apologize for the slowness in getting the annual meeting done. It
really has taken longer than it should, and while I’d like to say it’s due
to complex pre‐receiverships issues (certainly hasn’t helped), or Covid
slowing down the process . . . , ultimately its own [sic] me keep the ball
rolling on this. Please note I’ve been prowling through the items needed
to get an annual meeting completed ASAP (requesting the NOBO list
and getting counsel to generate the required proxy materials etc.).
Needless to say Mr. Goldberg’s letter is completely false ‐ no cash has
been invested in any deals ‐ and at this point the goal is to simply hold
an annual meeting and then liquidate the Company distributing the cash
to shareholders, which is what Mr. Goldberg wants to see happen
anyway.

Ex. 360 (emphasis added).

On January 14, 2022, Braziel sent the modified bank statements and the

Modified Trial Balance to the Special Magistrate. The modified statement for

December 2021 reflected a balance of $2,155,280.47, but the actual balance for that

period was $24,956.47. Braziel posted the modified bank statements to a website that

he maintained for the Company’s receivership to show that everything was fine.

Between January 20 and 26, 2022, Braziel transferred $2,130,388.00 into the

Company’s bank account, increasing its balance to $2,155,280.47. He told a colleague

that Goldberg’s allegations were false and that “the judge is silly for” ordering an

investigation. Ex. 434 at ’316.

21
On January 27, 2022, at 1:41 p.m., the Special Magistrate issued a subpoena

to the Company’s bank based on irregularities in the modified bank statements.

Braziel responded by pulling them from the website and deleting the relevant

webpage.

Braziel also lawyered up. Guided by his new counsel, Braziel began

cooperating with the Special Magistrate.

M. The Report

On January 2, 2023, the Special Magistrate provided Braziel with a copy of his

draft report. On January 3, the court approved a stipulated order establishing a

schedule for Braziel to take exceptions to the draft report. Braziel initially raised

twenty-seven exceptions.

On June 30, 2023, the Special Magistrate filed the final version of his report.

He offered the following proposed findings and recommendations:

1. Braziel violated the Discontinuation Order by failing to call any
meeting of the Company’s stockholders.

2. The court improvidently granted Braziel’s motion to discontinue the
Company’s liquidation after Braziel withheld information material to
the court’s decision.

3. Braziel committed self-dealing by misappropriating the Company’s
cash in order to enrich himself and support his investment firms, High
Five Capital and 507 Capital.

4. Braziel used the court’s processes to create an unfair outcome for the
Company and its stockholders. If Braziel had not misled the court
regarding how he conducted the receivership, then the court would have
revoked his authority as receiver before most of his self-dealing could
have happened.

5. The court should appoint a new receiver for the Company. The
Company’s most valuable assets are its causes of action against Braziel
22
and [his affiliates] for breach of fiduciary duty, unjust enrichment, and
civil conspiracy. The record reflects the absence of any genuine dispute
of material fact concerning Braziel’s restitution liability for at least
$2,000,726.93. Braziel should show cause why the court should not enter
partial judgment directing him to pay the Company that amount now.
This relief would be without prejudice to the new receiver’s right to seek
additional recoveries. Braziel also should show cause why he should not
pay the expense of the special [magistrate’s] investigation, which the
Company has advanced under a court order.

Report at 60–61 (citation omitted).

The parties agreed that the Special Magistrate could file a further submission

addressing the merits of any exceptions he rejected. After receiving that submission,

Braziel filed his notice of exceptions to this court. In his brief, Braziel stated:

By and large, Braziel accepts the Report’s extensive factual and legal
findings. He further acknowledges and agrees to reimburse the
Company for the expense of the Special [Magistrate’s] investigation. He
also accepts and agrees to make restitution payments to the Company,
with the only modification being an accurate determination of certain
proceeds attributable to the third-party investor. Braziel is further
willing to enter into an agreement or stipulation with a new receiver and
to make restitution payments based on a mutually agreed-upon
payment plan.

Braziel Br. at 3. Braziel continued to pursue only the exceptions that this opinion

addresses.

II. LEGAL ANALYSIS

When ruling on exceptions to a magistrate’s recommendations, a constitutional

judge must conduct a de novo review, both as to matters of fact and issues of

law. See DiGiacobbe v. Sestak, 743 A.2d 180, 184 (Del. 1999). In this case, the state

of the record makes it possible to conduct a de novo review without a separate

evidentiary hearing.

23
A. The NOL Exception

Braziel first takes exception to the Special Magistrate’s recommended finding

that the value of the NOL was unsupported and unreasonable. The Report states:

Braziel’s principal tax strategy involved the Company claiming an
$8.725 net operating loss (the “NOL”). The NOL took the $10 million
purchase price that Galanis fabricated in 2007, added Media Options’
broker fee from 2018, and backed out the $1.5 million sale price from the
2018 [Website Address] Sale ($10,000,000 + $225,000 - $1,500,000 =
$8,725,000). The Company reported on its 2017 tax return that it had
sold the [Website Address] in 2017 (one year before it did). The Company
applied the NOL to avoid paying taxes on its 2017 gains from the [ETF
Provider] Settlement and the [ETF Provider] Judgment. In the end,
Braziel paid $1,544 in federal income tax on the receivership’s over-$2.1
million net recovery. According to a spreadsheet prepared by a tax
professional, the unsupported NOL cost the IRS over $485,000.

