Civil Case (Haifa) 4895-03-22 Diamond Star Construction and Development Company Ltd. v. Hollander Stern Construction Company Ltd. - part 4

The transfer of the shares according to the letters of trust will be made after the payment of each of its holdings, according to the original value of ILS 25 million at a date no later than the date of the loan agreement with the bank.

23. This letter does not state that the plaintiff breached her obligations, although Haim Hollander confirmed in his testimony that already at that time he believed that she was in breach of her obligations (p. 50, line 3).  According to him, he did not raise allegations of infringement at that stage, since there were additional engagements between the parties in other projects.  According to him, the letter was "A wake-up call that if they don't bring the money they will be out(p.  50, lines 15-16).
24. Months later, on July 25, 2021, Chaim Hollander sent another letter to the plaintiff (Appendix 5.2 to N/3). In this letter, he already demands the payment, and it is stated as follows:

As you know, we showed a lot of patience but we can't wait any longer.

And later on:

We do not accept your seating on the fence and we cannot wait any longer for you to integrate.

If you would like to realize your integration into the fortress landscape, please pay your obligations by the end of this week.

If you do not pay the payment due from you by the end of this week, we will see it as your return to your intention to integrate into the view of the fortress and we will move on without you.

All agreements in the matter will be cancelled and notices of the cancellation will be sent to the authorities and you will no longer have any part in the project.

25. The plaintiff did not respond in writing to this request, but according to Danny Kochav's version, he spoke with Haim Hollander (P/2, paragraph 19). He said: "I assumed it was a misunderstanding.  Therefore, I spoke with Haim afterwards and reminded him of the parties' agreements.".  In his testimony, he was asked why he did not respond in writing and why he did not contact a lawyer, but did not provide any explanations.
26. It should be noted here that Oshri Chelouche also did not transfer any payment to finance the purchase of the shares or to pay the loan repayments from Bank Leumi.
27. On December 5, 2021, the defendant prepared a document known as a "Letter of Cancellation of Trust" (Appendix 5.3 to L/3) (hereinafter: Cancellation Letter). In the cancellation letter, it was recorded that the defendant granted the plaintiff, Oshri Cheloush and Linon an "option" (the right of choice) "[...] Participate in the purchase of some of the shares, provided that they bear their proportional share in providing an owner's loan to Nof HaMitzr Company and in paying the consideration and the accompanying acquisition costs(See the second "why" in the introduction to the cancellation letter).

It was also stated in the cancellation letter that the plaintiff and Oshri Shlosh "decided to waive the option to participate in the purchase of the relative share of the shares and until the date of signing this letter, they did not provide Nof HaMitzr Company with any owners' loan and did not pay any payment Other Appeal in exchange for the relative share of the shares and/or at the expense of the mandatory payments in connection with the purchase of the relative share of the shares [...]" (The fifth "why" in the introduction to the annulment).

28. In light of these declarations in the cancellation letter, it is recorded in clause 2.1 that "The parties agree that the option given to Diamond Star and Oshri Shlosh to participate in the purchase of the proportional share of the shares is null and void in the first place" (emphasis in the original - see S.).
29. Oshri Chelouche signed the cancellation letter, but the plaintiff did not do so. Danny Kochav stated that he refused to sign the cancellation letter as the plaintiff "[...] I stand by the transaction and the parties' agreements" (Section 23 of A/2).  He also stated that he demanded that the defendant produce the loan documents and clarified that he had given the defendant that "[...] After it examines and examines them, it will pay everything it is supposed to pay, exactly as agreed."
30. Danny Kochav added in his testimony that despite his demand, the defendant did not provide him with the loan documents (P/2, paragraph 26 and p. 20, lines 6).  - 9).  This version was denied by the defendant who claimed that the plaintiff was never interested in payments for the consideration or in the repayments of the loan (N/3, paragraph 43).
31. A few months later, on February 11, 2022, Haim Hollander sent a letter to the plaintiff, Linon and Oshri Chelouche, in which he announced the cancellation of the trust agreement with the plaintiff (Appendix 11 to P/2). In the letter, he notes that despite the letters sent to the plaintiff and a large number of meetings on the subject "[...] The amount of consideration for the shares was not transferred, nor even part of it." (Section 4).  He also noted that in a meeting held on December 26, 2021, Danny Kochav agreed to pay the sum of ILS 8 million, but the payment was not transferred.  Therefore, the defendant announced the cancellation of the trust agreement and added that an order had been given to the legal advisor of Nof HaMitzr to notify the Tax Authority of the cancellation of the trust (hereinafter: Cancellation Notice).
32. On February 14, 2022, the plaintiff's counsel sent a letter of reply in which the notice of cancellation of the trust agreement was rejected (Appendix 12 to P/2). In the letter, the plaintiff reiterates her demand to receive the financing agreement signed with the bank and clarifies that she will pay her share only after the documents have been transferred (paragraph 4 of the letter).  More letters were sent between the parties in which they reiterated the claims, and on March 2, 2022, the plaintiff filed her claim in this case, which is mainly a petition to enforce the trust agreement.

