Civil Case (Jerusalem) 54447-03-22 Ruth Corrie vs. Aryeh (Larry) Debrett

1. The cause of action is the plaintiffs' claims that they invested money in a failed business venture due to fraudulent representations or at least negligent misrepresentation by defendants 1 and 2, and as a result their money went down the drain. According to them, the defendants must indemnify them for the money that was lost, and compensate them for the hoped-for fruits and for the mental anguish caused to them.
2. Plaintiffs 1, 3-2 and 5 (hereinafter: Cory, Ancona and Guyot, respectively) loaned money to American Israel Development Shop in a tax appeal (hereinafter: the corporation or shop) owned by defendant 1 (hereinafter: Debret). Ancona and Guyot transferred the loan money through companies they owned (plaintiffs 4 and 6).  The loan was given as an investment in an economic venture of the corporation whose purpose is to promote a number of urban renewal projects (TAMA 38) and to maximize profits from them (hereinafter: the business venture).  Defendant 2 (hereinafter: Fine) presented the business venture to the plaintiffs and advised them to invest in this channel.  Debret paid Payne a commission at a rate derived from the amount of the loan invested in the project.

Corey invested ILS 400,000 in the economic venture on February 11, 2019, and again invested a similar amount on March 9, 2020.  Giyot invested ILS 700,000 in the venture on September 29, 2019.  Ancona invested ILS 1,014,512 ($300,000) in the venture on July 11, 2020.  Since the investment was made by way of a loan to the corporation, a loan agreement was signed between the corporation and each of the plaintiffs in a uniform and identical version, which includes exemption clauses that limit the possibility of suing the corporation in the event that the venture does not go well.

3. Later, the corporation entered into liquidation proceedings following the failure of the business venture, and the plaintiffs found themselves in a broken trough. Due to the fact that the corporation was insolvent, and apparently also in view of the contractual stipulations in the loan contract, the plaintiffs did not initiate proceedings against it.  They chose to sue the defendants for representations they made prior to the transfer of the funds.  According to them, at the time the defendants persuaded the plaintiffs to lend money to the corporation for the purpose of the investment, they knew that the venture had already encountered very significant economic difficulties and that one was doomed to fail.  According to them, the defendants' persuasion actions against them amount to torts of fraud and negligent misrepresentation.  Therefore, they are demanding the return of the investment funds, the nominal amount of which is approximately ILS 2,100,000, together with linkage and interest differences, as well as compensation for the loss of the opportunity for alternative transactions and for the mental anguish caused to them.
4. I will make it clear at this point that my conclusion is that the lawsuit against Debret should be accepted, both on its merits and on procedural grounds; and the lawsuit against Fine should be dismissed for reasons relating to the non-existence of factual and legal foundations that are necessary to prove the conditions of the tort of negligent misrepresentation.