Report at 49 (citations omitted). The Special Magistrate further stated that the

Company had to rely on the NOL because it lacked the funds to pay its actual tax

liability due to Braziel’s takings. Response ¶ 6.n; see also Report at 47–48.

Braziel advances a range of challenges to this recommended finding. None are

persuasive.

1. The Factual Objection

Braziel first argues that the factual record does not support the Special

Magistrate’s recommended finding. To the contrary, the record contains ample

evidence to supports the Special Magistrate’s recommended finding after de novo

review.

The record shows that Galanis and his network of frontmen fabricated the

purported $10 million purchase for the Website Address. Importantly, Braziel does

not claim otherwise. Instead, he argues that “there is . . . little evidence that no

24
consideration was exchanged for the [Website Address]” and points to the shares

issued by the Company in exchange for the cash used to purchase the asset. Braziel

Br. at 26.

The issue for purposes of the NOL is not whether the Company paid

consideration, but whether the transaction actually supported a value of nearly $10

million. There is no evidence suggesting that $10 million was a bona fide, third-party

value. The purported $10 million purchase price resulted from what was effectively a

round-tripping of consideration through Galanis’s affiliates and associates. See Ex.

419. They wanted a number they could use to inflate the value of the Company for

purposes of a pump-and-dump scheme. The record as a whole indicates that they

inflated the value of the asset by approximately an order of magnitude.

The record also shows that Braziel knew Galanis had fabricated the purported

$10 million purchase price. After taking over as receiver in 2016, Braziel uncovered

Galanis’s fraudulent scheme. On December 3, 2016, he described the fraud as follows:

25
Ex. 425 (third emphasis added). Other communications confirm that Braziel knew

Galanis had fabricated the $10 million purchase price and that the Website Address’s

real value was closer to $1 million.8

And the record demonstrates that the Company both re-acquired and sold the

Website Address in 2018, not in 2017, as Braziel claimed for purposes of the NOL.

The Company repurchased the asset when settling the New York litigation in June

2018. Braziel hired an agent to sell the Website Address in October 2018. A sale closed

in December 2018, and the Company received the proceeds in January 2019.

Braziel thus knew that the actual value of the Website Address in 2018 was

around $1 million. He could not have believed in good faith that the Website Address

was worth $10 million in 2017, which was necessary to support the NOL.

Having conducted a de novo review of the record, the court agrees with the

Report’s findings that Braziel knowingly reported a false cost basis for the Website

Address to generate a fictional NOL.

8 See Ex. 80 at ’941–42 (Braziel writing in separate December 3, 2016 email

that “In Fund.com Inc.’s case I already understand that [Galanis] inflated the value
of the Fund.com domain (reportedly worth 10M – actually worth maybe 1M) . . . to
bogusly inflate the asset value of Fund.com.”); Ex. 77 (December 10, 2016 email from
Braziel stating “If [Galanis] owned [the Website Address] in 2004, then he owned it
in 2008 when Fund.com purported [sic] purchased it for 10M . . . .”); Ex. 78 (same);
Ex. 437 (June 24, 2022 voice message from Braziel to Company stockholder stating
“[t]here is, you know, audit risk around that NOL. I mean the basis for our $10 million
loss, which is from the domain, is just based on a market transaction that is
potentially, you know, fake. And so, I mean, I don’t want to tell the IRS that.”); Stout
Dep. 81 (“[t]he reported purchase price was $10 million. But what [Braziel] conveyed
to me and what I understood to be the general understanding was that that was a
made-up purchase price that [Galanis] facilitated amongst himself basically to inflate
the balance sheet of [the Company].”).

26
2. The Jurisdictional Objection

Braziel next argues that neither the Special Magistrate nor the court has

jurisdiction over the Company’s tax filings. Braziel asserts that only the “Secretary

of the United States Treasury, by delegation to the IRS” has the authority to assess

a taxpayer’s tax liability and “[t]he Report seeks to have the Court infringe upon this

authority by assessing the Company’s 2017 tax liability and determining the

existence of a deficiency.” Braziel Br. at 16. Those arguments miss the point. This

case will not determine the Company’s tax liability or find that there was a deficiency.

This case is about determining what went on during the receivership.

The Special Magistrate evaluated the legitimacy of the NOL because the court

charged him with investigating what happened during the receivership. The court

instructed the Special Magistrate to investigate the allegations of self-dealing that

Goldberg raised. The fabrication of the NOL was part of Braziel’s self-dealing and his

subsequent efforts to cover it up. His involvement in the fabrication of the NOL also

relates to his credibility and to fee-shifting under the bad faith exception.

When determining that Braziel used a knowingly false cost basis to avoid taxes

that the Company could not pay because of Braziel’s self-dealing, the Special

Magistrate did not re-assess the Company’s tax liability. Instead, the Special

Magistrate carried out his charge. By adopting the Special Magistrate’s well-

supported findings after de novo review, the court is not determining the Company’s

tax liability. Other tribunals may address that issue.

A particular factual or legal issue can be pertinent in multiple settings.

