Civil Case (Tel Aviv) 62482-12-19 Toby Peretz v. Adi Leibowitz - part 2

- Oden Entrepreneurship and Execution in a Tax Appeal (Defendant 3; formerly M.  Schneider - Building Contractors Ltd.; hereinafter - Odan Entrepreneurship), in which the plaintiff and defendant 1 held equal shares, also through an option agreement for the purchase of the shares, until at a certain point the shares were transferred to the plaintiff and defendant 1.

Defendant 2 is the son of defendant 1, and served as a director of Edgar & A.M.  Management and as CEO of Edgar since 2011.

3. The plaintiff and defendant 1 do not dispute that in practice the real ownership of the aforementioned manpower corporations was theirs and that the corporate structure that was established, including the ownership of the companies, was intended only to circumvent the limitations of such regulation.

The plaintiff's and defendant 1's modus operandi was discovered by the enforcement authorities and a criminal investigation was opened against them, at the end of which an indictment was filed against them and others in T.P.  15640-06-15 (Tel Aviv District) for fraudulent and money laundering activities in connection with the activities of the aforementioned manpower corporations (and others), while misrepresenting to the Registrar of Contractors, concealing the ownership and transfer of profits of manpower brokerage services between various companies under their control illegally.  The plaintiff and defendant 1 reached a plea bargain with the state in which they admitted the facts detailed in the amended indictment (Appendix 1 to the affidavit of defendant 1; hereinafter - the plea bargain and the amended indictment, respectively), were convicted, and sentenced to a prison term of 33 months and high fines.  At the same time, they also paid the tax authorities millions of shekels.

4. After serving his prison sentences, the plaintiff wrote a letter dated June 18, 2019 to defendants 1-2, to the companies' accountant - Elron CPA, and to Adv. Gabriel Hayek, who represented the parties (Appendices 8-10 to the statement of claim, to which the plaintiff refers in paragraph 84 of his affidavit) regarding accounting between the parties, since he claimed that despite the existence of such companies, this was a partnership between the plaintiff and defendant 1. After these requests were not answered to his satisfaction, and in light of the claim of defendants 1-2 in their letter of July 28, 2019, that the requested calculation had already been carried out (Appendix 13 to the statement of claim, to which the plaintiff refers in paragraph 86 of his affidavit), his claim was filed, in which financial relief and relief were requested for the dissolution of the partnership, the provision of accounts and the appointment of various officials to investigate the partnership's business and the payment of taxes, including orders for the execution of all of these.
5. To complete the picture, it should be noted that even before serving his sentence, for various reasons, some of which are related to the police investigation and some of which are controversial but do not require a decision for this stage of the proceedings, in the years 2013-2014 the plaintiff and defendant 1 conducted negotiations to separate control of Uden Entrepreneurship and transfer it to defendant 1. In this framework, a draft agreement was prepared, which was not signed (Appendix 11 to the plaintiff's affidavit; hereinafter - the Odan Entrepreneurship Agreement), which included a certain arrangement in connection with the company's projects.

As part of the separation proceedings, it was decided, in the framework of a general meeting of Odan Entrepreneurship on December 3, 2014, signed by the plaintiff and defendant 1, to increase the share capital of this company and to allocate the increased share capital to defendant 1 (Appendix 30 to his affidavit).  In addition, on the same day, the plaintiff and defendant 1 signed the minutes of a meeting of the board of directors of Odan Entrepreneurship, in which it was decided to open a new bank account for the company, in which the sole authorized signatory would be defendant 1 (and/or anyone on his behalf) and to transfer its shares held by third parties to defendant 1 (Appendix 31 to his affidavit).

6. Defendants 1 and 3 filed a counterclaim for declaratory and monetary remedies against the plaintiff and against Tov Gal Initiation Company in a tax appeal (hereinafter - Tov Gal), an Israeli company in which the registered shareholder is the plaintiff's son, Mr. Uri Tovi, and which was directly or indirectly attributed to the plaintiff, according to Appendix A to the plea bargain. In the counterclaim, it was claimed, inter alia, that although it was not signed, the Oden Entrepreneurship Agreement was valid, that it was breached by the plaintiff and therefore a number of remedies were requested in this regard.
7. In the pre-trial hearing of March 2, 2023, it was determined that the evidence of the parties would be submitted, in the first stage, only in the matter of the plaintiff's claim for the provision of accounts (p. 18 of the transcript, line 24).  In another decision of September 17, 2024, it was clarified that at this stage the hearing would be devoted to the plaintiff's claim only.
8. The parties' arguments

B1 The plaintiff's arguments

8. To establish his right to dissolve the partnership and provide accounts, the plaintiff claims that:
9. The plaintiff and defendant 1 have maintained an unregistered partnership relationship since 2000, based on personal trust relationships, with an agreement to share the investment and profits equally. In the division of labor between them, the plaintiff functioned as a field man, and defendant 1 was involved in business development and financial management and led the establishment or takeover of the various companies in the partnership.  Defendant 2 managed part of the partnership's business since 2010 after he was appointed by his father, with a commitment to act for the benefit of the partnership.
10. Edgar, A.M. Management and Oden Entrepreneurship are companies that are part of the partnership's business.  The company registrations, the appointment of the directors and the selection of shareholders in each company were made in accordance with the decision of defendant 1.  Other companies that are included in the partnership's business, as claimed in the pre-trial of February 1, 2023 (p.  12 of the minutes, s.  18), are Odan Properties and Odan Hadar Yosef.