Background to the proceedings and the manner in which they unfold

5. Before discussing the parties' arguments, it is necessary to briefly address the nature of the prior acquaintance between the parties; and the way in which the focus of the plaintiffs' claims changed after it became clear that it was not possible to repay Debert. This will clarify some of the background to the events and the reason why during the litigation the plaintiffs chose to turn their arrows at Fine, after initially focusing on the allegations against Debreth.
6. Acquaintance between the parties: Most of the parties - all of whom speak English as their mother tongue and this language was used by them in all their written and oral contacts - had an early acquaintance and closeness. Corey and the defendants lived on the relevant dates of the lawsuit in the Beit Shemesh area.  The Corrie couple and Payne and his wife had a close friendship, and Corey's husband taught Debret Hebrew.  Ancona (who are brother and sister) and Guyot lived in the United States at the relevant times.  Guyut and Fine have been friends since 2014, following a bicycle trip to Israel in which the two participated.  Already that year, Giot also met Debrett, who even before the events that were the subject of the lawsuit, had tried to interest him in investing in projects he initiated in 2014 and 2018 (paragraph 9 of Guyot's affidavit).  The Ancona brothers are the only ones among the plaintiffs who did not have prior acquaintance with the defendants.  The relationship between them was created after plaintiff No.  2 approached Payne, who presented himself on LinkedIn (a social network that is commonly seen as having a professional tone) as an expert in real estate investments in Israel, and was interested in investing in real estate in Israel.
7. Changing the focus of the claims: The statement of claim focused, in essence, on Debrett's actions and omissions. Fine's involvement was presented as secondary to that of the corporation owner and the initiator of the business venture.  It is possible that this was due, inter alia, to the fact that the defendants were of the opinion at the time that Fine did not seek to defraud them (as Corey wrote in real time and as she testified in court - p.  59 of the appendices to Fine's affidavit; p.  23 of the transcript, lines 15-16).  The statement of defense was filed on behalf of both defendants.  It clarified, inter alia, that Fine also persuaded his parents to invest in the venture at the time of the plaintiffs' investments, and attached documents attesting to the agreement signed with Fine's parents.  Evidence to support this was also attached to Payne's affidavit and to an affidavit prepared by his mother, who the plaintiffs had waived her interrogation.
8. In April 2023, Debret's representation was terminated by Adv. Cohen, who continued to represent Fine. From that moment on, Debret did not act to advance his case in the lawsuit.  He appeared for two pre-trial hearings, apparently because the plaintiffs' request for a restraining order on the home of the Debrets (the rights of which are fully registered in his wife's name) was being discussed.  Despite this, Debreth refrained from presenting evidence and chose not to appear for the evidentiary hearing and not to submit summaries.  Hence, the provision of Regulation 75(2) of the Civil Procedure Regulations, 5779-2018 applies in his case, and the plaintiffs are entitled to prove their claim and win the requested relief against him.
9. Whether in light of the fact that Debret stopped cooperating with the proceeding and no assets registered in his name were discovered, or because the corporation he owns entered liquidation and it became clear that he did not own realizable assets, or for other reasons, the defendants chose to significantly change the line of argument at the stage between the statement of claim and the filing of their affidavits. In the lawsuit, the plaintiffs focused mainly on Debreth's actions, even though they claimed that Fine collaborated with him in the false representations made against them.  In their affidavits, the plaintiffs chose to relate at great length to the actions and omissions of Fine, who appears to be the owner of a real estate property (used as the residence of his nuclear family) that may enable partial repayment of the funds that went down the drain.
10. As a presumption of presumption of presumption, I will clarify that what was stated in the pleadings and what was attached to them is sufficient to reject the claim that Fine was actually aware of the difficulties that the venture encountered. No factual basis was laid for the far-reaching assumption that Fine sought to derail his parents from investing in a venture that he knew was doomed to failure, and the plaintiffs chose not to question his mother on matters relating to this or the relationship between the parents and their son.
11. Since Debret chose not to present evidence or appear for the evidentiary hearing, and when Fine does not in fact deny what emerges from the documents relating to the venture as disclosed by the plaintiffs, there is no need to address the issue of liability imposed on Debret at length. The facts relating to this matter will be briefly reviewed below.  It will be possible to conclude from them when it seems that Debret was aware of the difficulties in which the projects encountered.  This conclusion is invalid with respect to Payne's knowledge.  Since there is no dispute that Fine "does not hold any position in the companies and it is not claimed that he was organized in them" (paragraph 3 at p.  2 of the plaintiffs' reply), there is no basis for the assumption that Fine was a partner in this information; It has not been proven at all; In fact, it seems that what was said in this context was argued verbally and externally (although in the summaries the plaintiffs claimed that Fine did not tell the truth in various contexts).
12. Hence, the discussion in Fine's case must focus on the question of whether the elements of the tort of negligent misrepresentation apply in his case. This will include a mature discussion of the nature of the duty that applies to him, whether he was negligent in his actions towards the plaintiffs and whether there was a causal connection between the representation and their decision to invest the funds in the business venture.  The plaintiffs' argument today is that Payne was obligated to conduct his own inquiries, and not to rely on Debrett's representations; and that he should have positively examined what collateral was provided to secure the plaintiffs' investments.

