Civil Case (Tel Aviv) 35901-09-22 Dan Ravid et al. v. MHR 1 Investment Management Ltd. - part 4

The declarant on behalf of the applicants, Dan Ravid, referred to the term "success fee" in his cross-examination, noting that "there is an issue here that money was taken as the title of a success fee even before there was success.  It was simply stolen from our money and they called it a success fee, before there was a success" (transcript page 94, lines 11-13).

None of the statements of the respondent's witnesses answers the question of how any of the interlocutors with the respondent should understand from the term "success fee" their essence as a kind of "brokerage fee", the specific action or event for which they are given, their rate or the basis on which they will be calculated, the date and manner of their payment.  This is inconsistent with the rule that "a service provider - who is probably supposed to know what the value of the service he provides is, as far as he is concerned - must arrange the consideration for his services in the contract.  AT A MINIMUM, THE SERVICE PROVIDER IS EXPECTED TO INFORM THE RECIPIENT OF THE FEE HE WILL REQUEST FOR HIS SERVICES" (CIVIL APPEAL 6164/22 SMITHS DETECTION INC.  V.  WATERFALL ENGINEERING LTD., PARAGRAPH 78 OF JUDGE STEIN'S JUDGMENT, GIVEN ON OCTOBER 8, 2023).  This is particularly striking when in our case, both from the detailed presentations to the investors and from Shoval's testimony it appears that a significant part of the relevant actions - engagement in the transaction with the seller - have already been done, in a manner that reduces the uncertainty in these matters.  In most cases, in the absence of such notification and a claim by the service provider, "a legal rule in the form of a penalty default is applied, which will reduce the proper remuneration of the service provider who refrains from regulating the engagement between the parties for one reason or another - similar to the rule regarding the interpretation of a vague contract against its drafter..." (ibid., para.  80), or "a legal rule according to which there is justification for exempting, in part, the winner from the restitution of the appropriate fees" (ibid., paragraph 7 of the judgment of Justice Kabub).  In the circumstances of the present case, where it is not only a matter of demanding legal fees, but rather taking it on its own from the funds that are managed immediately upon receipt, while relying on a vague statement in a uniform agreement drafted by the respondent, this establishes an objective reason for the loss of confidence in it and anyone on its behalf, whether as those who take more than their proper share of the partnership's assets as the general partner, or at least as those who do not act with the required transparency.

80. With regard to its share in the property, MHR claims that since it undertook to provide the limited partners with rights in the property at a rate of 50%, and did so, the question of whether it was able to obtain additional rights for itself is of no importance.
81. And as Yagil put it in his testimony in the proceeding titled "Of the 50% that would have gone to Patrick Mueller, we got 25%, it's from our relationship with him, it's not about the investors at all. They stayed with their 50%, that's all" (Transcript, p.  118).
82. On the other hand, the declarant on behalf of the applicants, Dan Ravid, noted in his affidavit that "in accordance with the partnership agreement, the general partner is entitled to receive only a management fee of 10% of the rent to be paid to the partnership in respect of the partnership assets, and 10% of the profit in the event of the sale of the property" (paragraph 18 of the affidavit), and complained "... Because contrary to the general partner's representations, according to which the local partner will own 50% of the rights in the property, the local partner has received and holds only 25% of the rights in the property, while the remaining 25% of the rights in the property belong to the general partner! This is without the general partner investing in the partnership and at the expense of the limited partners!(paragraph 21 of the affidavit), and later in the proceeding, in his cross-examination, he reiterated that "they took the money from the investors.  They received 25% of the property" (Transcript p.  46), and that "I gave you money, you slept soundly, you took 25% of the property for yourselves, at my expense" (Transcript p.  70).
83. Section 29 of the Partnerships Ordinance, entitled "Duty of a Partner to His Partner", states that "the duty of partners is to conduct the business of the partnership for the common benefit, to be honest and loyal to each other and to provide each partner or his representative with correct accounts and complete information in any matter relating to the partnership."
84. The structure of the relationship between the general partner and the limited partner in the limited partnership, in which the limited partners put their capital into the partnership at the time of the engagement, while the power to bind the partnership and manage its affairs is given only to the general partner, requires an increased degree of trust, loyalty, fairness and good faith on the part of the general partner towards the limited partners. These duties form the basis for a fair partnership relationship.
85. The general structure of the duty of trust rests on two legs: the prohibition of conflict of interest and the duty of full disclosure. Together, the two rules create a preventive legal regime, where the prohibition of conflict of interest deals with the fiduciary's self-preference and the duty of full disclosure deals with the problem of partial information (Amir Licht, The Law of Trust: The Duty of Trust in a Corporation and the General Law, 5773-2013, p.  67).
86. The examination of the declarants on behalf of the Respondent clearly shows that in the engagement with the investors, no definition was given of the "Success Fees", their formula, date or rate, so that in practice the Respondent acted in a conflict of interest when the "negotiations" regarding the amount of its own "Success Fee" to receive investors' money, it managed, in fact, with itself and as a result it was the one who determined the rate of the Success Fee paid to it. In doing so, the Respondent acted in a conflict of interest, even if it was stated in the agreement that the success fee was paid to the general partner, and even if the applicants should have understood that these success fees, which are detailed in clause 5.2 of the agreement, are paid to the general partner as distinct from the 10% paid to them out of the profit that would have grown into the partnership at the time of the sale of the property.
