Ampa Ltd. v Kentfield Capital, LLC
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Ampa Ltd. v Kentfield Capital, LLC 2003 NY Slip Op 30253(U) August 11, 2003 Supreme Court, New York County Docket Number: 111896/01 Judge: Richard B. Lowe III Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various state and local government websites. These include the New York State Unified Court System's E-Courts Service, and the Bronx County Clerk's office. This opinion is uncorrected and not selected for official publication. [* 1] -·- SUPR.El.VfE COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ·----··-----·------X AJvll'A LTD., SHLOMO FOGEL, · 'r"EI:l:OSHUA WOLF, WOLF ICHILOV & TRUST COM.PA.-....-Y,LID., PJNE LEVEL COMPANY, INC., BAUl\'TON LID., DC ill UC, I:ndividually and Derivatively OJl behalf of DC lV.cA,.~AGERS LLC and PC TI U.C, Iruiividllally and Dcrivstively on behalf of DC JNVESTORS LLC., Index No. 111896101 Decision & Order Plaintiffs, -against- KENTFlELD CAPITAL, LLC, JOSEPH ·YERUSHA.LM1, MARTIN GANS and YERUSHALMI & ASSOCIATES, LI.J>, Defendants, KENTFIELD CAPITAL, LLC and BRICLl. REALTY CO., 1NC., Countcrclaima:nts, -against- AMPA LTD., SHLOMO FOGEL, YEHOSHUA WOLF, WOLF IClllLOV & TRUST COMPANY, LTD., PINE LEVEL. CO.Ml>ANY, JNC., HAUNTON LTD., DC ID LLC, DC lI LLC, AB'"liER FOGEL, LAWRENCE SCHNEIDER, HENRY SCHNEIDER, ADAM GREENE, NAFTAll CEDER, DOVERTOWER CAPITAL LLC and DC MANGERS LLC, Counterclaim Defendants HON. RICHARD B. LOWE, ID: The above caption matter was tried by thi!. Coun, without 2. jury, beginning on October l [* 2] .. 21, 2002 and ending "May 6, 2003. Tue following are findings of fact and conclusions oflaw pursuant to CPLR 4213. L Bs.ckrronnd Plaintiff Al'vl:PA is Israel's largest Illllllufacrurer and distn"'butor ofrefrigerators, and operates ournerous other businesses.. As of August J 6, 1998, tbe majority of its shares were owned by the Israeli !Ja>ed Grodecki family. On that date the rrroc1eckis sold the controlling interest in AMPA to a group that had been put together by pl..ai.ilti.:ff Shlomo Fogel, b.is brother Asher, their attorney Y ehosbua Wolf and several others. (They and their corporate vehicles arc called herein the "promoters''). The named plaintiffs are all pramoterS, with the exception of AMP .A. which has a stand-alone claim fcir tortious interference. The transaction at issue was one whereby the promoters =anged a partial levera.ged buyout; in which the hulk of the purchase price was borrowed from Bank Hapoalim in Israel and the balance was raised from nine investors. The largest of these investors is defendant and counterclaimant Kentfi.eld Capital LLC ("Kentfidd"), a Delaware company. The majority of Kentfield is owned by entitites controlli::d by two other defendauts,.Joseph Yemshalrni, a New Y Ork/Israeli tax and corporate attorney, and Martin Gans, a. businessman who is a partner of Y erushal.mi.'s in many other invest;rnents. The investors. invested in DC Investorn LLC {"DCr'), a Delaware company that is managed by another Delaware company called DC Managers LLC ("DCM"). DCM's agre=ent creates a three person board of directors who must vote Wlaniroously on all matters. The members of the DCM board art> defendant Gans, plaintiff Shlomo Fogel and another promoter. 2 [* 3] Immediately below DCI in the corporate stracture is a Dutcb company called Bum Holdings BV ("Bum"), which in turn owns the Israeli company Papas Holding, Ltd. ("Papos"). ·Papas borrowed approximately $30 million from Bank Hapoalim, and used these fuods, along with approximately $7 million raised from the investors in DCI, to purchase 70% of Grodec}d Holdings Ltd, which at that time owned approximately 57% of A.Ml'A's equity and controlled approximately 73 .5% of its voting power. Thus DC! indirectly acquired approximately 40% of AMJ'A's equity and approximately 51% of its vote. A central issue in this case is the question of the Promoters compensation for their efforts i.n putting together the Arapa trans3Ction. There is a contractual promise that they will receive equity in DCI, the Delaware compsny foo:ned for the acquisition. Under the agreement, the promote:ra receipt of equity will occur only after all the investors have been paid back tbeU: entire investments (approximately $7 million), together with interest and any m:. liability arising from the transaction.. The contract define5 the repayment to the investors as the "hurdle event". Tf the ''hm:clle event" occurs before August 2003, the amount of stock the promoters will. receive (th~ "promote").will be sufficient to control DCI. Aftertbat date, the amount of equity received decreases, so that if the hurdle event is delayed until after August 2003, the promotei:s' ability to ccntrol DCI and the other relevant holding companies will be eliminated, to the benefit ofKentfield. Plaintiffs allege that Ken.tfield's owners, Ycrulshami and Gans, have improperly blocked the ''hurdle event" in order to seize control ofDCI and its subsidiaries and thereby prevent the promoters· from acquir(ug control. The allegations surround lhe aaions of G1Uls and Y erulshami which allegedly blocked the use of available bank loans to finance the hurdle event, on th.o pretext that only operati,;,g profits 3 [* 4] from AMP A's various businesses can be us::d to repay the investors to acbieve the hitrd1e eve;nt In adPition to several other claims, Piaintlffs seek <!=ages against Yerulshami, individ=l.ly, fur legal malpractice alleging, as tax lawyer for the transaction, he failed to prevent ·. tax problems which were later fowd to be inherent in the Ampa tra.TJ.Saction. Defondants counterclaims allege that the entire transaeti.on resulted from. fraud in the induc=ent by the Promoters, who allegedly failed to disclose material termS of the bank loan used to acquire Ampa. Defendants also allege br=h of contract and corpoiate waste by the promoters. IL Hurdie Events Issues: A. hnprooer Veto of the Hurdle Eyent by Qws The Arnpa transaction was one whereby it was contemplated that fue promoters would eventually control DCI and the investors would get back their money and no longer be at risk. This "hurdle cvenr was projected to take place quickly. Y erulshai:ni testified that he was told it would happen about one yea:r after closi.D.g. the Ampa tr.msaction. Plaintiffi allege that Gans breached !tis fiduciary duty by vetoing the necessary financing which wollld allow for the "hurdle event" to occur. If the hurdle event is not acbieved by August 2003, Krntfield contends it will have control of both the equity and the management ofDCibecause tbe agreements giVing the promoters two scats on the DCM board tenninate at that ti.me and because it will hold a majoriiy of the equity. For this reason, control of the equity in .August 2003 is significant If the hurdle event is not achieved, Kentfield's sba.