It should be emphasized that the argument regarding the collateral was raised at a relatively late stage of the proceedings.  In the statement of claim, the allegations focused on the fact that Debret and Fine created the appearance of a successful project, contrary to reality.  The statement of claim does not claim that Fine created a representation that there are proprietary collateral for the venture.  The issue of collateral was mentioned in the statement of claim in the context of the fact that liens were recorded on some of the assets at a later date for the loans, while claiming that this was done in order to add a touch of credibility to the fraud.  The argument that representations were made regarding collateral that would be provided to the venture and that would secure the investment by way of a loan, was in fact raised for the first time in the affidavits of the main witness.  This can eat away at her weight.

13. After presenting the facts relating to the date on which it could have been assumed that the business venture carried a significant risk, and the determinations regarding Debreth's liability, the evidence leading to the conclusion that Payne had no actual knowledge of the state of the business venture will be briefly discussed. Afterwards, Fine's representations to the plaintiffs will be examined, their impact on their decision to invest, and the legal questions that must be decided as a result of those factual determinations.

Establishing the business venture and encountering difficulties

14. Debret owned 100% of the shares of a company called American Israel Development D.A.K.I. in a tax appeal (the company's text was attached as Appendix 2 to the statement of defense).  This company owns 100% of Shoop's shares (Shoop's version was attached as Appendix 1 to the statement of defense), and apparently also of other companies owned by Debret that were involved in various urban renewal projects.  Shoop's version indicates that Debret served as a director and CEO of the corporation.  At the time of the signing of the agreements relating to the venture, Jonathan Kestenbaum (hereinafter: Kestenbaum) also served as a manager in the shop.  In the prospectuses describing the business venture, Debrett was described as the CEO of Shop and Kestenbaum was described as the "president" of the corporation (see, for example, at p.  61 of the Corrie exhibits).

It should be noted that the plaintiffs did not initiate proceedings against Kestenbaum.  This, it seems, is because he was not in contact with them regarding and regarding investments; He was mainly in charge of liaison with the professionals involved in the project (p.  16 of the minutes, lines 27-28); Left the business partnership at some point; He and his family lost a huge sum of money that they had invested in the venture (p.  15 of the transcript, lines 12-13; for the exact amount, see paragraph 22 of the statement of defense).

15. On December 21, 2017, Shoup signed an agreement with Schopenhauer Arthur Entrepreneurship (hereinafter: Schopenhauer Entrepreneurship) and with its manager, the late Shmuel Or (hereinafter: Or). Schopenhauer stated that it had entered into agreements for urban renewal with the rights holders in five real estate projects (clause 3.5 of the agreement, which was attached as Appendix A to the statement of claim).  In the agreement, it was clarified that the assets were lien on in favor of the entity that financed the entrepreneurial company, the Wealthstone Corporation (which includes many subsidiaries; hereinafter referred to as Wealthstone).  It was agreed that Shop would provide a total of approximately ILS 24,000,000 for the purpose of financing the projects, at an interest rate of 13% and against 70% of the projects that Schopenhauer manages.  Of this sum, a sum of ILS 1,500,000 will be made available as an all-purpose loan for Or himself (clause 5.10 of the agreement).  One of the projects, on HaMatid Street in Holon (hereinafter: the HaMatmid Project), was under construction at the time.  It was agreed that the loan would bear an interest rate of 18%.  It was also agreed that the entire project account would be pledged in favor of Shop in the first specific lien of the rank (clause 9.16 of the agreement); Or will sign an independent and autonomous personal guarantee (clause 11.1 of the agreement); A specific third-degree lien will be registered in favor of Shoop, discounted only from that of Wellstone, on the property in the permanent project (clause 11.1.7 of the agreement), and after the amount covering the debt for a loan in the permanent project is transferred to Shoop, a specific first-degree lien will be registered in favor of Shoop on the full rights in the permanent project, without any other lien (clause 11.3.1 of the agreement).
16. There is no dispute that the corporation fulfilled its obligation and transferred to Schopenhauer and in light a loan in the total amount of approximately ILS 24,000,000. However, at the latest in early 2019, it became clear that Schopenhauer and Or had fundamentally violated the agreement.  This was expressly stated in the preamble to the addendum to the agreement of February 26, 2019 and in clause 3.1 of the body of this agreement (part of Appendix B to the statement of claim).  At that time, the corporation decided to take on the management of the projects, according to him, in the hope that he would be able to put them on the path to success (paragraphs 20-22 of the statement of defense).  Therefore, it was stipulated in this addendum to the agreement that the percentage of profits would be changed, and that the corporation would begin to realize some of the collateral, and would do so by transferring a project on Hanevi'im Street in Bat Yam to its management for the purpose of managing it, executing it and making the profits from it (clause 3.2.1 of the addendum to the agreement).  In another addendum to the agreement, dated March 18, 2019 (Appendix B to the statement of claim, at the beginning of the agreement), Schopenhauer reiterated that it was in a state of fundamental breach of the agreement (clause 2.1 of the addendum to the agreement).  This time, the parties agreed that the corporation would begin to realize an additional part of the collateral, and would do so by transferring the Matmid project to its hands for the purpose of managing it, executing it and making the profits from it (clause 2.2 of the addendum to the agreement).