87. In addition, the Respondent breached the duty of disclosure that applied to it both in light of the explicit language of section 29 of the Partnerships Ordinance and in view of the existence of such fiduciary duties. From the evidence before me, it appears that the respondent did not present the limited partners with full and reliable information about the use made of the partners' funds, and left in its hands funds at a rate that significantly exceeds the rates set out in the agreement (as distinct from the "success fee for the general partner", the rate of which, as aforesaid, was not specified), while taking advantage of its advantage in information and management power.  Its compelling, and sometimes contradictory, explanations for those actions, based on a vague contractual provision, are far from reflecting its obligation to provide and the right of the limited partners to receive "correct accounts and complete information in any matter relating to the partnership" as stipulated in section 29 of the Partnerships Ordinance.
88. Thus, inter alia, the partnership's financial statements did not reflect the brokerage fees paid to the general partner (and his German partner) in the amount of €378,763 each, commissions that were not explicitly mentioned in the partnership agreement or in the presentation presented to the investors, nor did the investors be given an explanation or detail in relation to the sums invested by the limited partners and the amount transferred to the German partnership, despite the opportunity given to the respondent to submit a supplementary affidavit on its behalf regarding these amounts.
89. Even by concealing the fact that the Respondent owns 25% of the Trace A 's shares, the Respondent violated its duty to provide the Applicants with complete information on any matter relating to the partnership. As noted, in a presentation presented to investors prior to the execution of the investment in the partnership, it was noted that in exchange for the capital required for the purchase of the property (25% of the cost of the property, with the rest of the amount to be financed through bank financing), the partnership limited in rights in the property would receive "the remaining 50% carried by a local partner responsible for the ongoing maintenance of the property".  The fact that the allocation of the tracking shares to the respondent did not detract from the limited partnership's share of the profits arising from the sale of the property, does not increase or decrease it.  The limited partner is obligated to provide the limited partners with complete information regarding any matter relating to the partnership, and this information also includes information regarding the structure of the investments made by the partnership, as well as to lay out to them all of his interests in the partnership's business, even if there is an identical relationship between the partnership's interest in maximizing its profits and the surplus interests of the general partner.
90. In these circumstances, I am of the opinion that the Applicants have been able to prove that the Respondent breached its obligations towards the limited partners in a manner that led to their complete loss of confidence in the Respondent, and that in these circumstances there is no reason to force the Applicants to continue the partnership relationship with the Respondent. These circumstances establish, in my opinion, grounds for liquidating the company in accordance with the provision of section 45(6) of the Partnerships Ordinance.
91. In this context, I will note that I accept the Respondent's position that in order for a cause of liquidation to be based on a loss of confidence, a subjective loss of confidence is not enough, but precisely for this reason there is no substance in their argument that the testimony of Applicant 1 could not be sufficed and it was necessary to hear all the Applicants. Circumstances in which it turns out that the designated general partner or his individuals made and exploited vague and incomplete representations even before the establishment of the partnership relationship in order to transfer to themselves or anyone on their behalf money, assets and opportunities involved in the transactions that the partnership was intended to make, certainly when it comes to taking out of the investment funds themselves immediately upon receipt - certainly give rise to an objective loss of confidence.
92. These circumstances, in my opinion, also establish grounds for dissolution of the partnership on the basis of the provision of section 45(4) of the Partnerships Ordinance, according to which the court may order the dissolution of the partnership, at the request of a partner, where "one of the partners, who is not the applicant, willfully or permanently dissolves the partnership agreement, or behaves in other matters relating to the partnership in such a way that the other partners have no reasonable practical possibility to continue with him in managing the partnership business". Admittedly, in a limited partnership, the limited partners are not partners in the management of the partnership's business, and in this sense, as the Respondent claims, there is no concern that the partnership will find itself in a "dead end", but in my opinion, in the absence of trust, which is the foundation and infrastructure for the partnership relationship, the reasonable practical possibility of continuing to maintain the partnership is also prevented.
93. I will now turn to the arguments that concern the court's discretion in granting the relief and the claim that there is no justification for granting it in the circumstances of the present case. These were raised in three contexts - one, the will of the limited partners, the second, the argument that the liquidation proceeding is contrary to the interest of the limited partners, and the third, the argument that there is no reason to issue a liquidation order when the limited partnership's property has already been sold, and the only activity remaining in the partnership concerned actions to recover the proceeds of the sale through the lawsuit against Muller and their distribution to the respondents, and the issuance of the liquidation order would impose substantial expenses on the partnership.
