Civil Case (Tel Aviv) 35901-09-22 Dan Ravid et al. v. MHR 1 Investment Management Ltd.

1. I have before me an application for liquidation of the Limited Partnership EIT 3 Darmstadt Germany Real Estate Investments (hereinafter: "Pitt 3", the "Limited Partnership" or the "Partnership") under Sections 45(4) and 45(6) of the Partnerships Ordinance [New Version], 5735-1975 (hereinafter: the "Partnerships Ordinance") filed by the Applicants, 25 of the 69 Limited Partners in the Limited Partnership, against the General Partner in the Limited Partnership, MHR 1 Management and Investments in a Tax Appeal (hereinafter, According to the context: "MHR", "Respondent" or "General Partner"). It should be noted that in addition to the proceeding in the title, other proceedings are being conducted in this court that deal with an application for the liquidation of additional limited partnerships in which the respondent serves as the general partner, under similar circumstances.

Background

2. The Limited Partnership is an Israeli partnership that holds 50 of the 100 "Tracking Share A" (hereinafter: "Tracking Share A") without voting rights in a Dutch company called FM1 Invest Germany BV (the "Dutch Company" or "FM1"). The shares holding the voting rights in the Dutch company are held, in equal shares, by MHR and by the German business partner, Mr. Patrick Müller (hereinafter: "Müller").  The remaining Trace A shares, i.e.  an additional 50 shares, are also held in equal shares by Müller and MHR.
3. The Dutch company holds 100% of the rights of the limited partner in the German partnership M Object Dramstadt GMBH & Co. KG (hereinafter: the "German Partnership"), which owns the rights in the income-producing property atEschollbrücker Str.  26 in the city of Darmstadt, Germany.  The general partner of the German partnership is MOD Verwaltungesegesellschaft Mbh (hereinafter: "MOD").
4. A loan agreement was signed between the Limited Partnership and the German Partnership, in which the Limited Partnership lent to the German Partnership a total of €4 million for the purchase of real estate property in Germany by the German Partnership.
5. The limited partners in the limited partnership, and the applicants among them, signed various documents to attach their joining as limited partners in the partnership, including a "joining form" and a "limited partnership agreement". In both documents, MHR is mentioned as the general partner of the partnership.  The joining form stated, inter alia, that "the investor is interested in joining the partnership, as a limited partner..." and in the partnership agreement it was stated, inter alia, that "the full and exclusive control over the management and business of the partnership and the powers to act on its behalf and the powers to act on its behalf will be in the hands of the general partner" (clause 3.2 of the partnership agreement) and that "the limited partners will not participate in the management of the partnership or its business and will not take any legal action on behalf of the limited partnership" (clause 3.4 of the partnership agreement).
6. On September 15, 2022, the applicants, who are among the limited partners in the limited partnership, filed a motion to dissolve the limited partnership, in which the court was asked to make use of its authority under section 45(4) and/or under section 45(6) of the Partnerships Ordinance and to order the dissolution of the limited partnership, in light of serious acts that were committed, according to the applicants, by the general partner in the limited partnership and to which, according to the claim, were committed, were only recently exposed.
7. In the framework of the application, it was claimed, in summary, that in the years 2015-2016, the general partner acted to recruit investors from Israel to invest in a commercial real estate property in Germany, and that in this framework they were presented with various representations. In retrospect, it was claimed, it became clear to the applicants that the general partner's offer to purchase securities in the limited partnership was made in violation of the provisions of section 15(a) of the Securities Law, 5725-1965, which prohibits the offering of securities to the public without publishing a prospectus.
8. According to the claim, the representations that were presented to the potential investors included, inter alia, a representation that the cost of the property is €12,150,000, of which €9,450,000 will be financed and the balance of €2,700,000 is equity required from the investors in exchange for ownership of 50% of the property; The property will be held by a German partnership and the remaining 50% of the rights in the property will be held by a local partner who is responsible for the ongoing maintenance of the property.
9. In the framework of the application, the applicants claim that shortly before it was filed, they discovered that contrary to the partnership agreement, according to which the general partner is entitled to receive a management fee of 10% of the rent to be paid to the partnership in respect of its assets and 10% in the event of realization, the general partner received a brokerage commission in the amount of €378,763, from the first day of the investment, not in accordance with the partnership agreement and behind the investors' backs; that the local partner has received and holds only 25% of the rights in the property, while the remaining 25% of the rights therein belong to the general partner, without the general partner investing in the partnership and at the expense of the limited partners; that there are unexplained differences between the amount of the limited investors' investment in the partnership - €5.18 million and the investment in the German partnership - €4 million, a difference that is presented in the partnership's financial statements under the term "direct investment cost", but, it is claimed, an inquiry with the German partner revealed that the limited partnership did not bear the transaction costs paid to the German partnership beyond the direct investment.
10. According to the applicants, in light of these claims, a cause of action arose for the dissolution of the partnership by the court, both for reasons of justice and honesty and for the reason that the limited partners had no reasonable possibility of continuing to manage the partnership business with a general partner, who, according to them, deceived them and beyond, with the partnership funds, which he raised from them through fraud and misrepresentations.
11. On January 6, 2023, the respondents submitted their response to the application, in which they raised, inter alia, an argument that the law of the application for summary dismissal from clause 9.2 of the partnership agreement states that the limited partnership will be dissolved only in one of the cases stated in that section, namely: (1) due to the general partner's decision to dissolve the partnership, (2) in a situation where an order regarding the dissolution of the general partner will be issued, (3) if a receiver is appointed over the general partner, and (4) if the general partner is declared insolvent.
12. The presumptive argument raised by the Respondent was rejected in the decision of March 28, 2023.
13. On the merits of the Applicants' arguments, the Respondent and the Limited Partnership replied, in summary, that the Applicants are acting with foreign motives in order to try to harm the General Partner and the other Limited Partners while cooperating with the German Partner against whom the Partnership is conducting proceedings in Germany; that the applicants will not benefit from the dissolution of the partnership; that there was no room to refer to the issue of the success fee as "theft of investment funds" and that the use of this rhetorical tactic was intended only to create the impression that a drastic remedy was needed for the dissolution of the partnership, when it was, at most, a financial dispute; that contrary to what is claimed, the partnership agreement stipulates that the partnership will bear all expenses related to its activities, including the success allowance of the general partner, who is also entitled to indemnification for expenses incurred for the partnership; that the dilution of the rights of the German partner, so that he remained with only 25% of the rights in the property, did not infringe on the rights of the applicants; that the discrepancy resulting from the ancillary costs of the transaction includes the success fees of the Respondent and the German partner, as well as additional expenses detailed in the Reply, and that the Applicants can demand that accounts be provided in relation to these expenses.
14. On July 12, 2023, an evidentiary hearing was held in which Applicant 1, Mr. Dan Ravid, the declarant on behalf of the Applicants, was interrogated, and on January 4, 2024, an evidentiary hearing was held in which the declarants on behalf of the Respondent and the Partnership - Mr. Yagil Manovich (hereinafter: "Yagil"), Mr. Shoval Manovich (hereinafter: "Shoval") and Mr. Zach Hermon (hereinafter: "Hermon"), the general partner's directors and shareholders in the chain.

Summary of the parties' arguments