Resolving a properly raised legal issue in one setting does not interfere with or
27
disregard the ability of another tribunal to address it in a different setting. See Aviva

Life & Annuity Co. v. Am. Gen. Life Ins. Co., 2014 WL 1677798, at *11 (Del. Ch. Apr.

29, 2014) (holding request for declaratory judgment unripe and noting that resolving

request would require court’s “application, on an advisory basis, of Treasury

Regulations to a situation not yet addressed by the IRS” but explaining that “even if

I were to address and decide this issue, my decision would not be binding on the IRS

or the federal courts.”).

This court has jurisdiction to make factual findings relating to the legitimacy

of the NOL as part of its review of Braziel’s actions as receiver. The court empowered

the Special Magistrate to address those issues in the first instance, giving him

jurisdiction over those matters for purposes of preparing the Report. Braziel’s

contention that the Special Magistrate and the court lacked jurisdiction over those

subjects misunderstands the nature of this proceeding.

3. The Statute Of Limitations For Challenging The Tax Returns

Relatedly, Braziel argues that the Special Magistrate and this court cannot

consider the events surrounding the NOL because the time for the IRS to challenge

returns from 2017 and 2018 has passed. Braziel Br. at 24. Here again, Braziel misses

the point.

This proceeding is not about—and will not determine—the Company’s tax

obligations for 2017 and 2018. This proceeding is about whether Braziel took money

for himself that belonged to the Company. Evaluating whether the Website Address

had a value of approximately $10 million in 2017, as Braziel claimed, is part of the

assessment of his self-dealing, not a determination of how much the Company must
28
pay in taxes. The statute of limitations for a challenge to the Company’s tax filings

has no relevance to this case.

4. The Tax Opinion Objection

As his fourth objection, Braziel argues that the Special Magistrate could not

properly make any conclusions about the NOL without obtaining a “a tax expert’s

opinion because of the complex tax questions involved.” Braziel Br. at 21. To say it

yet again, neither the Special Magistrate nor the court is ruling on the Company’s

ultimate tax liability. The Special Magistrate made a recommendation, and this court

has considered de novo, whether the Website Address had a value of nearly $10

million in 2017. That is an issue of fact that does not require special tax expertise.

5. Fisher Weis’s Signoff

Braziel’s only meaningful objection to the Special Magistrate’s recommended

finding relies on the fact that the Company’s former tax preparer, Fisher Weis,

approved the NOL. Braziel Br. 22–23. But as the Special Magistrate explains,

“Braziel’s success leading others to credit a falsity did not make the falsity true.”

Response ¶ 6. Throughout his communications with Fisher Weis, Braziel

manipulated financial documents from the Company and third parties to cover up his

actions. Report at 47–48. Put simply, Braziel misled Fisher Weis.

If anything, the record suggests that Fisher Weis had doubts about Braziel’s

claims. Fisher Weis asked Braziel detailed questions and sought backup, ultimately

causing Braziel to discharge the firm. For purposes of the returns that Fisher Weis

filed, the firm ultimately demanded and received a representation letter from Braziel

in which he took personal responsibility for the contents of the Company’s filings. Ex.
29
283. Fisher Weis’s willingness to file the Company’s tax returns based on that

representation letter does not mean that Fisher Weis validated the NOL.

6. The Absence Of An Alternative Cost Basis

Finally, Braziel objects that the Report did not recommend an alternative cost

basis for the Website Address. Braziel Br. at 27. The court did not charge the Special

Magistrate with re-doing the Company’s tax filings. The court charged the Special

Magistrate with investigating whether Braziel engaged in self-dealing while serving

as a court-appointed receiver. To fulfill his charge, the Special Magistrate sought to

understand the value of the Website Address and figure out how the NOL related to

that value.

For the Special Magistrate’s charge, it was sufficient to determine that the

value of the Website Address never approached $10 million and that the Company’s

effort to claim an NOL that incorporated that valuation was not bona fide. Those

findings supported the Special Magistrate’s recommendation that Braziel acted

disloyally during the receivership. The Special Magistrate did not have to recommend

a dollar-and-cents finding about actual value. It was sufficient to determine that

Braziel overstated the value of the Website Address by an order of magnitude.

* * *

None of Braziel’s arguments about the NOL warrant rejecting the Special

Magistrate’s recommended finding. Having conducted a de novo review of that

determination and the supporting evidence, the court overrules Braziel’s exception

and adopts the portions of the Special Magistrate’s Report and Response concerning

the NOL.
30
B. The Fifth Amendment Exception

Braziel next asserts that the Report violated Delaware Rule of Evidence 512(a)

by commenting improperly and drawing an inference based on his invocation of the

Fifth Amendment privilege against self-incrimination. After examining the record,

the court finds that the Special Magistrate did not do that. Regardless, the court has

not done that.

Braziel’s objection relies on a combination of the Fifth Amendment to the

United States Constitution and Delaware Rule of Evidence 512(a). The Fifth

Amendment states, in pertinent part, that a person shall not be “compelled in any

criminal case to be a witness against himself . . . .” U.S. Const. amend. V. The

Supreme Court of the United States has explained that

the Fifth Amendment not only protects the individual against being
involuntarily called as a witness against himself in a criminal
prosecution but also privileges him not to answer official questions put
to him in any other proceeding, civil or criminal, formal or informal,
where the answers might incriminate him in future criminal
proceedings.