94. As for the wishes of the limited partners, the applicants from the beginning of the proceeding constitute 36% of them (25 out of 69). In a decision given at the court meeting on May 3, 2023, an instruction was given regarding the sending of notices by MHR to all the limited partners "in the wording agreed upon between the parties...  [Where] it is clarified that the right of every limited partner to appear for the hearing and to express his position on the application, subject to the submission of an objection or a verified agreement in an affidavit...".  Prior to the aforesaid decision, on April 18, 2023 and April 27, 2023, the Respondent submitted 6 affidavits of limited partners opposing the liquidation, and on July 2, 2023, the Applicants submitted to the court file "12 affidavits of limited partners who are not a party to the proceeding under the heading, which support the liquidation request".  The Respondent did not dispute the authenticity of the affidavits attached by the Applicants and did not see the need to interrogate any of them.  It did not even name any of the original applicants it wanted to investigate.  While 37 of the 69 limited partners positively expressed their desire to dissolve the partnership based on the reasons for the request and while being aware of the costs involved in the liquidation, it should not be ignored.
95. With regard to the claim that Mueller's alleged influence, to which the applicants approached for information in order to prepare the request, it is not understood how from the claim that Mueller should not be trusted, MHR decrees that trust should be given specifically to it and its managers - given that the actual managers were the ones who saw fit to engage with Muller, and especially in light of the above findings regarding the manner in which they behaved vis-à-vis the partners with whom they marketed their business relationship.
96. Nor have I found any basis for the claim that the Applicants are acting on behalf of or on behalf of Mr. Muller or are being operated by him as "puppets on a string", as the Respondent claims. I see no fault in the fact that the applicants, in their distress and feeling that they were not provided with full information regarding their investments, contacted the German partner with a request for information regarding their own funds.  In any event, even the information provided to them by Mueller, in its entirety, turned out to be correct and accurate information and was not concealed by the respondent.  The Respondent, on the other hand, did not lay the slightest evidence that Mr. Mueller was behind the filing of the liquidation or that the Respondents were operated by him.
97. With regard to the claims concerning difficulties encountered by a functionary who will be appointed to carry out actions for the benefit of the partnership, from the outset MHR's position that its directors are the only ones who possess the information and the skill to conduct the proceedings in Germany raises a difficulty with regard to their good faith, since the appointment does not negate the ability, even the obligation, of those who serve as MHR's directors to provide him with the required information and, if necessary, to assist in the investigations he conducts - in accordance with instructions received from competent courts in Israel or abroad. In any event, at a minimum, according to the Applicants, MHR is entitled to 10% of the share of the limited partners in the profits that will arise from the sale of the property, in addition to the fact that, as stated, it holds the shares of Aqiba A, with the rights inherent therein.
98. Finally, I will note that I did not find any substance in the respondent's argument that the liquidation remedy is a drastic remedy that there is no reason to grant it in the circumstances of the case, since "contrary to the fact that liquidation is a 'drastic remedy' in the world of corporate law, it is the default in the world of partnership law" (Hermolin, supra, at paragraph 24). Admittedly, the liquidation of a partnership's business following its dissolution, "can be extremely problematic, inter alia, since the partnership is often engaged in projects, or proceedings of an ongoing nature, which may be harmed by the complete liquidation of the business" (the Hermolin case, supra, at paragraph 28), but in our case, the subject of the partnership is not a professional partnership or another business with an ongoing existence that provides products or services, and on which the engagements are relied upon by other parties that are not a party to the discussion.  Rather, it is a partnership that was "prepared for the purpose of a single random business or a single capacity", and as such, according to the default rule set out in section 41(a)(2) of the Partnerships Ordinance, it is dissolved "upon the termination of the business or capacity".  In our case, the real estate asset in which the partnership invested was sold and the dissolution of the partnership does not harm its business.
99. In light of the above, I am of the opinion that there is a cause for dissolution of the partnership, and in the absence of sufficient reasons not to order the dissolution of the partnership, an order for its dissolution is hereby issued.
100. With regard to the right of the liquidator, section 64(b) of the Partnerships Ordinance states that if it is decided to dissolve a limited partnership, "the general partners will liquidate its business, unless the court orders otherwise." It is clear that in the circumstances of the case and in view of the grounds for liquidation, there is no reason to leave the dissolution of the limited partnership in the hands of the general partner, and there is room to appoint a receiver for the partnership's assets who will act to receiver its assets, discharge its debts and distribute the surplus among the persons concerned, according to their rights.
101. As part of the liquidation application, the applicants petitioned for the appointment of an attorney from the attorney's office as a liquidator, but in light of comments that arose during the hearing of the application, they withdrew their request and in the framework of their summaries petitioned for the appointment of CPA Yitzhak (Itzik) Idan to the position. Attached to their summaries was CPA Idan's agreement to be appointed to the position, and in addition, he declared that he had no interest in the partnership or in its general partner and that there was no conflict of interest in fulfilling the role of liquidator or receiver of the partnership and any of his other interests.  In light of CPA Idan's experience, including as a functionary in liquidation proceedings, I grant the request and order the appointment of CPA Yitzhak (Itzik) Idan as the receiver of the limited partnership assets.

Granted today, 22 Tevet 5785, January 22, 2025, in the absence of the parties.