In practice, no liens were registered in favor of corporations owned by Debret on the real estate assets in the projects. A third-degree lien was registered at a later date in favor of the company that was established for the purpose of the Persistent Project, but it was inferior to two liens in the amount of ILS 20,000,000 each, which were registered in favor of Walthstone. Therefore, he did not seize real assets.
- Although the projects were not guaranteed with collateral, and at least not with proprietary collateral, Ancona was given two prospectuses of other projects in which another company owned by Debret was involved (projects on HaTayasim Street in Holon and Bialik Street in Bat Yam). The first of these was attached to an email sent by Fine to Ancona for the purpose of explaining the nature of TAMA 38, while presenting a similar project (Fine's email to Ancona dated December 26, 2019, on page 17 of Ancona's affidavit). It was not clarified how and when Ancona obtained the prospectus of the other project in the same other venture. These two prospectuses included an identical statement that the project that is the subject of the prospectus has excellent collateral collateral ("Projects have excellent collateral") and that investors will receive collateral for the rights in the new apartments ("Our lenders have a lien over the rights of the new apartments"). They also stated that the investing company would invest a maximum of 35% of the funds, and the remainder would be financed by a bank or an institutional investor (the prospectus was attached as Appendices B and C to Ancona's affidavit). It can therefore be assumed that the sending of the prospectus to Ancona could also have created a representation regarding the business venture that is the subject of the lawsuit - even though it was not included in the prospectus that was sent - including a representation regarding the collateral offered to investors, and even regarding financial strength backed by an institutional investor.
The prospectus does not say when they were prepared. As mentioned, they dealt with projects that were not managed by Schopenhauer and were not included in the agreement with Schopp.
- Regarding the business venture that is the subject of the lawsuit, other prospectuses were prepared, presenting only three of the five urban renewal projects included in the agreement between Schopp and Schopenhauer. One of them, dated March 2018, was sent to Corrie on May 17, 2018 (Appendix B to Corrie's affidavit). This prospectus does not include promises regarding collateral or about an institutional investor. Another brochure, which does not bear a date, was sent to Ancona on July 6, 2020 (Appendix H to his affidavit). This edition of the prospectus included a reference to collateral, but not to financial strength backed by an institutional investor.
There is no evidence that brochures presenting a representation regarding the collateral were sent to Guyut. As noted, the prospectus sent to Corrie did not include a representation regarding the existence of a collateral. Therefore, it should be held that a representation regarding the collateral, which was created through the transfer of the prospectus, was made only with respect to Ancona. Later on, it will be clarified that it was not proven that this representation was prior to his decision to invest, and in any event, it was not proven that Fine could or should have clarified this issue to the fullest.
- Unfortunately, all the projects failed. This is despite the great efforts of Debret and Kestenbaum, in which he and his family have invested a great deal of money. The defendants claimed in the statement of defense that some of the projects were not carried out due to the fact that the tenants chose not to continue with them or for other reasons (paragraphs 38-41 of the statement of defense). As for the permanent project, which was "the only project that was in the actual construction stage", it turned out that many costs were incurred in the framework of it that were not required, the construction was not done properly and this was not successful even through a new contractor, so that the project became uneconomical (paragraph 42 of the statement of defense). It should be noted that the final report submitted by the trustee in the corporation's liquidation file indicates that the TAMA agreements regarding the four projects that did not begin construction expired because the suspension condition for obtaining building permits was not fulfilled (p. 7 of the report).
- As mentioned, the only project that has reached the construction stage is the Persistent Project. It is also the project that was presented to some of the plaintiffs, while they were told that their money would be invested in it since it is in advanced stages and therefore constitutes a safer investment. However, this statement did not reflect the situation as it was. A document that Debret attached to his response to the request for temporary relief indicates that as early as June 27, 2019, he estimated that the Mutmid project would not generate any profits (the document is an agreement between the corporation and a new project management company, and it also relates to the expected profitability of each of the projects).