-e of the equity will be 54%. If the hurdle event is achieved by then, the promoters have conrrol as they will have 46% of the equity; with 4 [* 5] c Kentfield's being rCduced from 54% to 32%. Plaintiffs allege that in both November 1999 and October 2000 Gans improperly failed to approve :financing which would allow the hurdle eve.lit to occur. On November 18, 1999, the proxnoters to1d Yerulshami, Gans, and the other DCI investors that Bank Hapoalim would likely approve a loan allo .ving the hurdle event to occur. The testimony of Wolf. states that he had a conversation with .Gans fullowing a meeting of the investors .. He mid Gans that they wanted to go forward with a loan to achie.ve the hurdle eve11t and Ga.us responded he would only agree if the promoters to()k less equity than the agreeme:nts provided. This testimony was umebutted by Gans. It is this court's fuiding that the conversation did occur. However, Plaintiff has failed to establish tha! the November 1999 conversation was a vetq by Gans of the hurdle event. There is no evidence that the c0J1versation involved what amounted to a proposal by Plaintiffwhereby tbe terms were properly put before Gans and thereafter rejectedPlaintiffs allege that Gans again vetoed the hurdle event in November200D. The k \Plamtiffs' :Exhibit' 357 ; a :resolrition signed by clisint=sted DCT investon; requesting an i . I approval of tbe loan fOr the hurdle event. The letter is sufficient evidence that it was circulated among investors and was a proposal seeking approval, oftbe loan. Gans tesi:i.fulQand the doc=ent.ary eyjdence shows that he refused to agree to the lca.n. While no f=a.l meeting was held to put the terms of the loan to a vote, !he Court finds credible the testimony that it was the practice of the board to meet md conduct business informally. Therefore, the Court rejects defendants' argument that no formal meeting was held to discuss the terms of the loan. Ail:cr review of Exhibit 357; it is confounding and not credible thatthe defendants aver they were 5 [* 6] unaware of the proposal. The Court -finds that the Plaintiff bas established that the terms of the loan were presented to Gans in November 2000 and wt he subsequently vetoed the loan . As director, Gans:' decision to veto the loan is generally protected by the business judgment rule. The business judgme;ut role is a "presmnprion ths1 in making a business decision the directors of a corporation acted on an informed hasis, in good farth and in the honest belief thattbe action taken was in the best interests of the company. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). Therefore, the burden is on the plaintiff to establish bad firitharla.ckof due care by Gans. Smith v, Van Gorkorn. 4&8 A.2d 858, 872 (Del 1985). Should Plaintiffs meet their bUTden, the business judgment rule will not shie1d Gans from liability for his actions ill vetoing the loan. Cheffv. Mathes, 199A.2d 548, 554 (Del. 1964). Furthermore, the substantive protections of the business judgment rule can bi: claimed only by disinrerested directors whose conduct otherwisem~ts the tests of the :rule's procedural requirernents. McMullin v. Beran, 765 A.2d 910, 923 (Del. 2000). In other words, Gans must be shown to be incapable, due to person.al interest or domination and control, of obj ecrively evaluating the financing to achieve the hurdle evellt. Brehm y, Eisner. 746 A.2d 244, 257 (Del. 2000). Plaintiffs have met their burden by establishing that Gans was acting in bad faith when vetoing the loan. The Court has found that a conversation occurred between Wolf and Gans in October of 1999 whereby Gans stated he would approv-e the loan only iffue promoters took less equity in the company. While the Court beld that tbis was not evidence of a veto, it is compelling evidence tbat Gans w~s acting in bad faith and in self intaest when failing to approve financing which would pro= the hurdle event Furthermore, Gans. was interested as defined by~ Deleware 1aw. Here, hi" stands to benefit :financially by vetoing the hurdle event because 6 i' [* 7] Kentfield obtairu control of the equity ofDCI if the hurdle evc:nt does not o = by August 26, 2003. His personal interest was ~erefore diff~t from the ether DCI members whose goal ls return of their investments as quickly as possible, .and the promoters whose goal is control. Accordingly,. Gans' decision is not protected by the business judgmer.t .rule. Because the Court has held that (lam;' deci!n{}n is not shielded by the business judgment rule:, the burden shifts to defendants to establish that his decision was made after considering all material information reasonably available. :Brehm y, Eisner, 746 A.:1.d 244 at 258. The judgment of directors must be an informed one. Mom v. Household Int'L lnc,, 490 A..2d I 054, 1075 (Del. Ch.), affd 500 A.2.d 1346 (Del. 1985). Gl!IIS h8S come forward with no eviden.ce that he lI1l!de an informed decision wh.en vetoing !he hurdle event. Tue recurd is void of any evidence that he analyzed the loan, sought financial in:fQnna.tioo from inside or outside accoUIIlm:lts, or that he contacted bank officials to discuss fheil: analysis of the financing. Gans acknowledged thB! there is no do=entary evidence showtng that he took any steps to detennine·whether the Joan was in the best interest of the conwany. Signific;sntly, Gans has failed to rebut the testimony oibaD!c officer, Debra Elinati th.at the loan wouid have helped to ease the tax problems plaguing the .Ampa transaction. Her testimony was corroborated by Professor Chirelstein .from Columbia University School of Law. Chirelstein testified that achieving tile hurdle event was a necessary first step in solving these tax problans. His testimony was unrebutted by defendants. The Court does not find c~edible Gans' argument that the promoters should have :provided bim with information about the loan. The Court has found that he was sufficiently apprised of the available financing from the bank. Tb.c::rc is no evidence .showin~ that the ····· 0 .. ·--- - 7 [* 8] plaintiffs hid from Gans the informatio11 or failed to tum it over upon de!rJmd. The record shows no request by Gans for more information about the financing. To the contrary, the r=rd shows an uninfonned, flat out denial by Gans to approve the loan. The Court.also rejects Gl3llS' argument that the information memorandum, which details how the hurdle event is to be achieved, does not contemplate epcu:mbering the assets of Ampa with the additional loan.. The PPM (Pl. Ex.. 1, p. 36), the onlypre-<:losing dncument descnoing how the hurdle event will be achieved, states thaJ:, afte;r closing, the promoters plan to borrow money to achieve the hurdle event. Lastly, the Court rejects defeodants' argument that the PrbmotetS defrand&d Bank Hapolin when seeking the fuianci.ng. Defendants argue that Fogel lied to the bank about bis belief that Papos could repay the iri.crease in the loan. However, blink officer Elimi.ti, an _ uninterested wiilless, testified that.she reviewed all of the :finl!ncials arui pertinent data and reached the conclusion that the loan could be repaid. Lastly. Defendants also argue that the promoters led the bank to believe they were still invest.om,· and llad money at risk when seeking approval of the loan. The Court finds that the bank was aware tbat the promoters would not have money at risk when it approved the loan for the hurdle event.. Elimlti testified tb.e bank knew in November 1999 when it approved the lam that the promoters had n_o mDllcy ei risk and that "from the bank's viewpoint, for a period of a year we would have been fi:oancing 100 per cent of the transaction." Frankly, the Court finds it c:u.