Summary of the arguments

33. In her lawsuit, the plaintiff petitions to declare that the trust agreement is valid, and therefore she requests that orders be issued to ensure its enforcement. In her lawsuit, the plaintiff emphasized that according to the trust agreement, it was determined that the financing of the purchase could be done by way of obtaining bank financing.  Therefore, after the financing agreement was signed, it was not obligated to pay any payment for the purchase of the shares.  The plaintiff emphasized that it was agreed between the parties that only after receiving the documents of the financing bank, would she bear her share of the payment of the loan repayment.  It was argued that the sending of the cancellation notice constituted a breach of the agreement by the defendant.
34. The defendant, for its part, claimed that the plaintiff had breached the trust agreement by refraining from paying her share of the cost of purchasing the shares. The defendant emphasized that she applied for bank financing only due to a breach of the plaintiff's and Oshri Cheloush's obligation to bear the cost of the purchase.  It was argued that no agreement was reached that the funding received would come in lieu of payment of the consideration, and that no agreement was reached that the plaintiff would bear the cost of the financing only after receiving the documents.  The defendant further claimed that the loan documents were known and known to the plaintiff.  Therefore, the defendant argued that the claim for enforcement of the agreement should be dismissed.

Discussion and Decision

35. As will be detailed below, I have come to the conclusion that The claim should be dismissed, since I am convinced that there was no defect in the sending of the cancellation notice. I found that the plaintiff breached her obligation to pay the consideration, and that even if her claim that it was agreed that the purchase could be completed by receiving bank financing, the plaintiff did nothing to promote the receipt of the financing and pay her share of the cost of the financing, and that this too constitutes a breach of the obligations.
36. The first issue to be discussed concerns the interpretation of the provisions of the trust agreement; According to the agreement, the plaintiff was to pay from its sources its share of the cost of purchasing the shares for it by the defendant, as the defendant claims, or was it agreed that the acquisition could be financed by means of a loan to be received by the company or to be taken by the parties together, as the plaintiff claims? Even if the plaintiff's argument is accepted, there will be room to discuss the second issue, i.e., the question of whether the plaintiff fulfilled her obligation to provide the necessary financing for the purchase by way of receiving a loan. We will discuss the questions in order.

Trust Agreement

37. In the trust agreement signed between the parties, it was agreed that the defendant would purchase in trust for the other parties (the beneficiaries), including the plaintiff, the remaining shares of Nof HaMitzr Company. The purpose of the acquisition was to initiate the development of the land leased by the company (section 10).  In accordance with the agreement, the defendant undertook to purchase the shares of the partnership in exchange for a total of ILS 16,666,666, and to hold them in trust for the beneficiaries, each according to their share in the purchase.  In addition, the defendant undertook to register the shares in the shareholders' register in her name (Section 131 to the Companies Law, 5759-1999) for at least 12 months, at the end of which the beneficiaries were entitled to demand that the purchased shares be transferred to them (section 4.8).

The parties also agreed that the defendant could demand that the beneficiaries receive the shares, and in such a case they were obligated to accept them (section 5).  There is no time limit in this provision for the defendant's demand of the beneficiary.

