Civil Case (Tel Aviv) 35901-09-22 Dan Ravid et al. v. MHR 1 Investment Management Ltd. - part 2

The Applicants' Arguments in Their Summaries

15. At the beginning of their summaries, the Applicants discuss the increased fiduciary and fiduciary duties that apply to the general partner in his relations with the limited partners, the disclosure duties that apply to him, and the duty not to be in a conflict of interest.
16. According to them, in view of the fact that a relationship of trust is the basis without which a partnership cannot exist, a breach of trust is sufficient to justify the dissolution of the partnership, as arises from the provisions of sections 45(4) and 45(6) of the Partnership Ordinance.
17. In our case, it was argued, each of these grounds is sufficient to justify granting the application, since the general partner not only violated the partnership agreement when he pocketed money behind the investors' backs in violation of the provisions of the agreement, but also acted in a clear conflict of interest, when he secretly appropriated for himself no less than 25% of the rights in the property.
18. According to the Applicants, it was proven that the General Partner took from the investment funds of the limited partners by way of collecting brokerage fees that were hidden from them by withdrawing them from the funds transferred to Germany, that the General Partner took "success fees" disguised as "establishment expenses", when in fact there was an "additional 'recruitment fee', and that only after the Respondent was forced to submit invoices in the framework of the proceeding, while trying to evade providing information, did it become clear that additional funds were also taken by it through FM1 - actions that constitute a loss of trust, which in itself establishes grounds for dissolution of the partnership. and that the rolling version of falsehoods left no doubt as to a complete loss of confidence in the respondent.  Thus, while in its response to the liquidation request the respondent admitted that it had pocketed the sum of approximately €378,000 but claimed that these were legitimate "success fees" according to clause 5.2 of the partnership agreement, Yagil noted in his interrogation that these were "brokerage fees" or "recruitment fees", while Shoval defined them as "success and initiation fees", while Hermon referred to them as "entrepreneurship tax".  As to the discovery of the intention to take these sums, Yagil and Hermon argued in their testimonies for the first time, and without a documentary document or supporting testimony from any recipient that even though this was not stated in the agreement documents, they would have informed them of this "by emails or orally" by any of the limited partners he asked, and contradictory correspondence was even presented.  Subsequently, it was claimed by the respondent's declarants that the sums taken by them were lower than those that according to them Mueller took unlawfully.
19. According to the applicants, it was also proven that the general partner received rights in the property at the rate of 25% behind the investors' backs, in blatant violation of the duty of disclosure and trust imposed on him by law. In addition, it was proven that the respondent's version of defense in this matter as well was false and misleading.  Thus, the Respondent presented the investors with an explicit representation that the total equity required of the investors is €2,700,000, in exchange for taking ownership of 50% of the property, while the remaining 50% remains in the hands of a local partner, who is responsible for the ongoing maintenance of the property.  However, contrary to these representations, it became clear to the limited partners that the local partner has received and holds only 25% of the rights in the property, while the remaining 25% of the rights in it belong to the general partner, all without the general partner investing in the partnership, and it is clear that this was done at the expense of the limited partners, who could have received 75% of the rights in the property.  In this matter as well, it was argued, the facts were not denied by the respondent, who admitted both that she received 25% of the rights in the property, both in the fact that she did not pay for these rights and in the fact that she hid these facts from the eyes of the limited partners, when the specific reference to the German partner's share "constitutes an admission by a party that this is a very relevant matter".