-ious that Defondan1S are ~g that in an attempt to secure this loan, the Promoters defra:uded and lied to the bank. Yet, to this date the bimk which is willing to provide millions of dollars in financing, a± no time tak::s the position that it was 8 [* 9] defuiuded. Indeed, they have given testimony on behalf of the Plaintiffs. To this Court, it ~orders on in=ciulity tb,~t they would be supportive of Plaintiffs' position if, indeed, theywere · lied to and misled. · B. Aiding and Abetting ClauTI against Yerulshami and Kentfield Plaintiffs claim th:i.t Y erulshami and Xentiield aided Wld abetted the breach offiduciw:y du!y by Gans in co:onection with the hurdle event. Aiding and abetting liability arises where (1) there is a breach of fuiuciary duty, (2) the defendant "knowingly induced or participated in the breach, and(3) plaintiff suffers damage$. S&K Sales Co. V: Njke. me., 816 F.2d 843, 847-48 (2d Cir. 1987). In s11ppott of their claim, Plaintiffs proffer (r.ms' testimony that be relied on Yerulshami when making decisions. ibis testimony, in conjunction with the other actions bo::ing taken by Gans and Yerulshain.i st the same time (discussed infra in this decision), evidences to :this COTJrt that Yerulshami was instrumental in prowring Gans' actions. Those other actions, discussed infra, include his pa:rticipation in creating an Acting Board of;Managr:rs to supercedc the · authority of the DCM. They also include Yeru!shami's causing a letter to be sent to Bank Hapolim which resulted in a freezing of AMPA's assets. Yerulshantl specifically stated on the record, when being questioned about thiS letter, that he wanted to prevent the hurdle event. C. Damages The coun has 'llroad discretion to tailor fue relief to suit th;: situation as it exists on tb.e date the relief is granted." Needham v.Cruver. 1993 WL 179336 at5 (Del. Cb.. May 12, 1993). This Court fulds that the appropriate remedy is.an order requiring Gans, Yenilshami, and Kentfleld to pay the. other DCI investors the amount necessary to trigger the hurdle event This 9 [* 10] . remedy shall put all the parties in the positions i;which they sb,,.tld have been had Gans not improperly eJ'etcised his vetoes. . . Based on the foregoing, it ir6fdered that Gans, Yerulshami, ®d K.entfi.eld are jointly and . severally liable to the DCJ members.. ofuer than l(entficld and Bricla Realty, for their capital epn1nlmtions of..$3,100,000JXlplus 10% interest from Augiist ::Z.6, 1998 to the date of the vein, October 2.000. Payi:nent afthis amount shall achieve the hun:ile event as ddined lll the DCI agreement. m,. Acting Board of Managers lssues A. Illegal Creation of the Actjpg Boar4 ofMa!lagers At about the same time that. the proposed hurtlle event was vetoed, thl' evidence shows that Yerulshami unsuccessfully made a d=rmd upon the Buffer Sub Committee (a committee established by amemlment to the DCM agreement), to eliminate one of the promoters by amflilcling the DCM agreement. (Plaintiff's exhibit 118). Y~Ilshami also asked the p subcommittee to rewrite the powers of the DCM board so that the remaining promoter would have no voting power with regard to any inrerest o~the investors (Pl.&. 155 p.3). VVhen the BSC failed to act, Yentlshami and Gans hnproperly created the ABOM to seize control ofDCL Yemlshau',i and Gans scheduled a meeting oftbe DCJ investors on November 8, 1999 seeking to have: a resolution passed which wouid crea..-e .the ABOM. The meeting was scheduled in a Sll!Teptitious manner whereby Gans scheduled the meeting at a time wben it was lmown by him that Feigel would be in London, the meeting was scheduled on short notice, and the notice makes no mention of the proposal to cxeate the ABOM. Yeiu.lshfu/J.i and Gans drafted a resolution ciiatillg the ABOM comprised of the two of 10 [* 11] th= and an investor named Sbulman (Pl. Ex. 160). The resolution allows any two of tbem to a..'1: and instructs tbe ABOM to temporarily assume all the responsibilities and powers that were designated to the Board of Managers ofDCI in its LLC agreement. The Court finds that the statement in the ABOM resolutiori that i.t was approved by a vast .majority of the investors is false because the resolutio!l as written was never raised at the November & meeting of investors. Instead .Ycrulsami and Gans spoke 01Jly of an oversight body to work in conjunction with DCM (Green 1936: 14-25). The ABOM violates the DCM and DCJ agreements and its existence is without any legal authority. The DCM agreement has a unanimity rcquiremellt and its amendment procedures mandate approval of the promoters. The testiroony shows that Ye.rulshami and Gans were very aware of these provisions as they were the result of a hard fuught compromise between Yerulsbami lUJ.d the Promoters. Paragi;aph 7.4 (a) of tb.e DCI Agre=ent requires a court finding of fraud or willful misconduct before the DCM: board of :managimi could be replaced~ All allegations made by Defendants in support of their actions creating tb.e ABOM are not compelling. ff, as defendants argue, exigent circumstances existed, such as inappropriate conduct by the Promoters, wl;tich rcquifed action to be taken, the appropriate remedy under the DCI agre...""lllent was to obtain a court ruling finding misconduct by the-plain.tiffs. A<:cordingly, the creatiOll of the ABOM is in violation of these terms of the DCM a,greement. B. Remedv for the Illeg1)! Creation of the Acting Board of Managers 1. Permanent Injunction A permanent i:ojunction is warranted, if the plai.nt:ills show (1) the violation of a right presently occurring, or threatened and imminent; \2) that tbere is no ad.equate remedy at law; (3) 11 [* 12] that serious and irreparable injury will result if the injunction is not granted; and (4) that the equities are balanced in the plaintiffs favor. KMe V. Wa1sh, 66 N.E.2d 53 (1946). The Court fIDds that the creation of the ABOM to try to direct the actions of DCM, Piqios and the other companies in the corporate chain is in vio1ation oflhe parties rights under the aµeements. The Court fuids that irreparable harm <:Xists as money damages are not mifficient to compensate the harm that shall occur if the ABOM is allowed to ac::, and enjoining its actions is. the only appropriate remedy. Tue equities clearly lie in plaintiffs' favor as their rights under the management agreements arc being violated. Thh Court finds· in fa.vo; of the Plaintiffs and a pennanmt injunction against defendants Y erulshami., Gans, and Kentfield from using the ABOM of DCI in any manner is b~by isE>Ued. It is hereby ordered that Yerolsharni, Gans, and Kentfield shall be precluded from having the ABOM instruct any of the cm:porations in the corporate chain, their officem; directors or employees, and any companies !hat do business with those companies to take any actions. It is· .further ordc:red thai all defendants forthwith notify Bank Hapoalim in New York that the freeze · on bank accollllts should be lifted, and the Bank is free to bon.