The background to the signing of these agreements can be learned from a request filed by Shoup for an order to open liquidation proceedings in the insolvency case 9334-12-21 (Appendix 9 to the statement of claim).  In the application, which was supported by Debreth's affidavit, it was stated that the corporation transferred to Schopenhauer a loan in the amount of ILS 23,748,449, which included a loan for any purpose in the amount of ILS 4,876,216 that was transferred directly to Or (paragraph 7 of the application).  It alleges that Schopenhauer made "inappropriate use and does not comply with the provisions of the loan agreement between the parties, so that many funds were transferred to other Schopenhauer projects, as well as additional funds were transferred for the purpose of covering other debts of [Or]" (paragraph 8 of the application).  According to what is stated in the application, "as a result" the agreements were signed on February 26, 2019 and March 18, 2019, assigning the rights in the projects to the corporation and transferring their management to it (paragraph 9 of the application).  Hence, according to Debreth's version, these agreements were signed after he and Shoop realized that Schopenhauer and Or were making improper and infringing use of the loan funds transferred to them.

17. From what was stated in that request, it appears that Shop also did not act in accordance with the original agreement. The agreement stipulated that Or would have to transfer a loan for any purpose in the amount of ILS 1,500,000.  Instead, it transferred him a loan of close to ILS 5,000,000 out of the total loan amount of ILS 24,000,000 that it provided to Schopenhauer.  As stated, Shop's request to open liquidation proceedings indicates that the sums transferred to Or were apparently used for his personal purposes.  Or is suspected of being the one who caused other sums not to reach the projects themselves.  This deviation from the provisions of the agreement was also noted by the trustee in a report he submitted to the court in the liquidation proceeding.  It seems that it contributed to the project's chances of success.
18. On May 22, 2019, a document signed by Or and Kestenbaum was drafted (Appendix 12 to Cory's affidavit; Kestenbaum confirmed his signature on the document - p. 14 of the transcript, lines 18-19).  In this document, the parties declared that there are two problems that prevent "receiving financing and selling apartments, as we have already encountered in the ongoing project": one, that a separate company has not been established for each of the projects, and the second, the fact that Schopenhauer is a company owned by Or "whose past there is a problem in obtaining loans and financing from the bank." Hence, at the latest, Kestenbaum and Debret knew of difficulties in obtaining funding for projects due to Or's involvement and the disclosure of the fact that he had a negative financial record.
19. On August 6, 2019, the 19th addendum to the agreement between Walthstone, Schopenhauer and a company managed by Kestenbaum was signed. In the framework of it, it was agreed, inter alia, that various liens would be registered in favor of Walthstone, including the first lien on the Muttahid project (P/1, p.  159 onwards).  The liens, in the amount of ILS 20,000,000 each, were registered on December 18, 2019 (as appears from the draft, Appendix 11 to Cory's affidavit).

The text also indicates that a warning note was written regarding the rights of all the lessees in favor of Schopenhauer on August 14, 2018.  As of September 1, 2019, individual warning notes were recorded regarding the rights of the tenants, after a specific company was established for the Matmid project.  The lion's share of these notes (and in fact all but the first) was recorded at a later date for the mortgage registration in favor of Walthstone.  In any case, it appears that from the date of the signing of the aforementioned 19th Addendum, it could have been assumed with near certainty that no encumbrances would be recorded in favor of the corporation that could be realized.