Genger v. Sharon

• Court: U.S. District Court — Southern District of New York
• Writing for the Court: SHIRA A. SCHEINDLIN
• Citation: Genger v. Sharon, 910 F. Supp. 2d 656 (S.D. N.Y. 2012)
• Decision Date: 20 December 2012
• Docket Number: No. 10 Civ. 4506(SAS).,10 Civ. 4506(SAS).
• Parties: Sagi GENGER and TPR Investment Associates, Inc., on behalf of AG Properties Co., Third–Party Plaintiffs, v. Gilad SHARON, Third–Party Defendant.

910 F.Supp.2d 656

Sagi GENGER and TPR Investment Associates, Inc., on behalf of AG Properties Co., Third–Party Plaintiffs,

v.Gilad SHARON, Third–Party Defendant.

No. 10 Civ. 4506(SAS).

United States District Court, S.D. New York.

Dec. 20, 2012.

John Dellaportas, Esq., Evangelos Michailidis, Esq., Duane Morris, LLP, New York, NY, for Third–Party Plaintiffs.

William B. Wachtel, Esq., Julian D. Schreibman, Esq., Elliot Silverman, Esq., Wachtel Masyr & Missry LLP, New York, NY, for Third–Party Defendant.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge.

I. INTRODUCTION

Sagi Genger (“Genger”) and TPR Investment Associates, Inc. (“TPR,” and together with Genger, “plaintiffs”) bring this action to enforce a promissory note in the amount of $1.25 million against Gilad Sharon. The lawsuit arises out of a Canadian real estate venture (the “Canadian Venture”) between Sharon and Genger's father, Arie Genger (“Arie”).¹ Genger alleges that Sharon participated as a fifty percent equity owner in the Canadian Venture for consideration of $ 1.25 million in the form of a promissory note issued by Omniway, Limited (“Omniway”), which was never paid.² Sharon claims he invested only $25,000 through Lerner Manor Trusteeships, Ltd. (“Lerner Manor”).

I held a bench trial from December 3, 2012 to December 5, 2012. The parties made post-trial submissions on December 11, 2012. Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, I make the following findings of fact and conclusions of law. In reaching these findings and conclusions, I heard the evidence, observed the demeanor of the witnesses, and considered the arguments and submissions of counsel.

II. FINDINGS OF FACTA. The Parties

1. Sagi Genger

Sagi Genger is a joint United States and Israeli citizen residing at 1211 Park Avenue, New York, New York, 10128.³

2. TPR Investment Associates, Inc.

TPR is a Delaware corporation beneficially owned by the Genger family. TPR brings this action on behalf of AG Properties, which assigned all rights regarding claims against former AG Properties officers and affiliates to TPR in 2007, as consideration for TPR assuming obligations on the part of AG Holdings to repay the Gusinski loan.⁴

3. Gilad Sharon

Third-party defendant Gilad Sharon is a citizen and resident of Israel. ⁵

B. The Canadian Real Estate Venture

Amidst a maze of backdated, incomplete and contradictory documents, and even more dubious testimony, a number of facts are undisputed. In 2001, Sharon presented Arie with an idea for a joint venture involving residential real estate investment prospects in Canada.⁶ Sharon and Arie agreed that they would participate as fifty-fifty partners.⁷ In 2001, AG Properties was incorporated in Nova Scotia, with Arie as its sole director. ⁸ On December 31, 2001, AG Holdings, another corporation under the sole directorship of Arie, acquired one-hundred percent of the shares of stock in AG Properties.⁹ AG Holdings was wholly owned by AG Real Estate LP (the “Genger Family Partnership”), which was controlled at the time by Arie for the benefit of his children Sagi and Orly Genger.¹⁰ During 2001 and 2002, the venture acquired two residential apartment complexes in Montreal known as the “Durocher” property and the “Lincoln” property (together the “Canadian Properties”).¹¹

The two buildings were acquired for approximately twenty million Canadian dollars.¹² Approximately twelve million dollars of the financing came from first and second lien mortgage debt.¹³ The balance, approximately eight million dollars, which was not secured by any real property, came from various loans directly or indirectly from Genger entities including a loan of $2.5 million from AG Holdings, also a Genger entity, which borrowed the money from Gusinski.¹⁴ Arie testified that he did not personally guarantee any of the loans and that the Gusinski loan was not secured against the real property, but he was not certain about the other loans.¹⁵

From the outset the goal in structuring the Canadian Venture was to enable a flow-through effect for the benefit of the shareholders without there being any duplicatetaxation.¹⁶ In 2002, there were discussions about restructuring the Canadian Venture because “the tax structure that was in place ... was flawed in that it did not consider a particular aspect of Canadian taxation.” ¹⁷ The properties were placed in trust in 2002.¹⁸

C. Sharon's Investment in AG Properties

The source of Sharon's investment in the Canadian Venture is the crux of this litigation. Central to the agreement between Arie and Sharon was that each would have a fifty percent interest in AG Properties.¹⁹ Beyond that, the terms of Sharon's investment in AG Properties are anything but clear, not in small part because of his evasive testimony and unwillingness to cooperate in locating relevant information.²⁰ According to Arie and Sharon, the deal was that Arie would provide the financing and Sharon would provide the sweat.²¹ Genger argues that Sharon purchased his fifty percent interest in AG Properties through Omniway, a Cypriot company, with a $1.25 million promissory note (the “Omniway Note”) dated February 6, 2002 and secured by shares in AG Properties.²² Sharon and Arie contend that Sharon invested only $25,000—the same capital contribution that Arie made—through Lerner Manor, an Israeli trust that was first registered on September 9, 2002, ²³ with documents backdated “as of” February 6, 2002.²⁴

1. The Omniway Note

Omniway Limited was incorporated in Cyprus on July 6, 2001,²⁵ apparently for the purpose of providing a vehicle through which Sharon could invest in the Canadian Venture.²⁶ Although no original of the Omniway Note has been produced, two copies have been found. The Note, dated February 6, 2002, provides for payment to AG Properties of the principal sum of $1.25 million in three annual installments with the outstanding principal sum due on July 24, 2011.²⁷ No payments have been made of the principal or interest due under the Omniway Note. The Note states

[a]t the same time as it executes this Note, the Maker [ (Omniway) ] deposits with or transfers to the Payee [ (AG Properties) ] or its nominee certificates representing the Shares and also delivers to the Payee a power of attorney executed in the form of the attached Schedule A, a stock transfer executed in blank in the form of the attached Schedule B ... and a copy of a resolution of the board of directors of [Omniway] substantially in the form of the attached Schedule C.²⁸

The files of Raines & Fischer, the accounting firm for the Canadian Venture, contained a signed copy of the Omniway Note.²⁹ David Parnes, an attorney who prepared the documents for the Canadian Venture testified that he believed that the signature said “Joka.” ³⁰ Joka Secretarial Limited was the secretary of Omniway as well as a shareholder.³¹ The “name” and “title” lines on the note are blank.³² There is no resolution authorizing Joka to sign the note in evidence,³³ and Parnes acknowledged that it was odd that it was just signed, “Joka,” rather than “Joka Secretarial Limited.” ³⁴ No copy of the Note containing executed schedules has been produced.³⁵ Raines & Fischer's files also contain: (1) a written consent on behalf of AG Holdings signed by Arie resolving to enter into a voting trust agreement and shareholders' agreement with Omniway, which would regulate the rights and obligations of AG Holdings and Omniway as shareholders of AG Properties; ³⁶ and (2) an unexecuted AG Properties Shareholder's Agreement between AG Holdings and Omniway, each for one hundred shares.³⁷

Copies of an executed, albeit incomplete, Omniway Note were also found in the files of AG Properties, and there are charts as early as September 20, 2001 that show a structure in which Sharon invested $1.25 million in AG Properties through Omniway.³⁸ However, the testimony and evidence presented at trial suggest that the Omniway Note was not tendered, at least not as of February 6, 2002. On February 6, 2002 Arie executed the promissory note, and the Shareholders' Agreement on behalf of AG Holdings.³⁹ In a February 2003 memorandum to Ed Klimerman, Arie's attorney, David Parnes, the associate responsible for drafting the Canadian Venture documents, explained that Sharon kept returning the Omniway documents unsigned through May 2002, because the tax laws in Israel had recently changed and Sharon was debating whether to enter into the transaction in his individual capacity.⁴⁰ And according to a memorandum from Parnes and Klimerman, as of August 2002, “the sole shareholder of AG Properties Co. remain[ed] AG Holdings Company.” ⁴¹

In October 2002, in the context of rearranging the corporate structure of the Canadian Venture, Parnes sent an email to Uri Harpaz, Sharon's accountant, describing the Omniway vehicle including the $1.25 million investment sum as “50% of the liabilities of the Properties,” but noting that “[a]s of now, Omniway did not execute any of the documents it was supposed to be party to, including the Promissory Note ... and the Shareholders Agreement.” ⁴² Parnes noted that Sharon told him that “it might be advisable to do away with Omniway.” ⁴³ Utterly implausibly, Sharon denies that he ever knew anything about Omniway or the possibility that his interest in AG Properties would be secured by a $1.25 million promissory note.⁴⁴

Notes from a series of meetings among the parties to the Canadian Venture and their lawyers show that as of March 2003 the terms of Sharon's investment were still in flux, and his fifty percent interest had not been formally secured by either the Omniway Note or through Lerner Manor.⁴⁵ Parnes' notes from a March 12, 2003 meeting with, among others, Sharon, reflect that that “Gilad want[ed] to have his 50% interest in ‘Properties' held by a trustee/nominee on his behalf” meaning “a ‘simple agreement’ between Gilad and the trustee should exist [whereby the] trustee will be obliged to pay the $25,000 when called upon.” ⁴⁶ Parnes...