In fact, it seems that Debreth had prior knowledge of the possibility of profiting from the Perpetual Project. Indeed, in the appraisers' zero report prepared for the HaMatmid project on December 19, 2018 (Appendix H to the statement of claim), it was noted that the developer intends to complete the project by May 2019 (p. 26 of the report) and an estimate was given that the project will maximize profits in the amount of approximately ILS 4,200,000 (p. 30 of the report). However, in Kestenbaum's cross-examination, he was presented with a report by the corporation's receiver dated August 31, 2022 (N/1), in which he criticized the unrealistic estimates in the report and the fact that although it stated that 90% of the project had been completed, the execution rate was 70% at the time of the liquidation. The receiver expressed his opinion regarding the existence of a "very significant gap in the amount of over ILS 3 million" of sunken costs that were not included in the appraiser's assessment. This assumption was confirmed by Kestenbaum, who replied that he and Debret knew even before they entered the project that "there was money that was poured into a project that the appraisers did not recognize", in the amount of at least ILS 3,000,000, and that they knew that this sum had to be returned (p. 18 of the transcript, lines 25-30).
- Despite all this, Debret sent investors optimistic monthly reports from September 2020 onwards (Appendix D to plaintiff 3's affidavit). He described the progress of construction in the ongoing project, stated that the project was nearing completion (the completion date was postponed from report to report and month to month), and reported that most of the apartments had been sold. Only in June 2021 did Debret report to investors (Appendix T to Corrie's affidavit) that the project is expected to lose approximately ILS 4,500,000. At that time, he revealed for the first time to investors that already when the corporation took over the Constant project from Schopenhauer, he expected that the project would not lose or yield profits, and at most would make a small profit ("We predicted it would break even or make a small profit"); He claimed that when it came to generating profits, the corporation had cast its hopes on the other four projects included in the business venture.
Debrett's Liability for the Plaintiffs' Damages
- The conclusion from all of this is that Debret apparently already knew at the end of 2018 that the Matmid project would not be profitable. Already at the beginning of 2019, and at the latest in March 2019, Debreth concluded that Schopenhauer was incapable of managing the projects. Even after the corporation took over the Bat Yam project in February 2019, it was unable to bring it to a situation where a building permit was granted. A few months after taking over the Matmid project in March 2019, it was discovered that significant additional expenses were needed, including those resulting from the replacement of the project management company. In May 2019, Debret and Kestenbaum learned that external funding for the projects could not be obtained due to Or's problematic financial past. At that time, an amount of close to ILS 5,000,000 had already been transferred to Or as a loan for any purpose, which had not been invested in projects and was apparently used for Or's personal needs. The transfer of the sum for this purpose harmed the possibility of removing the liens and apparently also the chances of achieving profitability from the projects. The replacement of the management company in June 2019 also brought additional costs to the projects, when it was known in advance that the Matmid project would not be profitable.
Since in practice no building permit was received for any of the other projects, the approach to investors after June 2019 was made when the corporation was aware that Schopenhauer had failed to manage it; after he took on projects that were unlikely to be managed in his areas of expertise; when he made progress in the execution of a project that was known to yield no profits, and he held agreements relating to four other projects in which no progress had been made at that time; And while he was well aware that he had no guarantee of his investment in the projects.
- Since Debret chose not to present evidence and not to testify, it is difficult to put a nail in the eye as to whether his actions were done with the intention of deceiving the investors or whether they were done out of a subjective hope and belief that the projects in which the corporation invested a huge capital of ILS 24,000,000 would indeed succeed in maximizing profits in the end. There is, therefore, difficulty in determining that his actions amounted to fraud.
A similar difficulty does not exist with regard to the tort of negligent misrepresentation, the foundations of which will be reviewed below. The concealment of relevant facts from potential investors regarding the status of the project and the fact that some of the loan money went down the drain due to Or's actions, in a manner that harmed the chances of success of all the projects, are sufficient to establish the factual foundations of the negligent misrepresentation. At the very least, he was tasked with making full and proper disclosure of the risks, and not presenting as if the business venture had a guaranteed chance of success.