Baxter v. Palmigiano, 425 U.S. 308, 316 (1976) (cleaned up). Delaware Rules of

Evidence Section 512(a) states: “The claim of a privilege, whether in the present

proceeding or upon a prior occasion, is not a proper subject of comment by judge or

counsel. No inference may be drawn therefrom.” D.R.E. 512(a).

Rule 512(a) applies to any invocations of the Fifth Amendment, even in the

setting of a civil case. A. Schulman, Inc. v. Citadel Plastics Hldgs., LLC, 2018 WL

1812575, at *3–4 (Del. Ch. Apr. 15, 2018) (ORDER). “Although, as a matter of federal

law, courts presiding over civil actions may draw an adverse inference against a party

31
who invokes the privilege against self-incrimination without violating the U.S.

Constitution, . . . Delaware law prohibits courts in this State from doing so.” W.L.

Gore & Assocs., Inc. v. Long, 2011 WL 6935278, at *4 n.31 (Del. Ch. Dec. 28, 2011);

see also Digiacobbe v. Sestak, 1998 WL 684149, *10 (Del. Ch. July 7, 1998) (“I, as the

trier of fact, may not draw any inference from [the defendant’s] assertion of his

Constitutional right not to testify when to do so might incriminate himself.”).

Braziel invoked his Fifth Amendment rights during his deposition. Braziel

takes exception to three statements in the Report that refer to his invocation of his

Fifth Amendment rights, claiming that they contravene Rule 512(a).

1. The 500 Times Statement

Braziel first objects to the Report’s statement that “Braziel, his business

partner, and the receivership’s lead attorney testified by deposition, but Braziel’s

testimony fell short of its potential after he invoked the Fifth Amendment to the

United States Constitution over 500 times.” Report at 4 (the “500 Times Statement”).

To Braziel, the “over 500 times” implies an adverse inference that only someone guilty

of something would invoke the Fifth Amendment that often. Braziel Br. at 29–30. He

further contends that by saying the “testimony fell short of its potential,” the Special

Magistrate relied on the invocation of the Fifth Amendment to infer that Braziel’s

testimony was inadequate. Id.

The 500 Times Statement does not reflect an inference of guilt. It rather

explains why there were gaps in Braziel’s testimony. Any reader of the Report would

repeatedly wonder whether Braziel had any explanation for a particular event or

commentary on a particular issue. The 500 Times Statement informed the reader
32
that Braziel had not addressed numerous issues, not because the Special Magistrate

did not explore them, but rather because Braziel had invoked the Fifth Amendment.

That description does not invite an adverse inference; it provides a neutral factual

account of what transpired.

In the Response, the Special Magistrate confirmed that he included the 500

Times Statement when describing “how discovery unfolded.” Response ¶ 8. He

referenced the number of times not to suggest criminality, but rather to document

that Braziel was an evasive witness who invoked the Fifth Amendment even “in

response to innocuous questions that could not have provoked any confession of

criminality.” Id. This decision therefore overrules Braziel’s exception relating to the

500 Times Statement.

2. The No Inference Statement

Relatedly, Braziel challenges the following statement in the Report:

Braziel pled the Fifth when questioned about his acquisition of B.E.
Capital’s Class A shares in December 2021, but this report has not
drawn any inference from Braziel’s privilege assertions. On many
issues, the documentary evidence all pointed one way, so Braziel’s
decision not to answer simply was a missed opportunity to raise any
contrary evidence that might have existed.

Report at 89 n.99 (citation omitted) (the “No Inference Statement”). Braziel argues

counterintuitively that by stating that he was not drawing an adverse inference, the

Special Magistrate was in fact seeking an inference that the evidence against Braziel

“is so overwhelming that Braziel’s decision not to provide exculpatory testimony

necessarily mean [sic] he must be guilty of some crime.” Braziel Br. at 30–31.

33
That through-the-looking-glass argument works for conspiracy theorists, but

not for exceptions to a thorough and diligent report from a special magistrate. The

No Inference Statement means what it says: The Special Magistrate did not draw an

adverse inference from Braziel’s invocations of the Fifth Amendment. The court will

not draw an adverse inference either.

3. The Studies Statement

Last, Braziel challenges a third statement in the Report: “On November 15,

[2016], B.E. Capital moved for a default judgment naming Braziel as the Company’s

receiver. The motion emphasized that Braziel was a qualified person who had studied

the rules governing receivers of Delaware corporations, but Braziel later pled the

Fifth when asked to describe his studies.” Report at 15 (the “Studies Statement”).

Braziel argues that this statement requests two adverse inferences: (i) Braziel is

“untrustworthy because he refused to answer a simple question” and (ii) “Braziel

asserted the Privilege because he knows he lied to the Court about studying the rules

governing receivers of Delaware corporation.” Braziel Br. at 30.

The Studies Statement does not support either inference. The Studies

Statement appears is in a section titled “The Company Enters Receivership.” It is a

neutral and accurate statement that provides historical background. The Report does

not use the statement to suggest that Braziel is untruthful or untrustworthy. It

describes a fact that is plain from the face of Braziel’s deposition transcript. Braziel

Dep. 65–66.