20. In addition, it was argued that the Respondent's version of defense in its response to the liquidation motion, according to which taking 25% of the profits in the property into its hands benefited the "Israeli side", is not only unfounded on its face, but is an additional attempt to mislead the court that in any case these are rights for "profit" and not shares that grant voting rights in the German partnership or in the Dutch company, so that the appropriation of the rights in the property that were not allocated to the German partner to the general partner constitutes an unlawful derivation of a benefit on the part of a trustee.
21. According to the Applicants, the Respondent's new version that this matter has nothing to do with the investors at all cannot stand up to the fact that there can be no dispute that the General Partner must be transparent regarding the benefits he receives from the transaction, and in particular since the Respondent saw fit to present to the investors that it is obligated to present information on the subject to the investors.
22. In addition, it was argued that it was proven that the respondent in its response to the liquidation request presented a false version regarding the differences between the amount of the investment in the partnership and the investment in the German partnership, in light of a supplementary affidavit that constitutes an admission by a party to another serious breach of the increased fiduciary duties imposed on the respondent. Thus, in the liquidation application, it was claimed that the general partner presented the applicants with a representation according to which an equity investment of ₪2.7 million would be required in order to receive 50% of the rights in the property, but a review of the partnership's financial statements revealed that the total investment of all the limited partners in the partnership amounted to ILS 21,516,485, which is equivalent to approximately ₪5.18 million.  On the other hand, it turned out that despite the sum raised, only about €4 million was transferred to Germany, so that there is an inexplicable gap of about €1.8 million.  In this matter as well, the Respondent admitted the facts, but claimed that this discrepancy stemmed from "ancillary costs of the transaction", including success fees, additional expenses for purchase tax at the rate of 6.5%, valuations, bank fees, due diligence costs, tax consultant, notary fees and legal expenses, for which the Respondent did not present a single reference.  Even after the court decisions required it to submit invoices it issued to the Pit3 partnership, it submitted to the court file only invoices it issued to the Dutch company that do not contain any mention of Pitt 3, without any expression of the "full route" of the money transfer, and which is insufficient to include in its Pit3 reports its special "establishment expenses".
23. In fact, instead of presenting receipts proving payments made by the Respondent in Germany, it attached receipts of sums in the amount of €938,334 that it received as additional success fees, from the Dutch company, which were also hidden from the investors.
24. It was argued that the aforesaid leaves no doubt as to the need to dissolve the partnership and to appoint a liquidator who will control the funds in place of the respondent. The Respondent proved that it is not worthy of trust, that it conceals material information from the eyes of the limited partners, that it does not hesitate to act in a conflict of interest, while harming the interests of the investors, violating the duties of transparency and trust, and stealing from their pockets for its personal benefit behind their backs.
25. According to the Applicants, the Respondent's claim regarding "enormous damage" that will be caused as a result of the appointment of a liquidator is a "storm in a glass of water" since the Israeli partnership is not a party to the proceedings in Germany at all, and in any case its liquidation will have no effect on the continuation of the proceedings in Germany, since "the liquidator is not supposed to replace the German lawyers, and this is not the purpose of his appointment". Moreover, in the decision of the Amsterdam Court of Appeals dated July 20, 2023, which was submitted to the court file alongside a Hebrew translation in accordance with the decision of January 17, 2024, it was stated that the respondent's managers were not cooperating with the official appointed by him, and as a result of their actions and omissions, "hovering over FM1...  A bankruptcy scenario..."
26. Finally, it was argued that despite the pressure exerted by the Respondent on the other limited partners, only six partners (including Hermon) agreed to sign the text of the objection dictated by the Respondent, and that too without the required affidavit, while on the other hand, 12 affidavits of additional partners were submitted in support of the liquidation request, so that 37 out of the 69 limited partners in the partnership support the liquidation request and only 6 oppose it.