38. The parties also agreed to finance the purchase of the shares (section 2), to finance the tax charges and to finance the expenses that the defendant may incur in respect of its holding of the shares (section 6). The current proceeding deals only with the financing of the purchase.
39. Section 2.5 of the trust agreement establishes the general principle of bearing the cost of purchasing the shares. According to the provision of this section (quoted above in paragraph 7), Each of the beneficiaries undertook to pay an amount that reflects his share of the company's shares.  In clause 2.5.2, it was clarified that the plaintiff would bear the sum of ILS 7,500,000 for 60% of the sale, i.e., for 30% of the company's shares.
40. In clause 2.8 of the trust agreement, the parties added and emphasized that they "[...] They are committed to each other, and especially to the first party (The defendant - R.S.) to pay the payments specified in this agreement as required by the provisions of the sale agreement that will be signed with the sellers on time and in their proper manner [...]". In addition, the plaintiff (and the other parties to the agreement) also undertook to bear the purchase tax payments and any other payment "[...] which will be required for the purpose of registering the transfer of rights in their name shortly after the receipt of such demand and in any case, within the legal date set for the execution of such payment.".
41. Since there is a legal obligation to report the purchase of shares in a real estate association in trust for a beneficiary (Section 74 of the Real Estate Taxation Law (Appreciation and Acquisition), 5723 - 1963), the parties agreed to report the trust to the real estate tax authorities and to the Registrar of Companies (section 2.4). The parties also clarified that to the extent that the obligation to pay VAT applies, then each party will pay its proportional share "in advance" (section 2.9), i.e., before the date of reporting and payment of the tax.
42. The relationship between the parties is anchored in the trust agreement. In accordance with the trust agreement, the defendant undertook to purchase the shares of Nof HaMitzr from the partnership; Some of them are for themselves and some of them are loyal to the beneficiaries.  The agreement also stipulated that the defendant would hold the shares in trust for a period of 12 months (clauses 4.4 and 4.8 of the trust agreement).
43. Here it is worth making a few comments about the institution of trust. Section 2 The Trust Law, 5739 - 1979 states that loyalty is created in one of three ways; In law, in a contract or in a holy book (S.  Karam, The Trust Law, pp.  139-140 (4th edition, 2004)).  The voluntary trust, based on An agreement between the parties allows the parties to shape the terms of the trust as they wish; They are entitled to determine the purpose of the trust, the manner in which the assets will be transferred to the trustee, how the fruits of the trust will be distributed, how the trustee's actions will be financed, the trustee's salary and expenses, how and when the trust will end, and more (ibid., at p.  185; Opening Stimulus (Tel Aviv-Yafo) 1353/09 Lennox Investments in Tax Appeal v.  Ziv Haft - Trust Company in Tax Appeal (14/9/2009)).
44. Concept Loyalty encompasses various situations; Sometimes the concept of trust is similar to a mission in which the messenger is obligated to act on behalf of his sender and according to the instructions of the sender, and sometimes the trustee is seen as an independent entity that is not obligated to act according to the instructions of the beneficiary, even though he must act, at his discretion, for the benefit of the beneficiary (see A. Barak, The Law of Mission 1121-1122, Volume 2 (2nd Expanded Edition, 1996); Civil Appeal 9225/01 Zeiman v.' KumranIsrSC 62(1) 260 (2006); Civil Appeal 3829/91 Wallace v.' winepressIsrSC 88(1) 801 (1994); Civil Appeal 7610/19 Tel Aviv Betterment Tax Manager 1 N' Gillis (30/6/2022)).