The one additional wrinkle is that the Special Magistrate cited the Studies

Statement as an example of Braziel’s evasiveness in his deposition. Response ¶¶ 8 &
34
8.f. Evaluating the matter under a de novo review, the court agrees that in this

instance, Braziel did not act reasonably when invoking the Fifth Amendment.

There are limits in a civil case on a litigant’s ability to invoke the Fifth

Amendment. A witness cannot “avoid interrogation, in vacuuo, by merely stating that

his answers may tend to incriminate him.” W.L. Gore, 2011 WL 6935278, at *1

(citation omitted). “Rather, in a civil setting, invocation of the privilege must be

confined to instances where the witness has reasonable cause to apprehend danger

from a direct answer.” Id. (cleaned up). Thus, “assertions of privilege must be made

on a question-by-question basis where the particular answer either would support a

conviction or furnish a link in the chain of evidence needed to prosecute the witness.”

Id. (cleaned up).

Braziel argues he had a reasonable cause to apprehend danger when the

Special Magistrate questioned him about familiarizing himself with the Delaware

rules governing receivers. According to Braziel, his answers to those questions could

“form a link in the chain necessary to prosecute Braziel for criminal fraud, since an

answer that Braziel did not perform the studies relayed to the Court could potentially

establish the knowledge and intent elements of criminal fraud.” Braziel Br. at 34–35.

That is not a reasonable contention. If Braziel did not study the requirements, then

by definition he would not have known about them.

Because Braziel represented that he had studied the requirements, Braziel

claims he properly invoked the Fifth Amendment because “making a false submission

to the Court could constitute an overt criminal act necessary for conspiracy charges.”

35
Id. at 35. A false statement about reading the requirements for a receivership might

warrant a civil sanction. It is hard to envision that statement leading to a criminal

sanction.

Braziel did not act reasonably when invoking the Fifth Amendment in

response to questions about his efforts to familiarize himself with the law governing

receiverships. The Special Magistrate’s statements to the same effect, therefore, did

not violate D.R.E. 512(a). This decision therefore overrules Braziel’s exception based

on the Studies Statement.

C. The Sixth Amendment Exception

In his third exception,9 Braziel claims that the Special Magistrate procedure

deprived him of his “constitutional right to a trial by a jury” because the Report

“concludes that the evidence establishes, prima facie, the elements of the crimes of

theft, forgery, and tax evasion.” Braziel Br. at 36–37. That is not so.

The Sixth Amendment states in pertinent part that “[i]n all criminal

prosecutions, the accused shall enjoy the right to a speedy and public trial, by an

impartial jury of the State and district wherein the crime shall have been committed

. . . .” U.S. Const. amend. VI. To state the obvious, the Report was not a criminal

prosecution.

9 Braziel groups his Fifth Amendment and Sixth Amendment exceptions
together, resulting in a total of three exceptions to the Report. This decision splits
them out for simplicity, resulting in a total of four exceptions. The stylistic change
has no substantive effect.

36
The Special Magistrate used the elements of the crimes of theft, forgery, and

tax evasion to analyze whether Braziel should have to pay for the costs of the Special

Magistrate’s investigation under the bad faith exception to the American Rule.

“Generally, under what is commonly known as the American Rule . . . , each party

involved in litigation will bear only their individual attorneys’ fees no matter what

the outcome of the litigation.” William Penn P’ship v. Saliba, 13 A.3d 749, 759 (Del.

2011) (cleaned up). “One of the well-recognized common law exceptions to the

American Rule is the power of a court or an administrative tribunal, otherwise vested

with equitable authority, to award attorney’s fees when the ‘losing party has acted in

bad faith, vexatiously, wantonly, or for oppressive reasons.’” Brice v. State of Del.,

Dept. of Correction, 704 A.2d 1176, 1179 (Del. 1998) (quoting Alyeska Pipeline Serv.

Co. v. Wilderness Soc’y, 421 U.S. 240, 258–59 (1975)). For purposes of the bad faith

exception, “the fact that a party engaged in conduct which, on its face, would establish

a prima facie case for violating a criminal statute provides powerful evidence that the

party acted in bad faith.” Choupak v. Rivkin, 2015 WL 1589610, at *21 (Del. Ch. Apr.

6, 2015), aff’d, 129 A.2d 232 (Del. 2015).

The Special Magistrate found that Braziel’s conduct rose to the level of bad

faith. Relying on Choupak, he explained that “by taking from the WSFS Account,

falsifying bank records, and inflating the [Website Address’s] cost basis on the

Company’s federal tax returns, Braziel committed conduct that, on its face, meets the

elements of crimes that include theft, forgery, and tax evasion.” Report at 71 & n. 89

37
(first citing 11 Del. C. § 841(a) (elements of theft); then citing id. § 861(a) (elements

of forgery); and then citing 26 U.S.C. § 7201 (elements of tax evasion)).

By making those observations, the Special Magistrate did not find that Braziel

committed those crimes or could be convicted for them. The Special Magistrate made

recommended factual findings in a civil case to the effect that Braziel’s conduct

appeared sufficiently egregious to warrant fee-shifting.

After conducting a de novo review, this court agrees with the Special

Magistrate’s recommended findings. To be clear, that is also not a criminal conviction.

This court lacks jurisdiction over criminal cases. A prosecutor could not pick up the

Report and ask a court to declare Braziel guilty under some bizarre concept of res

judicata. Nor could a prosecutor do so with this court’s decision. Any finding of

criminal liability in connection with Braziel’s actions would require a prosecution and

a trial by jury.

The bad faith analysis that the special magistrate conducted and this court

agrees with after de novo review looks to the elements of criminal law solely as a

navigational aid to determine at what point a party’s conduct transitions from merely

aggressive to egregious to glaringly egregious. The criminalization of particular

behavior provides an indication that the conduct falls towards the more blameworthy

end of the spectrum. Whether the party actually committed a crime is not for this

court to decide.10

10 Consider an analogy: A parent who is not a qualified doctor has no ability to

diagnose medical conditions. When evaluating their child’s condition, the parent may
38
After reviewing the matter de novo, the court finds that the Report

appropriately compared Braziel’s conduct to the elements of criminal offenses for the

purpose of measuring whether Braziel’s actions were sufficiently egregious to require

fee-shifting under the bad faith exception to the American Rule. The Report did not

violate the Braziel’s Sixth Amendment right to a trial by jury, so this decision also

denies that exception.

D. The Belmond Investment Exception

Braziel’s final exception relates to the Special Magistrate’s recommendation

that he pay the Company $2,000,726.93 in immediate restitution, representing a

portion of the amounts Braziel took from the Company with the associated gains.

Braziel argues that he should only have to pay $1,850,726.93, or $150,000 less. For

purposes of the immediate award of restitution, the court grants Braziel’s exception

but only reduces the award by $94,337.06 to $1,945,063.99. At this stage of the case,

the court cannot conclude that a greater amount is warranted using the summary

judgment standard that the Special Magistrate appropriately recommends.

“Summary judgment is only appropriate where, viewing the facts in the light

most favorable to the non-moving party, the moving party has demonstrated that

nevertheless look to symptoms associated with known illnesses to determine whether
to keep the child home from school, see a doctor, or head to the emergency room. By
taking symptoms into account and comparing them with information about illnesses,
the parent is not usurping the doctor’s task, nor is the parent making an official
diagnosis. That is for the doctor to do. But a knowledgeable parent can make a
preliminary assessment of the situation. Likewise, a court that does not handle
criminal cases can help orient itself to whether particular conduct is egregious by
looking at whether society has seen fit to criminalize related types of conduct.

39
there is no genuine issue of material fact and the moving party is entitled to judgment

as a matter of law.” Dambro v. Meyer, 974 A.2d 121, 138 (Del. 2009). The court must

deny summary judgment “if there is any reasonable hypothesis by which the opposing

party may recover, or if there is a dispute as to a material fact or the inferences to be

drawn therefrom.” Applied Energetics, Inc. v. Farley, 239 A.3d 409, 425 (Del. Ch.

2020) (quoting Vanaman v. Milford Mem'l Hosp., Inc., 272 A.2d 718, 720 (Del. 1970)).

In this setting, Braziel is the non-moving party.

Braziel invested a total of $370,000 into Belmond. The total proceeds generated

from the investment were $1,494,337.06. Of the amount invested, $270,000 came

from the Company, and $100,000 came from Braziel’s father-in-law and brother-in-

law. The Special Magistrate proposed to account for the in-laws’ investment by

seeking interim restitution for the Belmond Investment in the amount of $1.35

million, which assumes that $144,337.06 of the proceeds were attributable to the in-

laws’ funds. That approach would credit Braziel’s in-laws with $1.44 for every $1 they

invested.

Braziel challenges the Special Magistrate’s allocation. He proposes that the

court credit his in-laws with $200,000 from the Belmond Investment, or $2 for every

$1 invested.

In reaching his figure, the Special Magistrate recommended a finding that the

in-laws largely cashed out by October 2018, before most of the gains materialized in

December 2018. Braziel disputes that assessment. He also maintains that once he

40
comingled his in-laws’ funds with the Company’s, then any future gains or

withdrawals must be allocated proportionately.

There are two Restatements of Restitution that address this issue. The Special

Magistrate relies on the Third Restatement.11 Braziel relies on the First

Restatement.12 Since the publication of the Third Restatement in 2011, the Delaware

courts have relied on it consistently.13 There is one Delaware case that applied the

First Restatement’s rule on co-mingled funds, but that case was decided in 1985,

twenty-six years before the Third Restatement was published, and it addresses an

issue where the Third Restatement applies the same rule.14 That decision does not

reflect a determination to follow the First Restatement at the expense of the Third.

11 Restatement (Third) of Restitution and Unjust Enrichment (Am. L. Inst.

2011) [hereinafter Third Restatement].

