Bloomfield Inv. Res. Corp. v. Daniloff

• Decision Date: 23 May 2023
• Docket Number: 17 Civ. 4181 (VM)
• Parties: BLOOMFIELD INVESTMENT RESOURCES CORP., Plaintiff, v. ELLIOT DANILOFF, Defendant.
• Court: U.S. District Court — Southern District of New York

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BLOOMFIELD INVESTMENT RESOURCES CORP., Plaintiff, v. ELLIOT DANILOFF, Defendant.

No. 17 Civ. 4181 (VM)

United States District Court, S.D. New York

May 23, 2023

DECISION AND ORDER

VICTOR MARRERO, UNITED STATES DISTRICT JUDGE

Plaintiff Bloomfield Investment Resources Corporation (“Bloomfield”) brought the instant action against defendant Elliot Daniloff (“Daniloff”) for fraud breach of contract, promissory estoppel, and unjust enrichment. (See “First Amended Complaint,” Dkt. No. 51.) Bloomfield asserts that it loaned $25 million to a company owned by two investment funds managed by ED Capital, LLC and ED Capital Management, LLC (collectively, “ED Capital”), entities entirely owned and controlled by Daniloff, and that it loaned this money in reliance on Daniloff's fraudulent promises and has not been repaid. Daniloff counters that Bloomfield's transfer of $25 million to Daniloff's company constituted an investment into the investment funds with no guarantee of repayment.

The Court conducted a four-day bench trial from October 24, 2022 to October 27, 2022. The Court now sets forth its findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure. The Court concludes that Bloomfield has produced evidence sufficient to support its claims for fraudulent inducement and breach of an oral loan agreement that was subsequently modified. Accordingly Daniloff is liable to Bloomfield, which is entitled to compensatory and punitive damages on those claims.

I. FINDINGS OF FACT^[1]

Daniloff is a New York resident. Through ED Capital, Daniloff serves as the investment advisor and investment manager of two investment funds: Synergy Hybrid Fund Ltd. (the “Synergy Hybrid Fund”) and Synergy Hybrid Feeder Fund Ltd. (the “Synergy Hybrid Feeder Fund” and with Synergy Hybrid Fund, the “Synergy Funds”). The Synergy Funds are Cayman Island investment funds that invest in Russian public and privately held equity and debt securities. The Synergy Funds hold 100 percent of the shares of United Meat Group (“UMG”), a Russian agricultural corporation involved in poultry production. Daniloff created UMG in 2009 and became its controlling owner. UMG is the Synergy Funds' primary asset.

Bloomfield is an entity created by and under the control of David and Simon Reuben (the “Reuben Brothers”), who are very wealthy investors based in London.

A. NEGOTIATIONS AND THE ORIGINAL AGREEMENT

The dispute in this case began when David Reuben (“Reuben”) was first introduced to Daniloff through Arkadiy Orkin (“Orkin”). Orkin has had a business relationship with Reuben and the Reuben Brothers since the 1990s. Orkin's sonin-law, Alex Bendersky (“Bendersky”), was a close friend of Daniloff's since childhood, and Orkin viewed Daniloff as a member of his own family. In 2010, Orkin learned about Daniloff's plans to venture into the Russian agricultural sector through UMG. To fund his project and obtain loans from Russian banks, Daniloff needed to show additional equity capital on the books of UMG. Orkin sought to help Daniloff in this regard.

In November 2010, Orkin contacted Reuben to brief him about Daniloff's project and to gauge whether Reuben would be interested in providing financial support for the project. Reuben informed Orkin via email that he was “presently not making investments in funds.” (Pl. Ex. 1; Trial Transcript (“Tr.”) at 11:10.)^[2] Reuben was reluctant to get involved in Daniloff's venture, but Orkin assured Reuben that “this business has no connection with the fund. It is owned by [a] private company OJSC United Meat company 100 percent controlled by Elliot [Daniloff].” (Pl. Ex. 1; Tr. at 11:1821.)

Upon Orkin's recommendation and persuasion, Reuben met with Daniloff in 2011 in London, and several times thereafter, to learn more about Daniloff's project. Daniloff needed roughly $20 to $30 million in funding to purchase equipment and obtain additional loans from banks. Reuben explained to Daniloff his concerns about the project because Reuben did not want to make any investments and no longer invested in Russia. Given Reuben's hesitation, Daniloff proposed that Reuben could instead provide him with a short-term loan of $25 million, which would be held in escrow in a bank. Daniloff could show the $25 million on the books, thereby allowing Daniloff to raise money from Russian banks. The loan would be paid back in several years. As collateral toward the loan, Reuben would obtain 50 percent of UMG's shares, which would be reduced to 25 percent after he was paid back in full.