Financing the Purchase

45. As we have seen above, the purpose of the trust agreement was to purchase the shares for the beneficiaries. It is clear that the parties intended that the beneficiaries would finance the purchase of the shares for them.  For this purpose, explicit provisions were established in the agreement regarding the share of each beneficiary in the payment for the purchase, and the share of each of them in the payment for the expenses associated with the purchase, such as purchase tax and value-added tax.  Each of the beneficiaries has taken upon itself an undertaking to bear its share in the purchase of the shares from the partnership.
46. In the present case, the parties sought to make use of the trust institution in order to enable the defendant, the trustee, to exercise its right to purchase the shares of the partnership. It also appears that the purchase of the shares in trust for the beneficiary is intended to enable the parties to simplify the purchase process and enable the signing of the purchase agreement on time (see the affidavit of Haim Hollander N/3, paragraph 26).
47. The provisions of the trust were set out in clause 4 of the trust agreement. From a perusal of these provisions, it can be concluded that the parties requested that the purchase of the shares be made in trust, and that from the moment the shares were purchased and purchased to the defendant, it was obligated to act on behalf of the beneficiaries.  Thus, in clause 4.4 it is determined that "From the date of signing this agreement until the cancellation of his appointment as a party (The defendant - R.S.) As a trustee at the end of 12 months from the date of signing this agreement, party A will act in accordance with the instructions of parties B, C and D (The Beneficiaries - R.S.) Only in respect of activity in the shares of parties B, C and D (The Beneficiaries - R.S.) in the Fortress Landscape Company, provided that these provisions are in accordance with any law".  Thus, provisions have also been established that impose explicit duties on the beneficiaries, such as taking "In any proceeding, it is requested to hold party A innocent of any claim and/or claim and/or damage in connection with and/or expense in connection with his holding of the shares of parties B, C and D in the company in trust in accordance with this agreement." (Section 4.6).  They also pledged to assist in the submission of the company's reports.  It was also determined that the trust would end after 12 months and subject to the demand of the beneficiary, or at the request of the defendant (clauses 4.8 and 5 of the agreement).
48. It can be seen that the provisions of the trust bring the relationship between the defendant and the beneficiaries closer to a relationship of agency and subject the defendant to act according to the instructions of the beneficiaries. The nature of the relationship between the defendant and the beneficiary also has an impact on the interpretation of the provisions of the agreement regarding the financing of the purchase of shares for the beneficiaries.  You can find several references to the expected payment dates.  Clause 2.3 of the agreement stipulates that the purchase will be made in accordance with the purchase agreement that was expected to be signed with the sellers.  The reference to the provisions of the purchase agreement indicates that the parties intended that the payments under the trust agreement for the purchase would be made in accordance with the dates set out in the purchase agreement.  Moreover, we have seen that with regard to the payment of value-added tax, it was explicitly stated that the beneficiaries must pay it in advance, i.e., before the statutory date of payment of the tax.  In other words, it was clear to the parties that the payment dates for the purchase would be earlier than the payment dates as required by the purchase agreement and by law.
49. In clause 2.10 of the trust agreement, the parties explicitly referred to the first payment required by the purchase agreement, in the sum of ILS 4 million, and determined that this payment would be borne only by the defendant and Yinon.  The provision of explicit instructions for the execution of the first payment shows that the parties intended that the balance of the payment to the partnership would also be made using the beneficiary's money and not from the defendant's money.

It also appears that the plaintiff does not deny that she should have paid the consideration payments on time, and the dispute deals only with the manner of financing the purchase (see, for example, paragraph 10 of Danny Kochav's affidavit P/2, his testimony, p.  20).

50. Here it is worth noting that in the cancellation agreement (Appendix 5.3 to N/3), which was not signed by the plaintiff, it was recorded that the plaintiff was given an option (the right of choice) to participate in the purchase of some of the shares. Ostensibly, granting the plaintiff a right of choice to participate in the purchase is not the same as purchasing in trust for her, since the right of choice gives the recipient discretion to decide whether to exercise the right and purchase the shares, or not to exercise it (see on the right of choice).  - Option Civil Appeal 8872/18 Weiss N' Ben Menachem (18/7/2021); Civil Appeal 346/88 Avivi N' Ben ZechariahIsrSC 46(4) 684 (1992); Civil Appeal 8505/09 Shasha N' Green in a Gas-Powered City in Tax Appeal (23/03/2011).  When an option is given to purchase shares, it is clear that prior to exercising the option, the recipient is not obligated to pay for the shares.  The obligation to pay arises only when the option is exercised according to its terms.
51. It seems to me that the use of the term "option" in the cancellation agreement does not reflect the agreement of the parties, and the plaintiff does not claim this either. Therefore, I found it only necessary to raise this issue without expanding the discussion of it.

In any event, it appears that the parties agree that according to the trust agreement, the defendant purchased the shares for the plaintiff, and that the plaintiff undertook to pay the agreed consideration.  Therefore, it must be determined that it was agreed between the parties that the purchase of the shares would be financed by the beneficiaries, including the plaintiff, and that this financing would be completed before the purchase of the shares.