The Respondents' Arguments in Their Summaries

27. In their summaries, the respondents claim that the cause of "loss of confidence" on which the application is based has not been proven, inter alia, because loss of confidence is an objective claim based on subjective foundations and that the application was based on a single testimony of applicant 1, which cannot lift the burden of loss of confidence on the part of all the applicants.
28. According to the respondents, by virtue of the principle of good faith that applies to the use of rights, it is necessary to examine whether it is not possible to suffice with a less predatory and extreme remedy than the liquidation remedy, and that in our case the applicants did not relate at all to the possibility of using a less extreme remedy in a manner that attests to the lack of good faith. In our case, it was argued, the remedy of liquidation and the appointment of a receiver would not only be useless, but would only worsen the situation of all the parties involved, and especially of the applicants themselves, with the exception of Muller, who would benefit from it.  Alternatively, it was argued that even if the court accepts the applicants' arguments, it is possible to suffice with less predatory remedies, such as the issuance of an order prohibiting the disposition of funds collected from the sale of the partnership's property and/or collected from Müller, the deposit of the funds in the court's coffers or in a trust account of the parties' attorneys, and more.
29. In addition, it was argued that clause 9.2 of the partnership agreement stipulates that it will be dissolved "only" in the cases detailed therein, including a decision by the general partner to dissolve the partnership, where an order will be issued to dissolve the general partner, the appointment of a receiver over the assets of the general partner, or if the general partner is declared insolvent. In our case, it was argued, none of the conditions listed in the partnership agreement on which the applicants themselves rely are fulfilled and since the applicants did not have grounds for dissolving the partnership, and in particular since the provisions of the Partnership Ordinance are dispositive, so that the consent of the parties as detailed in the agreement must be respected.  According to the Respondents, it is clear that clause 9.2 of the partnership agreement constitutes an explicit provision in the agreement, or at least indicates clear circumstances that establish such an intention.  Therefore, and only for this reason, it was argued, should the main application be rejected.
30. According to the Respondents, the entire present proceeding was born out of a sin, since the Applicants took a proceeding in accordance with Regulation 54 of the Civil Procedure Regulations, 5779-2018 , instead of filing a lawful civil suit, in a manner that severely violated their supra-constitutional right to access the Respondents' courts. This, it was claimed, was done by the applicants consciously and deliberately, while the company and its managers were busy dealing with the futile claims of those applicants (or at least some of them) in an application for an order to open proceedings under the Insolvency Law, which was rejected while charging the applicants with expenses, as well as an appeal that was filed with the Supreme Court.
31. The Respondents further claim that the Applicants and/or their counsel are in continuous and close contact with Müller, who feeds them false information and is operated by him as a "puppet on a string" and in respect of whom it has been determined that he is a fraudster who stole from the partnerships an amount of approximately €11 million. According to the respondents, despite the fact that Müller, as emerges from a series of decisions of judicial courts in Germany and the Netherlands, is the wrongdoer who deliberately harmed the companies held by the Dutch company while illegally exploiting his control, the applicants and their counsel are acting together with him in a manner that raises questions about their cleanliness, when the applicant testified that he relied on statements given to him by his attorneys, did not speak with Müller and did not read the judicial decisions that were given in connection with him in this way.
32. According to the respondents, we are dealing with a limited partnership and not a regular partnership, and that in his case there is no dead end that prevents the partnership from advancing its affairs, and the opposite is true - the partnership's affairs are vigorously and successfully promoted by the general partner, and "in business restrictions, it remains to collect the funds that were stolen by Mueller and that he has already been obligated to pay the partnership". The respondents further argue that there is an abysmal difference between a "regular" partnership and a limited partnership as in his case, in a manner that degrades all the claims of the applicants, since in a limited partnership there can be no deadlock at all since all the management decisions are in the hands of one party - the general partner.  According to the respondents, in accordance with the case law, in order for the court to make use of such an exceptional and extreme remedy, two cumulative conditions must be proved.  First, because the relationship of trust has been damaged; and second, that the actions of the partner are inconsistent with his duties as a partner.  Alternatively, the case law determined that it is necessary to prove three other cumulative conditions, namely that there is a danger to the partnership's assets, that the partner behaved inappropriately, and that the danger to the partnership's assets is due to the partner's inappropriate behavior.  In his case, it was argued, we are dealing with artificial distrust stemming from the fact that the applicants act as Müller's long arm and are nourished by his husband's words.  In any event, it was argued, it was not proven that "the actions of the partner are inconsistent with his duties as a partner".  Thus, it was argued, the main dispute, according to the Applicants themselves, is that according to them, MHR was not entitled to collect commissions and/or expenses and/or success fees as it actually collected.  On the other hand, according to the respondent, all of her actions as a general partner were open, known and transparent, both in advance and throughout the entire process, and the general partner was also entitled to collect all the sums collected by him.  The Respondents further argue that the Applicants did not claim and did not declare that if they had known in advance each of their current artificial claims, then they would not have entered into the partnership agreement in the first place, and that a claim of loss of confidence in partnership relations is likened to a claim of a fundamental breach on the contractual level, or at least a claim of misrepresentation, such that the Applicants should have claimed and declared that if they had known before signing the partnership agreement, what they claim would have been discovered to them only retrospectively, Then they would not have entered into a partnership in the first place.