In July 2011, Reuben emailed one of his employees, Alexander Bushaev (“Bushaev”), outlining his understanding of the proposition. Bushaev was the Chief Financial Officer (“CFO”) of the Reuben Brothers' offices in Geneva, Switzerland and looked after their loan portfolio. In the email, Reuben explained that the $25 million to Daniloff would be “show[n] as equity altho[ugh] given as [a] loan and any d[i]sbursements to be monitored by [Reuben].” (Pl. Ex. 6.) Reuben and Bushaev also discussed the arrangement by phone. Reuben indicated to Bushaev that Reuben's entire discussion with Daniloff about the transaction reflected that the $25 million transfer would be in the form of a loan that would only be shown as equity because Daniloff would “not be able to borrow against the loan; he can only borrow against what will be shown as an equity.” (Tr. at 22:22-24.)

Daniloff did not want to put this agreement (the “Original Agreement”) in writing. If Reuben's name appeared on the loan, Reuben's high-profile status would make him a target of guarantees and banks in Russia, posing an obstacle to Daniloff borrowing money. Daniloff proposed that, instead, the loan appear as an investment which would hide Reuben's name from the transaction and allow Daniloff to obtain additional loans from banks. However, the $25 million would remain a loan and be held in escrow.

Reuben was comfortable making this arrangement orally, instead of in writing. According to Reuben, a contract was never signed in the majority of the business deals he had entered into in Russia. Instead, business agreements were entered into and honored on the strength of trust and confidence grounded on the bonds of family and friendship. Despite relying primarily on oral contracts, Reuben had never failed to recoup his money. Thus, Reuben felt that he had no reason to believe that Daniloff would fail to repay him, including because Orkin vouched for Daniloff as part of the family and assured Reuben that he would work on this venture together with Daniloff.

After rounds of discussions, Daniloff and Reuben agreed to the terms of the Original Agreement roughly around September 2011. According to Reuben, the two “shook hands . . . [and] did the deal.” (Id. at 17:19-20.) Accordingly, the Original Agreement provided that Reuben would loan $25 million to Daniloff on the condition that (1) the funds would be fully repaid in roughly two years; (2) the funds would remain in a segregated bank account, any disbursement of which would require Reuben's authorization; (3) Reuben would receive a 50 percent stake in UMG as security for the loan; and (4) Reuben's shares in UMG would be reduced to 25 percent upon full repayment.

B. THE SYNERGY HYBRID FUND

Roughly around September 2011, Daniloff informed Reuben that he would need documentation signed so that the loan could appear as an investment in his investment fund, the Synergy Hybrid Fund. To accommodate Daniloff, Reuben designated Patrick O'Driscoll (“O'Driscoll”), the CFO of one of the Reuben Brothers' offices, as point person to help Daniloff effectuate the transfer of the $25 million into the Synergy Hybrid Fund, which would serve as a conduit for the loan proceeds. At no point, to Reuben's understanding, was this channeling of the loan proceeds through the Synergy Hybrid Fund actually meant to be a true investment into the fund. At that time, Daniloff likewise made no representations to Reuben that he believed that the money he received was a true investment and not a loan.^[3] Reuben's representatives exchanged multiple emails with Daniloff confirming that the Synergy Hybrid Fund acted only as a conduit for the loan proceeds to be shown as an investment and that the funds would continue to be held in escrow with Bloomfield having signatory control, consistent with the Original Agreement. For example, on September 6, 2011, O'Driscoll emailed Daniloff for confirmation that the fund was for “visibility purposes” and “in reality, the investment is not sitting in the fund.” (Def. Ex. E; Pl. Ex. 12.) Though at trial, Daniloff testified that he did not remember the email sent by O'Driscoll (see Tr. at 183:21-22), at the time that O'Driscoll sent the email, Daniloff did not dispute O'Driscoll's characterization of the Synergy Hybrid Fund's limited purpose or how the proceeds would be used. On September 14, 2011, Ben Webb (“Webb”), an employee of O'Driscoll's who assisted with the administration of the loan proceeds, emailed Gennady Zalko (“Zalko”), the Chief Executive Officer of UMG, that: “In order for us to invest, we will require that we become signatories on the bank accounts so that expenditure is controlled with our authorisation.” (Pl. Ex. 15 at 6896; Tr. at 192:2-6.) Despite Daniloff insisting at trial that Zalko did not represent Daniloff, Daniloff had explicitly instructed Webb to contact Zalko directly regarding opening an account at ING Bank where the loan proceeds would be held in escrow.

After this email correspondence, Zalko set up an account with ING Bank where the loan proceeds were to be deposited and remain untouched absent Reuben's express authorization, and over which Webb would have signatory authority on behalf of Reuben....