52. The plaintiff claims that her undertaking to pay the purchase price in accordance with her relative share was not breached, since according to the agreement, the parties were given the option to finance the purchase in an alternative way, by receiving bank financing. The plaintiff relies on the provisions of clause 2.12 of the trust agreement, which states:

The parties will act to provide bank financing for the payment of the sale or part thereof as agreed with the financing bank, with each of the parties guaranteeing to the bank the payment of the debt and the fulfillment of its obligations in accordance with the requirements of the financing bank and its proportional share of the bank's fees and interest and any other payment or expense.

53. This section establishes a general provision that ostensibly also applies to payment for the sale proceeds, i.e., in exchange for the shares. However, the clause does not establish sufficiently clear provisions regarding the payment of each of the beneficiaries of the loan to be taken, the identity of the borrower, who is required to act to formulate the financing agreement with the bank, and so on.  The section also does not clarify the relationship between its provisions and the provisions of Sections 2.5 and 2.8.
54. The defendant argues that the provisions of the aforementioned clause 2.12 are not intended to apply to the financing of the purchase of the shares, but only to the financing that will be required in the future for the purpose of advancing the construction project. According to her, which is also supported by the testimony of Yinon Bublil, the financing of the purchase should have been done by the beneficiary of her own fortune (see the testimony of Yinon Bublil, p.  37, lines 19, 34-35, testimony of Ofer Stern, p.  42, lines 23).  - 28, p.  45, testimony of Haim Hollander, p.  49).
55. In this dispute, the defendant's position should be preferred. The argument that the parties agreed that the acquisition could be financed by bank financing is inconsistent with the obligation to pay value-added tax "in advance pro rata" as stated in clause 2.9 of the trust agreement, with the obligation of each party to pay the purchase tax according to its share (clause 2.8).

We will also mention Hollander's testimony according to which he joined Shuki Hazan, who was a partner of the plaintiff, to a meeting at the bank.  According to him, Shuki Hazan asked to receive funding for the payment of the plaintiff's share only (p.  54, lines 27-32).  Again, Shuki Hazan was not summoned to testify by the plaintiff, as she was expected to do.  From this testimony it can be learned that Shuki Hazan, the plaintiff's representative, also understood that each of the beneficiaries was obligated to finance their share of the purchase.

56. It is also important to note that the plaintiff did nothing to promote the receipt of bank financing to finance the purchase (see the testimony of Danny Kochav, who clarified that he had done "zero", "nothing" (p. 16).  If it was indeed agreed that the purchase could be financed by means of a loan from the bank to be taken by the parties together, it would have been expected that the plaintiff would act to promote the receipt of the loan.  Danny Kochav was asked about this and replied that "Shuki Hazan acted on behalf of the Diamond Star" (p.  20, line 29), however, we saw that according to the testimony of Chaim Hollander, Shuki Hazan acted to obtain funding only for the Diamond Star and not for all the parties.  This conduct of the plaintiff and her manager, Danny Kochav, is inconsistent with her position that the loan from the bank was intended to come in lieu of payment from her equity for the purchase of the shares.
57. Although the language of the provision in clause 2.12 of the agreement also applies to the financing of the purchase of the shares (the "consideration for the sale" and the "sale" defined in the preamble to the agreement is the purchased shares), the conduct of the parties and the other provisions of the agreement indicate that the intention of the parties was that the consideration for the purchase would be paid by each of the beneficiaries of its sources (see the interpretation of the agreement according to the parties' intentions: Section 25(a) The Contracts (General Part) Law, 5733-1973; Civil Appeal 4628/93 State of Israel v. Apropim Housing and Development (1991) Ltd.IsrSC 49(2) 265 (1995); Additional Civil Hearing 2045/05 Vegetable Growers Organization Cooperative Agricultural Association in Tax Appeal v.  State of Israel (11/05/2006); Civil Appeal Authority 6810/21 Bank Leumi Le-Israel in Tax Appeal v.  Baranovet Ltd., paragraph 12 (20/10/2022)).

Since the plaintiff did not fulfill her obligation to finance her share in the purchase of the shares, it is clear that she thus breached the trust agreement and the defendant had the right to cancel the trust agreement due to this breach.