33. On the basis of the aforesaid, it was argued that at most we are dealing with a relatively marginal financial dispute in terms of its scope, in relation to the collection of commissions by the company, and it is clear that such an honest dispute does not satisfy the second cumulative condition according to which the partner's actions are inconsistent with his debts.
34. It was argued that the second alternative that was determined in the case law does not exist in his case either, since it has not been proven that there is inappropriate behavior on the part of the company (since it has been proven that the damages caused to the partnership were caused as a result of Muller's lost action), since it has not been proven that there is a danger to the partnership's assets, and in light of the aforesaid, there is no need to examine the third cumulative condition for a causal connection between the inappropriate conduct and the danger to the partnership's assets.
35. According to the Respondents, the Applicants based their argument on a series of judgments that are not relevant to our case, since they deal with companies or partnerships that have reached an impasse, which is not the case in our case.
36. Substantively, it was argued, there is no point in dissolving the partnership since the property has already been sold and all that remains is to return the funds that Muller stole so that the appointment of a liquidator will cause tremendous damage, especially to the applicants.
37. According to the respondents, the German partnership's property was purchased for about €12 million and sold to a third party for about €18 million, while "Müller stole €6.5 million, and as a result, the funds cannot be distributed to the applicants." It was argued that the Applicants chose not to testify with Patrick Mueller, nor did they ask him to testify in a visual conference, and that their refraining from testifying until his testimony might have been relevant, establishes a presumption that if he had testified, his testimony would have acted against them. Therefore, the respondents claim that their version was not contradicted.
38. In this situation, it was argued, it is not clear what benefit the dissolution of the partnership would be for an appointed official to be required to continue the engagement with the German lawyers acting on behalf of the partnership and to collect the funds from Mueller. According to the respondents, this will necessarily lead to a significant delay in the advancement of the partnership's affairs, and to high and unnecessary costs, which are inconsistent with the interests of all those involved.  According to the respondents' position, in the absence of benefit to the dissolution, the filing of the application for dissolution of the partnership constitutes an exercise of bad faith of a legal right that is sufficient to reject the application.
39. According to the Respondents, the claim of no confidence made by the Applicants is artificial. The Applicants complain about the alleged unlawful taking of fees and/or expenses and/or success fees, and on the basis of this they claim a lack of trust, but that this is a classic legal dispute that must be decided while conducting an appropriate proceeding, and which in any case does not confer the right to dissolve the partnership.  Thus, for example, in the main application, the applicants claimed that they were supposedly promised a fixed return of 10% per annum, but it was proven that such a commitment was never given, but on the contrary, they were presented with all the risks involved in investing overseas, until this claim was abandoned by them.
40. It was argued that from the Applicants' summaries it appears that most of their claims relate to the fact that the Company collected, according to them, commissions and/or success fees allegedly unlawfully and while concealing them from the Applicants, but that the words were written in Rachel, your little daughter, in clause 5.2 of the Partnership Agreement, and according to the testimony of Yagil, an investor who harassed him in some way in the agreement, received detailed and full answers from the company's representatives, and that a marginal dispute in its relative scope as to the amount of expenses may at most constitute grounds for filing an appropriate financial claim and this does not constitute sufficient grounds for relief Such an unusual and extreme dissolution of a partnership.
41. According to the respondents, the use of the rhetoric of "theft of investment funds" is intended to create a "colorful drama", in the hope that by virtue of it the court will get the impression that such a drastic remedy of dissolution of a partnership and the appointment of a receiver is needed. Moreover, since this is a claim of fraud, the applicants have an increased burden of proof, which they did not meet.
42. With regard to the claim that the brokerage expenses determined in Rachel, your little daughter in clause 5.2 of the partnership agreement, are ostensibly "expenses paid to third parties", it was argued that this is a vague and suppressed assumption of the applicants, who, in light of the weakness of their claims, have made a new invention. In any case, it was argued, this argument was made only in the summaries and constitutes an expansion of a prohibited front.
43. According to the respondents, "no confidence" is not a magic word for which such an exceptional and extreme remedy of dissolution of a partnership can be ordered and that this remedy will cause tremendous damages from all along, the person who was in contact with Müller is the respondent through its managers, they are the ones who are familiar with the matter from the beginning to the end and the only ones who can testify in the legal proceedings in Germany when the applicants and their counsel are in an inherent conflict of interest in light of their cooperation with Müller. In addition, it was argued that even though the Applicants' ISA withdrew this petition, the fact that the Applicants dared to request the appointment of a lawyer from the office of their attorney as a receiver only shows that there are no real reasons for the request.
44. Finally, it was argued that the Respondent's relationship with Muller is not of the Applicants' concern and there can be no dispute that the Applicants were promised 50% of the rights that would be received from the sale of the property, and thus no change was made, and in any event, no damage was caused to the Applicants.
45. In addition, it was argued in this context that although the fact that the company has the right to receive 25% of the profits of the property, if any, does not grant it excess voting rights, the fact that the company must also profit from the arrival of the funds in Israel constitutes conclusive proof that the company and the applicants are on the same side and have a clear common interest. In this matter as well, it was argued that at most the claim can reflect a financial claim, which does not lead to the dissolution of the partnership, certainly not at the current stage when the property has already been sold and all that remains is to collect the funds from Muller.