12 Restatement (First) of Restitution (Am. L. Inst. 1937) [hereinafter First
Restatement].

13 E.g., State v. Monsanto Co., 299 A.3d 372, 391 (Del. 2023); Morgan v. Scott,

2014 WL 4698487, at *2 n.6 & *3 n.12 (Del. Sept. 22, 2014) (TABLE); Principal
Growth Strategies, LLC v. AGH Parent LLC, 2024 WL 274246, at *12 (Del. Ch. Jan.
25, 2024); Gener8, LLC v. Castanon, 2023 WL 6381635, at *31 n.390 (Del. Ch. Sept.
29, 2023); In re Columbia Pipeline Gp., Inc. Merger Litig., 299 A.3d 393, 479 n.37 (Del.
Ch. 2023); Garfield. v. Allen, 277 A.3d 296, 343 (Del. Ch. 2022); Metro Storage Int’l
LLC v. Harron, 275 A.3d 810, 866 (Del. Ch. 2022); Paul Elton, LLC v. Rommel Del.,
LLC, 2020 WL 2203708, at *13 (Del. Ch. May 7, 2020); Urdan v. WR Cap. P’rs, LLC,
2019 WL 3891720, at *20 (Del. Ch. Aug. 19, 2019), aff’d, 244 A.3d 668 (Del. 2020);
Preferred Inv. Servs., Inc. v. T & H Bail Bonds, Inc., 2013 WL 3934992, at *21 n.201
(Del. Ch. July 24, 2013), aff’d, 108 A.3d 1225 (Del. 2015).

14 See Lomas & Nettleton v. Graybeal, 1985 WL 44701, *3 (Del. Ch. Apr. 17,

1985) (citing First Restatement and holding that “[t]he fact that defendants may have
comingled their own funds with the misappropriated funds does not destroy the
identity of the trust property since the funds can be traced to specific purchases-the
house and furnishings.”); see also Third Restatement § 58(1) (“A claimant entitled to
41
Fortunately, there are only limited differences between the two regimes. As

the Third Restatement explains, the rules for tracing commingled funds are

consistent “in all respects but one.” Third Restatement § 59 cmt. a. That one issue

involves how to treat a conscious wrongdoer’s share of commingled funds. Id.

Under the First Restatement, a claimant who traced assets through a

commingled fund into a product of the fund is limited, even against a conscious

wrongdoer, to a share of the product “in such proportion as his money bore to the

whole amount of the fund.” First Restatement § 210(2). Under that regime, which

emphasizes the “rule of proportionality,” the Company could only recover an amount

of gains proportionate to its investment of $270,000. Even if the court determined

that Braziel’s in-laws were wrongdoers, the Company could not gain a more beneficial

allocation.15

restitution from property may obtain restitution from any traceable product of that
property, without regard to subsequent changes of form.”).

15 See First Restatement § 213(1) (“where a person wrongfully mingles money

of two or more persons, each of them is entitled to share in the mingled fund or in
property acquired with the fund, in such proportion as his money bore to the whole
amount of the fund.”); id. cmt. c (“Where a person wrongfully mingles money of two
or more persons and subsequently wrongfully withdraws and dissipates a part of the
money, the claimants are entitled to share the balance proportionately. This is true
where the wrongdoer deposits the money of two or more persons in a single bank
account and subsequently makes withdrawals which he dissipates. It is immaterial
in what order the deposits were made, since there is no inference that the money first
deposited is the money first withdrawn. The rule in Clayton’s Case (see § 211,
Comment a) that withdrawals are presumed to be in the same order as that in which
the deposits were made, has no application to this situation, where the intention of
the wrongdoer in making withdrawals is immaterial.”).

42
Under the Third Restatement, when a wrongdoer is involved, the claimant can

“claim the entire advantage of beneficial withdrawals that can be attributed to the

claimant’s funds (§ 59(2)(a)).” Third Restatement § 59 cmt. a. Under this regime, an

innocent claimant can identify as the traceable product of his property the whole of

any investment made by withdrawal from the commingled fund, “consistent with the

limitations of lowest intermediate balance.” Id. cmt. d. Under that rule,

[t]he claimant, in effect, is allowed to trace into that portion of the
commingled fund (or any withdrawal from the fund) that equals but does
not exceed the lowest balance reached by the fund between (x) the point
at which claimant's property is added to the fund, and (y) the point at
which the withdrawal is made or the fund is apportioned.

Id. cmt. a. If the wrongdoer commingled the claimant’s funds with his own or another

wrongdoer’s funds, then “[d]isadvantageous or untraceable withdrawals are

attributed to the wrongdoer’s funds, to the extent the available balance permits.” Id.

cmt. d.

The Third Restatement’s approach is more equitable in that it elevates the

interests of an innocent party over the claims of wrongdoers. It also enables a court

to adapt the form of relief to the circumstances. In contrast to the single rule for all

settings that the First Restatement uses, Section 59 of the Third Restatement “states

distinct rules for different categories of cases, depending on the equitable status of

the competing parties.” Third Restatement § 59 cmt. a.

For purposes of tracing commingled funds under the Third Restatement, the

more claimant-friendly rules apply only when “property of the claimant has been

commingled by a recipient who is a conscious wrongdoer or a defaulting fiduciary (§

51) or equally at fault in dealing with the claimant’s property (§ 52) . . . .” Third
43
Restatement § 59(2). Someone is “equally at fault” when they were unjustly enriched

as a result of “bad faith or reprehensible conduct.” Id. § 52(2)(c) (citation omitted).