>r transfa instructions signed by any two of the three mcmbc:rs of the board of directors of DCM.. 2. Punitive Damages . Plaintiffs seek punitive damages for Gans' improper veto of the hurdle event and for defendants' improper creation of the ABOM. Punitive Damages maybe awarded where the defendants' conduct demonstrates a "high degree of moral culpability which manifests a 'conscious disregard of the rights of others or conduct so recldess as to amount to such regard."' fiome Insurance Co. V: American Home 12 [* 13] }'roducts corp., 75 N.Y.2d 196, 203 at 203 (1990). The Court iD its discretion denies lhe request for punitive damages as a search of the record does not find conduct which :reaches the standard necessary for such an award. This Court finds that Gar.s., Yen.tlsharni, and Ri:ntiield may have had some legitimate concerns about the Promoters conduct. Howeve;r, the actions they took to resolve such conduct was clearly illegal a!ld in violation of the various agreements tlley were allegedly seeking to enforce. Accordingly, while tbey are liable for this illegal conduct, the Court finds that they did not have the motivatioti which would warraut punitive damages for their conduct. IV. Claim relating to tlte December 26, 1999 letter A few weeks after =atiog tho ABOM, Yerulsahmi had his Israeli lawyer, Dan Cohen Write to its lender, Bank Hapol.im, that the defundants controlled the companies. 1k letter claimed that Kenfield not only had the right to veto transactions a:t the Papos level, but at Am.pa.· as well. This letter caused the bank to freeze the 1oan, :as well :as many other open projects with Ampa. Allegedly, this caused damage to Ampa i:Q the amount of about $1.l ll:lillion.. ~ seeks damages fromdefe:odantsYemlshami, Ganssnd Kentfieldjointly !l.lld severally. The Court finds credtble the testimony ofElinati, the bank officer in charge of the Ampa account at present, and Lani.r, the bank officer in charge in 1999. Both testl:5ed that as a result of this letter the l;>ank immediately froze i:S rclatiouship with Ampa and Papos pending receipt of a legal opinion as to whether tbe promoters propi:rly spoke for those compm:tles. The court also finds that this freeze caused damages to Ampa. The Court does not find compelling defendants argurru:nt that there is a duty of candor. towards banks an.d that the Jetter only in.""orms the bank of that which it has a right to know. 13 The [* 14] Court finds the purpose of the letter was to kill the financing which w<Md allow the promoters to achi.eve the hurdle event. This finding is based upon lhe credible ter.timony of the bank officer Elinati who mane it clear that the bank saw no need for disclosure ofthe veto. Furthemmre, Elinati testified that th"1'e was no discrepancy be:ween the loan application and the veto right. The finding also rests on the testimony ofYerulshami who adm.:tted ."bill purpose was to kill the refo:i.ancing for the llurdle event". This pmpose was further evide:nced in a stateme:nt made by Oded Edan to the Ampa board on February 16, 2000 (Pl. Ex. 182 p. 2872). Furthermore, the letter w~ inrended to kill the financing necessaty to procure the hurdle event because it was sent at approxirol;tely the same time that Yerulshami and Gans =iited the ABOM and vetoed the hurdle event Cohen, when sending the lelrer, was Uilder the belief that it was necessary because Yerulsbami told him the hank should be aware that Kc:nffield had been gmited a VEto on the Papos board {Cohen 3207: l 0-16). However, as the Court has found Yerulsh.ami 's intent was actually to kill the hurdle eyent financing. Plaintiffs seek to hold defendants liable because their conduct is actionable WJder !si:aeli law. The court was provided with the legal opinions oftwo Is!lleli lawyei:s. The Defendant's . witness, attorney Dan Cohen and Plaintiff's witness Professor Joseph GToss. Cohen who testified on whether his o'Wn conduct violates Israel law is fo!llld to be an interested witness aud the Court does not find his testimony credible. The Court, however, finds the testimony of Professor GTOss Credible and based on his testimony, holds that Defendant's conduct is actionable under Israeli law. B. Qarnages Stetril!ling from the Dan Cohen Letter )4 [* 15] The, court finds that damages to .A,..mpa resulted from the Jetter sent by Dan Cohen to BllDk Hapol\m, Defendants claim that there could be no danlages ftom a freeze beca=, before Cohen wrote his Jetter, the bank had insisted on a general lien, called a floating charge, against Ampa's assets as a condition to approving new credit However, testimony established that the Ampa board, approved a floatiD g charge J,lefure ihe Cohen letter was sent. After the letter, the .bank changed the. terms, causing damages to Ampa The Collrt finds Yero!sbimli, Gans, andKentfleldjointlyan.d severa1Jy liable for dam.ages incurred as a result of the December 26, 1999 letter. Howev<lr, th!l Court does not have sufficient evidence to determine the am01JI1t of damages inc.uned. Despite, the testimony given in support as to tl;e amount of damages, the Court has no documentai:yevidcnce before it in support Accordingly, the issue of the amQU!lt of damages inCllII'ed is hereby sent to a referee to hear and detemrine. V. The Malpractice Issues A. Malpractice by Yerulshami and His Firm A fow months afi:cr thv acquisition of AMPA was consummated, me promoters, learned that the corporate sttucture created enormous tax problems for the U.S. investors in the transation. In particular because of §951 o.ftbe lntemil Revenur:: Code that deals with controlled foreign corporations and related LR..S. principles, ClSCh repayment of the .$30 million bank loans that was used ro fa1ance the 1998 acquisition is treated as if a dividend bad het:\l paid to the ' - ' ,1 ¢ ~ ¢ mvestors. The result 1s that the mvestors must report these pay1nents to the bank as mcoroe, even tbough they do ndt receive any funds with which to cover the tax.es that axe due. The concept is called "pliant.om income." 15 [* 16] p.rofessor Chirelstein testified that a comp~ w:: attorney would not have pi:nnitted the AMP A transaction to proceed without informing the participants of the disastrous tax consequences inherent in the structure. ¢ It was undisputed at trial that nn such disclosure was made until months after the transaction ~losed. Had proper disclosure been made, the court finds that Sh.Joma Fogel would have entered int.o an alternative deal, involving an Israeli bauk called FIBL which would have funded the enfue transaction without any need to involve any ·Americans. Before the August 1998 closing, Y erulsbami represented to the pro:inoterS that he was an experienced international tax attorney competent to handle the tax aspects ofthe rransactions. The promoters contend that his offer was accepted.