• The figures on the profits of the partnership presented in the amended indictment were much higher than the reports that the plaintiff received over the years from defendants 1-2 and lower than the fruits he received from the partnership's assets.

1. The transfer of the shares in Oden Development in 2014 was carried out at the request of defendant 1, for the purpose of a separate transaction that he wished to execute through it and which demanded high guarantees to which the plaintiff did not agree to be disclosed. As part of this process, a draft of an accounting and separation agreement was drafted, which was not signed, but the shareholders' records were changed in order to prevent the plaintiff from exposing the risks of the transaction, which left the formal control of Oden Entrepreneurship in the hands of defendant 1.
2. The plaintiff and defendant 1 never attached practical importance to the companies' articles of incorporation. The establishmentof the partnership and their registration structure were intended for the purpose of operating through others and external planning needs, while in practice the partnership transcended these, and the division between them was based on personal consideration throughout the entire process and even after the transfer of the shares in Odan Development.
3. The prosecutor and defendant 1 pleaded guilty in the amended indictment in accordance with a joint plea bargain, and equally bore the fines and other financial costs of the plea bargain, and served a prison sentence.

• As part of the amendment to the indictment, the charge against defendant 2 was dropped from it, and the plaintiff was also forced to bear some of the responsibility for his actions and omissions.
• Throughout the criminal proceedings, defendant 1 promised the plaintiff that they would carry out a full accounting for all the partnership's business at the conclusion of the partnership, but this was not done and the inquiries to defendant 1 were all rejected.

1. The plaintiff contacted the accountants and lawyers who handled various matters of the companies to examine the accounts, but did not receive true data, due to the control of defendants 1-2 in the companies and due to their prohibition from providing full information without their approval.
2. According to the amended indictment, approximately ILS 146 million was transferred from the group of companies controlled by the plaintiff and defendant 1 for their benefit and for the benefit of their family members. Defendants 1-2 illegally withdrew funds from defendants 3 and 5 that were transferred to them, or to third parties related to them, and embezzled them in the partnership's business.
3. In light of this, an economic investigation should be conducted in all of the partnership's businesses in order to locate funds due to the plaintiff and appoint an official to represent the partnership's business in the tax authorities, as well as to return to the plaintiff half of the sums received by the defendants illegally.

B.2 Defendants' Arguments 1, 3-5

9. These defendants deny the plaintiff's claims in their entirety and claim that:
10. There was never a partnership between the plaintiff and defendant 1, neither personally nor in the structure of the group of companies.
11. The plaintiff and defendant 1 operated in the field of brokerage and employment of foreign workers, and as of 2005, following new legislative arrangements, they established and/or took over a number of manpower companies. Some of the companies through which they operated were not added to the statement of claim, even though it was claimed that they were part of the partnership.

• The amended indictment did not include a claim of partnership between the parties. He referred to the plaintiff and defendant 1 as the actual controlling shareholders in a number of companies between the years 2005-2012.

1. The amended indictment was deleted not only for defendant 2, but also for the plaintiff's daughter, who was a shareholder in Tov Gal.
2. The plaintiff and defendant 1 had additional companies under the exclusive control of each of them separately, inter alia, according to the amended indictment - Tov Gal - through which the plaintiff operated and was added as defendant 2 to the counterclaim. The plaintiff seeks to hide the funds he received through these companies from the account.
3. The plaintiff received access to all the companies' documents against the background of the police investigations and the negotiations for the separation through professional bodies, and the results were acceptable to him at that time.

• As it appears from the amended indictment, the plaintiff was not only a "man of the field", but a controlling shareholder in the companies for which he claimed accounts and accounting, took part in their management, had signing rights and all the actions carried out therein, including the registration structure, the addition of the additional holders mentioned in the amended indictment (who were his associates), were at his own discretion or at his request, with his consent and signature. Therefore, the plaintiff was exposed to and had access to all of their financial information, and he has no standing in the claim to receive accounts.
• The plaintiff even received his share in Odan Initiation's projects afterwards, but refused to bear his share of the losses incurred by it and is in a debt balance to it in the amount of the counterclaim.

1. The plaintiff acted to compete with Odan Entrepreneurship while he was serving as an officer and shareholder in it, through Tov Gal.
2. When the relationship of trust between the parties was broken, it was agreed to conclude a separation agreement in 2014 between the plaintiff and defendant 1 in relation to Oden Development, according to which the parties acted over the following years. The agreement included the division of responsibility for the various projects and the right to profits from them, including the transfer of the plaintiff's shares in Oden Development to defendant 1.  In addition, after the separation, the plaintiff no longer has a right to the accounts in the matter of this company.
3. The application to the Attorney General and the attorney in 2019 was not only made on behalf of the plaintiff, but also in the name of Tov Gal, which was not part of the array of companies controlled by the parties and is therefore not entitled to any accounting information.

• The defendants raised additional claims: there is a judicial estoppel since the prosecution's claims contradict the plaintiff's confessions in the amended indictment - both regarding the structure of the "partnership", and regarding the lack of knowledge about the money transfers between the companies controlled by the plaintiff and defendant 1; Lack of good faith and abuse of legal proceedings that are expressed in the concealment of many relevant facts that negate the lawsuit, including receipt of funds, access to accounts, freezing the activities of defendants 3-5 as of the end of 2014, implementing the separation agreement in practice, and omitting relevant parties for a full investigation of the dispute and including irrelevant parties in order to exert pressure; the absence of rivalry with defendants 3-5, who are companies that are not alleged to have been direct partners; Defendant 5 is in liquidation and therefore it is not possible to initiate a claim against it; statute of limitations and delay of the claim that caused evidentiary damage; A claim for accounting for illegal profits is invalid and contrary to the plea bargain.

B3 Defendant's Arguments 2

10. Defendant 2 filed a separate statement of defense on his behalf. Beyond the repetition of defendant 1's arguments regarding the lack of a framework of partnership with the plaintiff, defendant 2 also claimed, in summary, the absence of rivalry with the plaintiff, since it was not claimed that he too was a partner in the partnership (which is denied by all the defendants).
11. Even if defendant 2 served as a manager in some of the companies, the amended indictment attributes all of their management and control to the plaintiff and the defendant. Defendant 2 was not included in it, and even without it, the plaintiff did not prove circumstances justifying lifting the corporate veil between the companies and defendant 2.

B4 The plaintiff's arguments in his reply to the defense statements

12. In summary, the plaintiff argued in his response, in addition to reiterating his claims regarding the existence of an unregistered partnership, that: the defendants' claims support the partnership structure that existed between him and defendant 1; There was an agreement to separate and perform a full reckoning; In the plea bargain, the plaintiff and defendant 1 were represented by a joint attorney and entered into an equal plea bargain; The tax authorities treated them as partners in the legal sense; Defendant 1 admitted to having a partnership with the plaintiff in his interrogation with the tax authorities; The law allows for recognition of a partnership even when ownership of the companies is involved.
13. The plaintiff also raised a series of arguments relating to the accounting on its merits, but this does not require a decision at this stage of the proceedings.

B5 The Parties' Evidence

14. On behalf of the plaintiff, his own affidavit was submitted, as well as affidavits on behalf of Ms. Sarah Biton, Director of Personnel in various companies related to the parties (hereinafter - Biton), Mr. Oshri Zafrani, a manager at Hasson Gesher (hereinafter - Zafrani), Ms. Iris Harush, secretary at Tov Gal and other companies related to the parties (hereinafter - Harush), Mr. Timur Kardanov, who served in various positions in the various companies (hereinafter - Kardanov) and Adv. Reuven Paran, who has represented the parties in personal and business matters over the years (hereinafter - Paran). The plaintiff also summoned additional witnesses for questioning without an affidavit - CPA Yitzhak Elron (hereinafter - CPA Elron), Mr. Eyal Mizrahi (hereinafter - Mizrahi), Ms. Nurit Dovrat (hereinafter - Dovrat), Mr. Meir Piso (he relinquished his testimony in his statement of September 12, 2024) and Mr. Moti Hasson (hereinafter - Hasson).
15. On behalf of the defendants, affidavits were submitted by defendant 1 and by Adv. Gabriel Hayek, who handled the establishment of various companies in the group of companies of the parties and provided them with legal services (hereinafter - Hayek).

III.                      Can the law of partnerships also be applied to the way a limited company is organized?

16. In order for the plaintiff to be entitled to the remedies requested by him, he must of course prove the existence of a partnership.

In order for a person who claims to provide accounts to receive an order for accounting, he must prove the existence of a special relationship between him and the defendant that justifies the provision of accounts.  This is the case in partnership relations between partners or in a mission relationship between the sender and the sender, as well as in trust relationships in which there is a proprietary relationship between the trustee and the beneficiary (Civil Appeal Authority 5064/90 Sassi v.  Arza Wineries T.R.Z.  Ltd., IsrSC 45(2) 130 (1991); Civil Appeal Authority 8266/11 UBM v.  Maoz Travels in Tax Appeal et al.  (August 16, 2012)).