The Special Magistrate recommended a finding that treated the in-laws as

wrongdoers under the Third Restatement because they knew at all times that Braziel

intended to use the Company’s funds to make investments. The evidence supports his

proposed finding on knowledge: On December 26, 2017, Braziel emailed his in-laws

to follow up on a conversation they had the prior day. Report at 25 (citing Ex. 122).

Braziel wrote: “Hey, guys, I was being very serious yesterday about Fund.com Inc

[sic] and its ability to house deals. I love the ship management roll-up idea and

Fund.com has of course cash (about 1.4m USD currently), but also a public stock to

use as currency if you needed for deals.” Ex. 122. Braziel attached a bank statement

for the Company’s account and crowed that it showed a “bank account balance

showing 1.4m ready for investment.” Id.

Based on this recommended finding, the Special Magistrate carefully traced

the in-laws funds using the Third Restatement’s principles. He then recommended a

finding to the effect that Braziel had either withdrawn the bulk of the in-laws funds

or invested them unprofitably by the end of October 2018 and that only $9,621.26 of

the in-laws’ funds remained invested after October. As a result, the Special

Magistrate recommended using that figure when determining the in-laws share of

the eventual gains.

The Special Magistrate properly applied the Third Restatement’s tracing

principles. But there is a difference between (i) knowing that Braziel planned to use

44
Company funds to make investments and (ii) knowing that Braziel was not permitted

to make investments using Company funds. Under a summary judgment standard,

the court cannot conclude that Braziel’s in-laws knew the latter. At this stage of the

case, the court cannot conclude that Braziel’s in-laws engaged in the kind of “bad

faith or reprehensible conduct” that qualifies a party as “equally at fault” and subject

to the anti-wrongdoer and pro-claimant presumptions of Section 59(2) of the Third

Restatement.

If the court could conclude using a summary judgment standard that the in-

laws were conscious wrongdoers, then the court would agree with the Special

Magistrate and adopt his conclusion. But because the court cannot make the

predicate determination, the court cannot—as yet—adopt the Special Magistrate’s

reasoning on this topic.

But the court also cannot adopt Braziel’s alternative amount. Although Braziel

argues for applying restitution principles from the First Restatement, he has not

provided an alternative amount that follows those principles. Instead, Braziel argues

the “best evidence” of his in-laws’ portion of the gains from the Belmond Investment

is a series of wires totaling $200,000 that he sent from his personal bank account in

November and December 2019. Braziel Br. 46–49. After accounting for a $50,000

reduction that the Special Magistrate made in response to Braziel’s exceptions, 16

16 The Special Magistrate’s draft report initially omitted a second wire of
$30,000 from Braziel’s in-laws to the First Brokerage Account. Response ¶ 7.a. In
response to Braziel’s exception, the Special Magistrate reduced the award by $50,000
to account for the omitted wire and some margin for error. Id.; Report at 79 & n.95.

45
Braziel subtracted the remaining $150,000 from the Report’s topline recommended

award of $2,000,726.93, to arrive at a revised amount of $1,850,726.93. Braziel Br. at

49. But in focusing on the topline number Braziel misapprehends the Report and

overcorrects the award.

Braziel did not take an exception to the Special Magistrate’s recommended

finding that the Belmond Investment achieved gains of approximately $1,494,337.06.

Apportioning $200,000 of that amount to Braziel’s in-laws leaves $1,294,337.06 for

the Company.

The Belmond Investment accounted for $1,350,000 of the Report’s

recommended award. Replacing that figure with the $1,294,337.06 apportionment

implied by Braziel’s exception results in a revised award of $1,945,063.99. That

revised award exceeds Braziel’s proposed figure of $1,850,726.93 by $94,337.06.

The $94,337.06 delta derives from Braziel’s apparent misunderstanding of the

Report’s calculation. The Report’s recommended amount of $2,000,726.93 addressed

multiple investments that Braziel made using the Company’s money. Report at 78–

84. Braziel only took exception to the portion of the award for the Belmond

Investment, so only that $1,350,000 is at issue. Reducing that portion of the award

by $150,000 attributes $1,200,000 to the Belmond Investment. The tables below

compare the calculations:

46
III. CONCLUSION

As to the issues where Braziel takes no exception, the court adopts the

proposed findings and recommendations set forth in the Report. As to issues where

Braziel took exceptions, this decision overrules all but the exception relating to the

Belmond Investment after conducting a de novo review. This decision grants Braziel’s

exception regarding the allocation of proceeds from the Belmond Investment but does

not adopt Braziel’s proposed alternative immediate restitution award. Instead, the

court reduces the award to $1,945,063.99.

This decision discharges Braziel as receiver but without any limitation on his

potential liability for actions taken in that capacity. The court retains jurisdiction

over Braziel for purposes of further proceedings.

Within twenty days, Braziel must pay the Company restitution in the amount

of $1,945,063.99, plus post-judgment interest at the legal rate compounded monthly.

Braziel must pay the fees and expenses of the Special Magistrate. If the parties

cannot agree on an amount, then the Special Magistrate will file an appropriate

motion.

Within thirty days, the Special Magistrate will identify three individuals who

are qualified and willing to serve as successor receivers. The court will select one. The

new receiver can then determine how to proceed, including whether to pursue

additional claims against or remedies from Braziel.

Within ten days, the Special Magistrate will submit an order, on notice to

Braziel, implementing these rulings.

48