· Yentlshllmi, on the other hand, testified that he was not hired as the promoters' lawyer and no retainer agrecmellt was signed. The determination of whether 2ll attoroey-client relationship exists is inherently factua~ and is goveroed by traditional principles of contraci; law. Qiltberg y. Shea, 1996 WL 406682 at 4 (S.D.N.Y. 1996). "An att.orney-clfonttelationship may exist in the absence of a formal retainer ·agreement." S.walg Development Cor:p. V. Gajnes, 274 A.D.2d 385, 386, 710 N.Y.S.2d 6l9, 620 (2..i Dept 2000). The Court finds Yeruls'fllm:ii's statement that be was never retained, not credi'ble. The evidence as presented shows tllll.t Y erulshami was hired by fhe promoters as tax attorney. Be was hired and he worked with the 1aw fum of Morrison and Forester ('"MoFo''), which was retained to draft the basic agreements. The finding is based upon the credible teStlmony of Stuart Offer from MoFo who stated that he had a poone conversation whereby Yeruslshami made it clear to him that he bad the expertise to handle tb.e tax analysis of the transaction 8.!Jd that he would do 16 [* 17] so. 'This fin,ding is also based upon a nche.ck list" put into evidence which was drafted by MoFo listing the open= is.sues. This check list was dr-..:ftoo at Yerulsharni's request so that his firm would llavi;: Mofo 's thoughts about what tax: work needed to be done. Yerulshami is the only lawyer to whom the document was sent. MoFo's time records show tbeir attomeyi; spent almost :no time on any tax worl: subsequent to sending the check list. The Court finds that Yentlshami actually perfonned tllX work Yerulshami handled itemS on the checklist, which included making the "check the box" elections which resulted in the' Israeli companies md Bum becoromg "pass th.roughs" He also drafted the loan <locumCIJts for Papos and Burn. Yerulshami also changed DCM and DCI from ILP's to LLC;s and had his firm draft a memo entitled "Risk Facto:rs Relating to Israeli Taxation"' that was sent to the other investors iD PCI hif:fure closing. Yerulshami alleges he had no time to change th!l crupoxate structure to avoid the phantom income tax problems because they existed before he ever iovested in the venture. The closing occuo:ed August26"', 1998. According to bis time records, Yei:ulshan:ri personally spent 35 hours in August, b~ginning on August 4, 1998. Other members of.his :firm worked 99 hours beginning the same day. Furthermore, testimony ofMoFo employee S~hauie Oana revealed that Y erulshami participated in numerous, conferences, ether in person or phone. Tue credible testimony of Cana also was that Y erushalntl and the others at his firm were .::onsidered melI1bCJ:s of the wotking group arranging the transaction. Acci:ltdingly, this Court finds credible tbe evidence submitted in support of finding Yerushalmi was able to bring to the Promoters attention, the phantom trot issues. 17 [* 18] / -'·· -.~ The failure ofY e:rulshami. to report the problems constitute malpractice for which he is liable. The credible testimony of tax l'rofessor Cbrirclstein was that a competent tax professional would never have consented to the very deal structure used to acquire A.MJ>A. He further testified that a campetcllt tax professional would have disclosed the phantom tax issue. While the phantom income tax problem was inherent in the deal, it was incumbent upon y erulslmni, as tax attorney fortbe deal, to bring the problem to the attention oftllose involved. .Accordingly, Yerulshawi is liable for lllltlpraaiice. B. Breach of Fiduciary Duty by Gans for Not Helping to Solve the Phantoin Income Tax Problem · The Court dcJes not find f:llough evidf:llce on the record to find that Gans breached his fiduciary duty far not helping to solve the phantom ineame tax problem. Plaintiffs ccntend that he should have allowed the hurdle event to occur followed by the dissolution of D.CI and DCM, which would have been followed by sales by the American promoters, not by Gans or other Kentfield members. Gans is not a tax attorney nor Wl!S he given the responsibility of solvin.g the phantom income tax problem. The record also does not reflect that he knew of the pha1ltom inc0me tax problom and he still f811ed to take actions to remedy the problem. C. Damages This Cou.-t :finds that YerushaJmi aud Yemshalmi & Associates LLP joiutly and severally are hereby liable to the promoters in the. amount of$ 3,309 fot malpractice. Forlhermore, Yerusbalmi and Yerushalmi & As$ociates LLP jointly and severally must pay DCI the sum of $14, 824 which is to be distributed to those DCI members who incurred phantom taxes. 18 [* 19] nore, Y erushalmi and YerushaL.-ni & Associates shall be liable for the full amoUIJt of :1 taxes incurred in the future by the promoters er any of the DCI members. It is further Ordered that the above relief is denied as sought against defendant Gans. ,famation Issues The Promoters Seek punitive damages b~eci upon several alleged instances cf defamatory ents made by Defendants to other DCI inveStors. The alleged defamatory statements were when: ¢ Gans chaired an ABOM meeting where investors were ~ven a written presentation stating "The promoters have been signing checia> at all levels by themselves or through cronieS, while not providing ooro.plete rspora of the bank accounts and financial transactions to the Investors or to Martin Gans." ¢ Defendants told the investors that "the1promoters have assigned responsibilities of DCM to Dovertower, a company that is owned and controlled by pi:omoters. This dekgiilion was made without DCM's authorization and consei:it. ¢ The defep.dant&' present.ati.ons accused promoters of sclf-dealing in the Ampa group of companies. ·Further, defendants aeeused plaintiffs of i:aising their salaries and improperly purchasing a piece of land in which A.mpa was interested. ¢ Yemlshami and Gans claimed that the promoters are responsible for the t.a:x structure· which caused the phantom tax. problem. The Defondauts argue that the C0..'1Jlil!l.!1ications are protected by tbe common interest ilege. The common interest qual.i:fied privilege applies where a communication is made 1 we~ persons with a common intei:'est or dmy. Lihrnnan '" Gelslein. 590 N.Y.S.2d 857, 862 ¢.92). The privilege is broadly applied, and tbe parties to the privilege "need only have such a ation to each other as would support a reasonable zro'Ulld for supposing an innocent motive for Parting the information." Anas v.prown, 702N.Y.S.2d 732, 734 (2""Dept. 2000). The 19 [* 20] -- .privilege may only be ~futed if actual ~ite o: ill will is "the one and cmly cause for the publication.." Liberman, 590 N.Y.S.2d at 439; ~ 702 N.Y.S.ld at 763. The Plaintiffs i:oncede in theirpost-tPal replybrioftbzt the privilege is applicable because the communications were made to the members 6fDCJ who haye a common interest with Ke.ntfield as owners ofDCI. While the statements were most likely self serving to the defendants and in furtherance of an agenda to gain control of the. equity at stake, plaintiffs, through their conclusory stateme.Qts,. have failed to meet their Lurden of establishing malice directed at the Promoters. Accordingly, damages based on the defamation claim are denied. VII. Promoters' :Right to ¢Management Fe.e The promoters contend they proved the issu~ of a right to a management tee at trial and briefed this issue without objection by defendants that it was an unpleaded claim. Defendants claim that the issue was not pleaded or tried. The Plllintiffs request to ame.nd the plea.dings pursuant to 3025 {c). Plaintiffs request is granted. An application to amend under 3025(0) lies within the dis=tionofthe Court. Murrav v, City of New York. 43 N,Y.2d 400, 401 N.Y.S.2d 773 (1977). Here, Dcfe:tidaots cannot allege demonstrable and r::al surprise or prejudice as to this claim. Fur+..hermore, the proof at trial wammts the consideration of this claim · by die Court. ·Accordingly, the Court shall address the issue in its decision. The Promoters seek a 2 % management fee;pursuant to Paragraph 7.8 oftbc DCI Agreei;nent. Paragraph 7.12.(c) offue DCM Agreement state& that th<: fee "shall be applied as . agreed by Members other than K=tficld Capital LLC holding at least 60% of the Company Int=sts." The five memb.ers of DCM: are Kentiield (25%) and the four promoters (75%). The 20 [* 21] fee hru not b= paid since Bank Hapoalim in November 1999 froze both DCM's and DCI's bank accounts. When 1hc issue was tried, Gan$ mJlde the Statement fuat the pro!)lOters had to pay professional and travel e:xpenses from the 2% fee, leaving only the residual for them. Gans conceded OD cross ex.arhlnation that no such provision is contained in the DCI and DCM agreements which both state that "the company shall pay all legal and accounting fees" and the next &Ubpl!l'agraph in each. CQlltract which has· ¢e same language about "travei expenses." The Court finds that pa."!lgra.ph 7.8 of the DC! agreement sets forth that the managers are enti.tled to the claimed 2% mazi».gement fee for services rendered. Thill fee, under the agreements, iB not to be reduced by a!lY expenses. At the posi trial oral argument, defense collllScl conceded that th<: manageme11t fee is disclosed in tile DCM agreement, however argued that at the time everyone thought there would be an upstream of dividends r8ther than borrowing of additional money. & the Court has already founcl, bonowing additional money to finance the venture '''as a,nticipated in the l"PM. Accotdi.ngly, Bank Hapoalim New York is directed to release funds to pay this fee, plus interest, upon presentment of transfer ir.lstructions signed by Fogel and Lawrence Schneider, authorized signatories on those accounts. vrrt. Counterclaiin Isrues A. Fraudulent !i:lducement as a Matter of Fact The first four counts of the Ame~ded CoUllteJ:claim are based upon allegations of .fraud. The Defendants allege numerous i.."lStl!nces of fraudnlei:it conduct by the Promoters. ~ .21 ;-;; ,__ . [* 22] The Defendants allege the Promoters lied about the terms of the biltlk loan taken to finance the Ampa transaction. Specifically, it is alleged the Promoters never revealed that Kentiield and the other DCI investors could not be ;epaid until after the bank loan was paid. Defendants also allege they did not know that the bank iusisted on a provision that the promoters would constitute a majority of the directors of the board of Papa~. The Court :finds that Defendants knew well before closing tllat the bank had priority and that its loaJJ was senior to other debts. Two loans w= taken by Papos to buy control of Grodetsky Assets; the company that controls Ampa. Tue jirst loan was frorn Bank Hapoalim for $30 million and the second was :from Bum Holdings, the Dutch company that owned Papas, for about $5 million. OnAuguStlOlh, 199&, a resolution ;vas drafted wlrichstated the Bum' loan to . Papos was· subordillate to the loan Papos has taken from :Bank Hapoalim. Gans el(ecuted the reSolution p=uant to the direction ofYerulsham.i's finn. Yerulshami also testified that he knew before closing that the balJk loan was "seniOi:." Accordingly, the Court doesnot:frod that Defendants, prior to making their investment, were unawru:e of the t=i; of the bacl: loan. Yerulsbami also alleges he did not know that 1:hc bank insisted upon a provision that the promoters would constitute a majority of the directors of the Papos board. However, this same provision is in the DCM Agreement which Y=lshami helped draft and wbich was signed on behalf of Kentfield. This is comp!:lling evidcucc that Yerul:ihaJ:Ili knew the bank would re_quire the promoters to constitute the majority of the board of Papas. Furtb=ore, ~a fraud claim lacks merit where the other party bad the means available to · . ascertain the truth, but ek::ctod to roly solely upon a representation." Cgazza y. Thinlmath.Com, KY-Ll, Jan. 10, 2002, -p. 21. Tne court does not find credible that Yexulshami, a sophisticated 22 [* 23] in:temational investor was un~ of the terms of this baDk loan. There is no credible evidence ¢ on the record of PrOmoter's alleged intent to hide these terms from Yeru.lsliami. Yerulshami also had access to any information he wanted because he was a party of the working group that put together the DCI inv~ent. Furthermore, the record is also void of credible evidence that the loan documents were changed immediately prior to closing. Accordingly, the Court finds that the defendantS were not fraudulently induced to invest based on an alleged concealment by the prorncitas of tbe terms of the bank loan. 2. The Transaction Fee. Defendants allege that before the closing the promoters did not disclose the request for a transaction fe~ :from the sellers. Defendants argue that the promoters falsely represi::nted that the sellers of Grodetsky assets promised an approic.itnati: $2 million tranllaction fee for p\ltting together the dr::al, but that the promoters waived it. However, the promoters believed they we:rc still entitled to the fee. The promoten; invested $1,q million before the closing and believed they were entitled to a trallSaction fee of about $2 million. An invoice was sent to the B!ltlk asking it to send fue money to :B= Holdings for eventual payment to the promoters. The money had to be held there until unanimous approval to release the money by the DCM hoard of directors, including Gans, was obtained. -An illVofoe 16i that c:xact a.mount of money was also sent t-0. Yerulsl:iami in New Yark. The Court finds that there was nothing sw:reptitious about the promoters' request for the money. Yerulshami disputed the fee. The promoters and Yerulshami negotiated the settlement of tbis fee and this i:;. evideoced by numerous drafts sem by 11ark Levi;; of Y cralshami' s Jaw firm to I 23 [* 24] .. tbe. Promoters. ln the drafts, it was agreed that the promoters would receive S1,984,000, and they would still be considered investors in DCI for $1.6 million ofwhicb they would get back after other investors had been paid. This was a compromise by the promoters who believed tbey were entitled to both a fee and a return. of their investment when the others got paid. The court does not find credible Ye:rulshami's testimony that he objected to Leve sentling these drafts to the :promoters and the Court finds he approved the sending o.f the drafts. The: Court finds that the Promote~ were under pressure from Lawrence Scbneider, who ·had put up the promoters initial capital of $1.6 milli.op, to return the molley, and in conjunction with this, eventually Yerulshmni pressured the promoters to give up.the fee entirely. This is evidenced in tl;!e :5nal agreement dated May 17, 1999. The agreement states th8l: the promoters waived their fee and their $ l .6 million capital investment was converted into a loan lllld immediately repaid together wi1h expenses of$384,00G. Documentary i;vidence shows that Yentlsl1ami was sent invoices for the promoters' $384,000 ill :zq:ienses. Gans signed the agreement, individually, and Yerulshami signed it on behalf ofKcntfield. Y e.tulshanri now claims that the promoters never intended th.at their tnoney would be at risk. Bnt the proof shows that the promoters believed they were entitled to a fee, which they could use to payback Schneider, and that they would be investors at risk for $1.6 million. The Court is not eompellf:d by Defendants argument that the. pl'.!Jmoters ~ely represented they were promised a transaction fee by the sellers, 1he Grodetsk;ys. befeu~ts argue that this false representation led to the May, 1999 addendum allowing fue promoters to take: out their $1.6 million investment 24 [* 25] In ;npport of their allegation that the promoters were never promised a transaction fee, defendants proffer tlie testimony of Yerulshami who testified be hlld a conversation with Zelma Rubenstein. from the Grodetsky family. He testified that Ms. Rubenstein stated that there was never a promised commission to the promoters. The Court doe$ not find iliis testimony credtnie. . This conversation only came to light at trial and Ms. Rubenstein was never called as a witness for deposition or at trial in support of this testimoily. Accordingly, the Court finds this issue of the transaction fee was resolved by the parties as evidenced in the May 1999 Addendum. Therefore the COUrt denies defendants' claims as they ate merely a rcl:!ashing of th.at whi.ch ha& already been resolved by agreement. Lastly, defendants' arguzm:nts about the transaction fee do not support a claim for fraudulent inducement b~aus11 whatever the proroorexs may·have told Yerulshami about the commission was after the August 1998 closing. The alleged representation could not have induced him to invest. A prerequisite to a furud in the inducemem: claim is that the alleged representation induced the contract. Shea v. Hambros PLC. 244 A.D.2d 39,46, 673 N. Y.S.2d 369, 374 (1" Dept 1998). Accordingly, the Court denies the claims of fraudulent inducement based on tbe alleged failure to disclose the transaction fee. B. AHeiied Breach ofAWements 1. Breach ofthe DCM Agrument Defendants allege that they were deprived of a meaningful voke on the DCM board because the pr~moter memberi of the board (Fogel and Schneider) prevented the board from rneetirig. The court fi:nds no credible evidence an fhe record supporting this allegation. 25 [* 26] 0 Defendants have failed to come forward with any compelling evidence sho1\':ing that the . . promoters frustrated any attempts to hold =tings of the DCM board. Furthe:r,tbe record. shows that there wr:re consensual informal meetings. This is logical since Gans is based in San Francisco, Fogel in Israel and Schm:ider in New York City. The DCM agreement speciiically provides that meetings can be inforinal and held on tbe telephone. No evidence shows that Gans · tried to hold a meeting, but could not. Further, at Gans' request, an in person meeting had been held on NovembE"Jr 8, l999. Defendents have also failed to allege my damages resulting from the failure of meetings being held. Defendants have profferedno credible evidence of any issues the board should have coosidered, but did not. 2. Breach of the September 25, 1998 Amendment On September 25, 1998, about one month after the closing, the signatories to the DCM Agreement agreed that Kentfleld's representatives OX'.1 the Papas board would have the right to veto resolutions agreedto by the other Papas board members who are all promoters. Defendants argue that the p(omoters failed to formally implement the ve:to in 1:he Articles of Association of Papos. Defendants assert that the promoters bad the responsibility to unplemeJJt the amendment, but surreptitiously failed to do so. The promoters assert that the onus was on Yemlshami .. because, d1e amendine.ntstates that the implementation necessitated a resolution by Bum Holdings, the Dutch companyYerulsbami's Jaw furn had located, with whom his fum had primary contact 26 [* 27] --.· ,-- The record is not conclusive as to who had the burden to implement the amendment. However, the Court :finds that Defendants bave failed to. prov::: tiamag:s ro..;uting from the failed implementation. Defendants allege as a r-..sult of the failed impleim:ntation, they were deprived of vetoing appointments on the Ampa board. Yerulshami 's testimony w.i.> that Papos did ;not make such appointments to the Ampa board, but that they are made formally by Grodetsky Asssets who controls Ampa directly. Israeli legal &pert Professor Jos:ph Gross 'testified to !he same. Grodctsky Assets appointed the directors and Kentfield had no veto right at the Grodetsky Assets level. Kentfield funs has no right to veto appointments of Ampa directors. This :finding is further supported by the fuct that in March 1999, Grodetsky Assets appointed new Atxqm directors who appeared at an Ampa board meeting on March 28, 1999 attended by Edan.. If, at that time, Y erulsbami believed the appointments in Man:h were impropei:, he would have objeded. An objection was never made until litigation of fuis matter began. .Accorditl.gly, the Court does not find this damages argument credible. 3. Breach ofthe April 1999 Addendum Creati11g CJ1.Executive Committee In Aptil., !he DCM Agreement was amended to provide for the creation of an &ecutive Committee to make all major operational decisions in the management ofPapos Ltd., Grodecki ---~~AssetsLttlc,,Ampa Ltd., and all their.subsidiaries and affiliates. OdedEdan was a member of the Executive Committee. Disputes in the Executive Committee We<e to be resolved by a Buffer Subco:mmitte<': !'m:n..sisting of.Oded Edan for Kentfield and Zeevik Feldman for Promoters. A deadlock in the Buffer SUbcommittee was to be referred to the DCM: Board, and a deadlock in 27 [* 28] the DCM Bo~ was to be referre:d to a permaneDt decision roaker to be appointed by tb.e Buffer Subcommittee.' Defe:ndimts argue that the Executive Conunittee created by the April agreement never held formal m<;etings. Tuey submit evidence that the efforts to impl=ent the Bu.'fcr · Suhcommitteeiand Perrnan.ent Decision Maker also failed when Oded Edan and Zeevlk Feldman deadlocked an~ Feldman would r.pt agree on a perrrumi:nt decision maker. Thus, defendants argue that Ken!fieJd was ef'feciively frozen out of major operational decisions regarding Ampa. Th~e i s IlO credible evidence on the record showing that the promoters intentionally froze 1 Kentfa:lr] out of major operational decisions regarding Ampa..The Court finds credible. Fogel's testi.manytha~Ampa was ~anaged informally, that he kept Edlin fully apprised of all major issues, and thl\t Edan approved every significant transaction. ! - - During trial, Edan coul.d not rela:te a ' single matter·~ was kept from him and which he did not approve. I Accordingly, the Court does :riot find that there was a breach ofthe addendum breating an I . E:x:ecutive Coi:nmittee. ' 4. Brea.ch oftheMay 1999 Adkndwn I Defenfiants argue that thtl promoters breacb,t.d the provision in the May 1999 add':°dum ; ' reqUiring th= to use their be,st efforts to minimize the impact of phantom income on the DCI ' ' I ' · .--investors,- _ The J:iefendants have failed to come forward with credible evidence proving thi;:f.;.i};~ i ' ! to minimize the problem. While on the stand during trial, Gans fuiled to dispute that after this l' addendum was signed, no phantom income was generated. 28 [* 29] " Kentfield's other claim of breach of the May Addendum is that the promoters have oot paid Kentfield $46,000 in phantom taxes generated .in J998. As for this alleged $46,000, ' promot:er:s do n.ot deny they rhay owe this amount. However, they argue fuey have not been provided v.~th sufficient documentation of the debt. The Court finds this amount is payable only after submission of proper affidavits :frQm. Kentficl.d's members stating the amount of the tax they have paid. 5. Fraud m the Inducement based on aJJegadon tJu1i the agreements wer.i not petfinned · The defendants seek ~ages based on an alleged failure top~= under the three agre=ents, discussed supra, which were negotiated and signed in September 1998, April 1999 and May 1999, B=se the court has found that plafatiffs did not breach any of fuese agreements, it.need not reach the questio.o of whether there was fraud in the inducement. · C. Breach of:fiduciarv Duty and Comorate Waste ' Defen~ allege the promote.rs' self-deaJing kd to i:b.eir claim of promoter's breach of their fiduciary duty and corporate waste. Speci:fically, defendants cite a transaction whereby ' ' ' Ampa leased Skoda cars from a company connected with Shlomi Fogel. Defendants also cite to an attempt by:the promoters to obtain the Ha'argaz property for themselves, rather than for Arnpa as eontemplatbd. Defendants also cite to numerous pa)'lnfmts to Dovertowe:r and unidentified I ·.·· paymeiitstolawyers andotherprofessiona]s. ' Corpo,rate Waste is "an exchange of corporate assets for consideration so !. disproportion;i.tely small as to lie beyond the range at which any reasonable person might be willing to trade." Whitey. Paoic, 783 A.2d 543, 554 (Pel. 2001). A plaintiff's burden in proving corporate waste is severe because coJJltS recognize t:liaJ: they a:re ill-fitted to attempt to 29 [* 30] judge the appropriate degrees of business risk. ~ 7&3 A.2d at 554; Glazer v. Zapata Com., 658 A.2d 176, 183 (Pel. Cb. 1993). DefeI!dants haVQ failed to present evidence that the Skoda lease was unfair or an exchange beyond reason. Tue evidence shows the Skoda lease~ approved by Ampa 's board, including"Edan, following a thorough prcsent.ation by an Ampa manager about why the lease was at a beneficial price to. Ampa. There is no credible evidence that the lease was so unreasonable as to colilltitute CO!Jlorate waste. AB for the allegation of self-dealing regarding the Ha' ar_gaz property, there CaJJ. be po dam.ages because the deal never took place. The record shows that no promoter ever p=based the property, therefore, there can.be no d.snlages. Defendan,ts also proffer payments of Sl 00.000 to Dovertower and Ullidentined pa,ments to lawyers and-0ther professionals. The Court finds that the payment t.o Dovertower was paid as permitted by'!] 7. lZ(c) of the DCM Agreement and, 7.8 of the DCI Agreement· The plaintiffs hav1: come forward witb evidence showing that Gans approved in writil).g the majority of the payments. Accordingly, the Court finds that they were not improper. Defendants argue 1bat the proroote<.rs were unwiUing to issue properly prepared K-1 's to the irrv::stors so the investors could calculate and pay their federal income by the October 15, 1999 fust :filing deadline, The court rejects·this ar~ in support of defendants' claimJ:iecause Yeru.lshami acknowledge that Kcntfield received these forms and filed its tax.es before Ocotber 15,.1999, tbe last date the ms pemti:ts f~ filing tax returns v."ithout penalty. Lastly, Defend.a.nts allege that the cash flow projections in the May 1998 offering memorandu,.7, indicated Ampa- could be worth as much as $159 million, and that the company 30 [* 31] subsequently lost money. They allege that had they overseen the company, .such a loss would not have occurred. At trial, Yerulsbami testified that he Jc;new the numbers in the offering memorandum were not accurate and would be changed downward. Y eru!shami cannot now argue that he relied on the numbers in the memo when he admitted he knew they were subject to char)ge. Defendants failed to rebut Plaintiffs' economic expert who testified that the best proof ofvalue is the price negotiared between the buyer and selle:r. The prices.et forth in the August 1998 purchase agreement :reflects a value of approximately $62 million for Ampa. An expert appraisal introduced by l'laintiff' s shows the value of Ampa iDcreased to $112 million by December 1999. This is credible evidence tbaJ: the promoters are not liable for corporate waste. Aecordingly, defundants claim of breach of ;fiduciary daty and corporate waste is denied. D. Tortious Interfen:nce Defendantll assert that the two promntr;:rs (Fogel and Lawrence Scbncider) tortiously interfered with the DCM and DCI contracts. Defendallts allege that the DCM board did not meet and allege that the pi;omot.ers made unauthorized payments. Hc:rc, nothing is alleged other than breaches of contract. There is no allegation supporting tortious inter:ference with contract by the promotels. Accordingly, the c;ause of action is denied. - ,;~,·----, ' ,,w,~---.,'-" ¢, ¢,-.,., E. Bricla' s Fraudulent Inducement Qaim In July 2000, about seven moo.ths after litigation begim, Kentfield bought 90% ofBricla, which li.t the time owned a small interest in DCI. Bricla now brings a claim of fraudulent 31 [* 32] inducement to invest based on the grounds !bat it believed the promoters' investment would remain at risk. The Court has found the May 1999 Addi:ndum to the DCI Agreement resolved this issue by. treating the promoters' investment as a loan and nituming it with interest. Bricla's claim is that it is ootboUild by the Addendum because it was not a signatozy. The Court :finds that Bricla is bound by the Addendum. ·The Add..'"ll.dum was an amendment to 1he DC1 Agreement which provided that it can he ame:nded by vote of the DCM board of di;ectoi:s and more than 50 % ofDCI's members. All the DCM directors and DCI me.members signed the Addendum,· except for Briola which owned only 5. 7% at the time. Accordinly, the Court finds that Bricla is bound by the agreenrent. F. Declaratory Judgment · Defendants seek declaratory judgment removing PCM as manager of DCI. This relief is sought based on grounds of miscond:uct by the promoters and s;Jegations that, to date, DCM has been ini:ffective. Al; the Court has held supra, the recprd does not support these claims. Accordingly, the request for declaratory judgment is denied. IX. CONCLUSION This $hall constitute the Order and Decision of the Court. Settle Judgtnent. . . J.S.C. [* 33] -.. 1 Dated: August 11, 2003 ·' 33
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