The Applicants' Arguments in the Reply Summaries on Their Behalf

46. In the summaries of the reply on their behalf, the Applicants argued that in the absence of a substantive response to the Applicants' claims, the Respondent chose to attack the Applicants and their agent on the grounds that the Applicants are "puppets" of Mueller who "feeds them with false information", but from the Respondents' summaries it is not possible to clarify what that "false information" or "biased and misleading" is, and for good reason, since the facts and documents received from Mueller, which caused the loss of confidence and served as the basis for the request for liquidation, were not denied by the respondent, and turned out to be true, reliable and accurate.
47. According to the Applicants, in the judgment of the Court of Appeals in the Netherlands of December 6, 2023, which was given after the Applicants' summaries in this case were submitted, very serious determinations were made against the Respondent and its officers, according to which they put the partnership in danger of bankruptcy and acted at the expense of the investors, which are more relevant and more severe than the rulings made against Mol in the judgments brought by the Respondent.
48. According to the Applicants, there is no basis for the Respondents' argument that an affidavit is not sufficient, Sections 45(4) and 45(6) of the Partnerships Ordinance do not establish an obligation to prove a subjective loss of confidence on the part of each of the members of the Partnership, and since there is no dispute that all the partners received the Applicant's request for liquidation and the Applicant's affidavit, so that they knew and knew it well. In any event, it was argued, the argument should be rejected because it is an expansion of a prohibited front.
49. According to the Applicants, there is no basis for the Respondents' claim regarding the need to testify for Müller since the Respondent does not deny the content of what Müller gave to the Applicants regarding any of the three factual elements that make up the liquidation request - the brokerage fees it collected and their scope, the rights it received in the property, and the scope of the funds transferred to the German partnership as a loan - and therefore there was no need for Müller to testify.
50. According to the Applicants, there is no basis for the Respondent's claim that sections 45(4) and 45(6) of the Partnerships Ordinance apply only in the case of a "dead end" and never apply to a limited partnership in which only the general partner makes decisions. In any event, it was argued, the request for liquidation also relies on section 45(6) of the Law, which is a basket clause that leaves the court broad discretion and by virtue of which the court is empowered to order the dissolution whenever circumstances arise that, in the opinion of the court, make the dissolution of the partnership an act of justice and honesty.  This is an honest remedy, and the court's hands should not be tied from granting a liquidation relief when a general partner stole and concealed from the limited partners, just as the company cannot be conditioned to act in good faith.  According to the applicants, this argument should be rejected even as it is an extension of the façade.
51. According to the Applicants, there is no basis for the Respondent's claim that in accordance with the case law there are cumulative conditions for liquidation, and in any event, these conditions are fulfilled in our case. There is no basis for the claim that the agreement foresaw a situation of problems and left the discretion in the hands of the general partner alone, since this argument is relevant to ongoing management in the ordinary course of business, but not in the case of theft and breach of trust.
52. The Applicants argue that the argument should be dismissed as if it had not been proven that if the Applicants had known about the money that the Respondent stole from them, they would not have entered into an agreement, "like a beggar who stole money from the pocket of a certain person", who claims that if he had asked the Applicant, he would have answered in the affirmative, when the actual sequence of events, the unilateral taking of funds while disguising and obscuring them continues - lies at the Respondent's doorstep. They add that the liquidation request does not deal with the money from the sale of the property that the respondent claims was transferred "fraudulently" by Mueller to another partnership controlled by the respondent, but rather with the indisputable investment funds that reached the respondent's pocket, from the first day of the investment, or there is no explanation for their disappearance.
53. With regard to the claim that if a liquidator is appointed, all he will have to do is to continue the engagement with the German lawyers who act on behalf of the partnership and to act to collect the funds from Müller, it was argued that the continuation of the engagement with the German lawyers does not have special business expertise and that any liquidator will be able to carry it out, while his role will also include examinations and investigations in relation to the huge sums that disappeared from the partnership during the period of its management by the respondent and the excess sums that the latter took. Without his appointment, it will not be possible to return the theft, since the respondent will certainly not act to sue herself.

Discussion and Decision

54. Section 45 of the Partnerships Ordinance deals with "liquidation by the court" (as distinct from "dissolution of the partnership by itself or by a partner" which section 41 of the Ordinance deals with) and instructs that:

"The court may, at the request of a partner, order the dissolution of the partnership in one of the following: