Merhav Ampal Group, Ltd. v. Merhav (M.N.F.) Ltd. (In re Ampal-American Israel Corp.)Merhav Ampal Group, Ltd. v. Merhav (M.N.F.) Ltd. (In re Ampal-American Israel Corp.)
MEMORANDUM DECISION GRANTING THIRD PARTY DEFENDANTS’ MOTION TO DISMISS
Mеrhav Ampal Group, Ltd. (“MAG”), an indirect wholly-owned subsidiary of the debtor, Ampal-American Israel Corporation (“Ampal”), brought this adversary proceeding to recover on a $20 million note executed by Merhav (M.N.F.) Limited (“MNF”) and guaranteed by Yosef A. Maiman (“Maiman,” and with MNF, the “Defendants”). The Court granted summary judgment in favor of MAG, see Merhav Ampal Grp., Ltd. v. Merhav (M.N.F.) Ltd., Adv. P. No. 14-02385(SMB),
Meanwhile, the Defendants filed a Third-Party Complaint, dated Nov. 24, 2014 (“TPC”) (ECF Doc. #8) against three Indenture Trustees
For the reasons that follow, the Court dismisses Count III for failure to state a claim, and declines to exercise supplemental jurisdiction, to the extent it exists, over Counts I and II. Accordingly, the TPC is dismissed in its entirety.
BACKGROUND
Ampal, a New York corporation, is a holding company heаdquartered in Tel Aviv, Israel. (¶¶ 11, 16.)
A. The Ethanol Project and the Third Party Defendants’ Interference
In or around 2006, MNF partnered with Ampal to explore the development of a facility that would process and create ethanol from sugarcane (the “Project”). (¶¶ 21-22.) In December 2007, Ampal agreed to loan MNF $20 million (the “Loan”) to facilitate the purchase of the land for development of the Project. (¶ 23.) The terms of the Loan were documented in various agreements, including a promissory note dated December 25, 2007. (¶23.) Ampal was granted the right to convert the debt into equity in the Project under the terms of a contemрoraneously executed option agreement. (¶ 23.)
In December 2008, MNF and Ampal agreed to extend the maturity date of the Loan, and Maiman executed a personal guaranty as additional security (the “Guaranty”). (¶24.) In December 2009, MNF and Ampal agreed that the Project needed more time and entered into an “Option Exercise Agreement” under which Ampal exercised its right to convert the Loan into a 25% equity interest in the MNF subsidiary developing the Project. (¶25.) The debt-to-equity conversion was conditioned on MNF securing debt financing for the Project needed to fund the development of the ethanol refinery facility and sugarcane plantation (“Project Financing”). (¶ 25.) Under the agreement, failure to secure Project Financing by December 31, 2010 would cancel the debt-to-equity conversion, and the Loan would become due. (¶25.)
On December 31, 2010, Ampal assigned its interests and rights in the Loan and
During 2011 and 2012, the Defendants made progress on the Project, including (1) arranging to acquire or lease almost 30,000 acres of land, (2) receiving a “Tax Free Zone” determination covering the refinery plant itself and various tax reliefs for the import of goods and services, (3) оbtaining a license to develop a port on the Magdalena River, and (4) negotiating an agreement with a Brazilian contractor. (¶27.) MNF had also obtained the approval of Seguradora Brasileira de Crédito á Exportagáo, a government loan insurer, to back $270 million of Project Financing from the Brazilian Development Bank (“BNDES”)
Notwithstanding progress оn the Project, Ampal faced difficulties in connection with its most significant preexisting investments. (¶ 29.) As a result of turmoil in the Middle East in 2011, often referred to as the “Arab Spring,” companies to which Ampal had dedicated the majority of its investment resources began to experience financial strife. (¶29.) These difficulties prevented those companies from paying dividends to Ampal. (¶29.) As a result, Ampal was unable to meet its debt service obligations on the Debentures, (¶ 29), and beginning in or around January 2012, commenced negotiations with the Indenture Trustees and the bondholders regarding alternative repayment terms. (¶ 30.) Negotiations continued for approximately eight months, but no restructuring deal wаs reached due to the bondholders’ unreasonable demands. (¶ 31.)
The Third Party Defendants also embarked on a public smear campaign to improve their negotiating leverage. (¶ 32.) “Numerous articles with inflammatoxy and untrue comments appeared in media outlets” containing “defamatory and utterly false statements made by the [bjondhold-ers and their representatives regarding the directors’ appropriation of coi’porate funds, their inability to lead Ampal, and their failure to live up to supposed obligations to the [bjondholders.... ” (¶ 33.) Moreover, the Third Party Defendants even blamed the political uprising and terrorist attacks that had occurred in Egypt on thе Ampal directors. (¶ 33.)
The Third Party Defendants also sought to gain leverage over the Ampal debt restructuring by causing potential investors in the Project to second guess any involvement with Ampal or MNF. (¶ 34.) During the restructuring negotiations, the Third Party Defendants were aware that Ampal and MNF were negotiating with potential Project investors so that BNDES would proceed with the $270 million Project Financing, and the $20 million Loan would be converted to a 25% equity stake in the Project for Ampal. (¶ 35.) They believed that Maiman had “more to lose” than Am-pal if the Project failed given MNF’s greater stake in the Project, and would be
The Third Party Defendants’ conduct prevented the Project Financing from going forward, and consequently, the Project, “25% of which would have been owned by Ampal or MAG,” ■ was never completed. (¶ 40.) Thus, Ampal “lost the opportunity to own a large portion of what would have been an extremely lucrative asset.” (¶ 40.)
B. The Third Party Action
The TPC asserted three claims for relief. Count I alleged that the Third Party Defendants tortiously interfered with the Loan and Guaranty. As a result of their “systematic, coordinated dissemination of defamatory content regarding Ampal, [MNF], and Ampal’s directors, including Maiman,” (¶46), potential Project investors backed out and the Project Financing could not clоse. (¶ 47.) Absent Project Financing, the Third Party Defendants knew (i) MNF “would be Unable to repay the Loan” constituting a breach of the Loan documents, and (ii) “Maiman would be unable to repay the Guaranty.” (¶ 48.) The Defendants asserted damages resulting from their inability to meet their contractual obligations. (¶ 49.)
Count II asserted a claim for tortious interference with prospective business relations. As a result of the same conduct by the Third Party Defendants, “the potential equity investors either backed out of the Project or, at a minimum, questioned their involvement in it,” (¶ 52), and MNF “was forced to abandon the Project,” causing harm to the Defendants. (¶ 54). For convenience, Counts I and II are referred tо as the “Tortious Interference Claims.”
Count III sought to disallow and expunge the Indenture Trustees’ proofs of claim (the “Claims”) pursuant to 11 U.S.C. § 502(b)(1).
The Third Party Defendants moved to dismiss the TPC on February 26, 2015.
The Defendants opposed the motion.
The Thud Party Defendants replied
DISCUSSION
A. Standing to Pursue the Disallowance Claim
The Defendants have standing to object to the Claims. Section 502(a) pro
The Third Party Defendants nonetheless argue that Defendants lack standing to object to the Claims because, in a chapter 7 case, parties in interest may not object to a claim until the trustee has refused to do so. (Moving Memo at 28-29.) Despite the plain language of section 502(а), a creditor’s standing to object to a proof of claim in a chapter 7 case has been questioned. See Kowal v. Malkemus (In re Thompson),
The question raised by the foregoing authorities need not detain us for long. Spizz has not opposed the Third Party Defendants’ efforts to disallow or reduce the Claims, and he does not intend to file his own objection for the reasons discussed in In re Ampal-Am. Israel Corp.,
In opposition, Spizz explained that he did not see any merit in the claims against the Third Party Defendants. Maiman never mentioned their wrongful conduct or pursued them while he ran Ampal, and Ampal’s “[Local Bankruptcy] Rule 1007-2 Declaration [ran] on for twenty-three pages without mеntioning the ethanol project or the tortious conduct of the bondholders or Shapira.” Ampal I, 534 B.R. at
B. Count III
1. The Disallowance Claim
Section 502(b)(1) of the Bankruptcy Code provides that, upon objection to a claim, “the court ... shall determine the amоunt of such claim ... and shall allow such claim in such amount, except to the extent that (1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” 11 U.S.C. § 502(b)(1). The Indenture Trustees filed the Claims in the Ampal bankruptcy case, (¶ 48), on account of the unpaid Debentures. MNF and Maiman assert that these claims should be “disallowed and expunged under 11 U.S.C. § 502(b)(1) on the basis of the unclean hands” or immoral conduct of the Third Party Defendants. (¶ 63.)
The parties dispute the threshold question of whether unclean hands is a defense to the non-payment of the Debentures. The doctrine of unclean hands is based on the maxim that “one who comes into equity must come with clean hands.” Bentley v. Tibbals,
As an equitable defense, unclean hands will not bar a legal claim. Aetna Cas. & Sur. Co. v. Aniero Concrete Co., Inc.,
The Claims asserted by the Indenture Trustees are obviously legal in nature and arise from Ampal’s failure to pay off the Debentures. To serve as a bar under New York law, the Indenture Trustees’ unclean hands must directly relate to the Claims. But the present bondholders or their predecessors, whose interests the Indenture Trustees represent, purchased the Debentures for consideration that flowed to Ampal, and years later, they engaged in tortious conduct (according to the Defendants) that had no connection to their Claims in this case. Hence, the unclean hands defense does not bar the Claims.
The Defendants nevertheless argue that the law is “unsettled,” (Opposing Memo at 20), and cite to several decisions they say support the opposite conclusion. They do not. For example, in Ins. Co. of N. Am. v. Milberg Weiss Bershad Specthrie & Ler-ach, No. 95 cv 3722(LLS),
Neither Second Circuit case supported the District Court’s conclusion. In Read-co, which did not involve unclean hands, the plaintiff asserted affirmative claims for relief based on estoppel and waiver and not as defenses to legal claims. In Mallis, the Court addressed whether unclean hands (i.e., in pari delicto) barred the plaintiffs’ legal claims for fraud and negligent misrepresentation. Quoting Weiss v. Mayflower Doughnut Corp, Judge Friendly observed that unclean hands is a defense when the underlying conduct is entwined with the subject matter of the litigation, but concluded that unclean hands did not apply because “appellants’ supposedly wrongful actions do not possess the requisite connection to the subject matter in litigation.” Mallis,
The plaintiff subsequently sued the defendants to reform the deеd, to impose a constructive trust and equitable lien and for damages, but the Appellate Division affirmed the dismissal of the complaint. It ruled “that the plaintiffs unclean hands in participating in a course of conduct of deception and deceit is an effective bar to all of the causes of action in the complaint, including ,,. the cause of action sounding in fraud. Having engaged in a fraudulent scheme involving the conveyance of the premises, the plaintiff has forfeited his right, in law or equity, to protection or recourse in a dispute involving his accomplices in that very scheme.” Id. at 436.
Smith involved a similar fraudulent agreement. There, the Smiths (the plaintiffs) and the Longs (the defendants) formed a new corporation and entered into a shareholders’ agreement that allocated the equity in the new venture. The corporation applied for an SBA loan, but the application was denied based on the ownership percentages held by plaintiffs and their previous problems with an SBA loan. The plaintiffs subsequently transferred the majority of their aggregate shares to the defendants to reduce the plaintiff George Smith’s interest in the new corporation to below 10%. On the same day, the parties executed a buy back agreement that allowed the plaintiffs to buy back their interests within eight years for $1.00, and subsequently entered into an amendment providing that the transfer of the plaintiffs’ shares did not relinquish them rights under the original shareholder agreement.
Relations between the parties eventually soured, and the plaintiffs sued to enforce the buy-back agreement. They successfully moved for summary judgment in the trial court on their claims for specific performance and money damages, but the Appellate Division reversed. The Court ruled that “ ‘unclean hands in participating in a course of conduct of deception and deceit is an effective bar’ to causes of action to enforce the agreement that results from that deception and deceit.” Id. at 586 (quoting Chun Wong,
The unclean hands doctrine discussed by the Smith and Chun Wong courts is the same limited exception identified by the Mollis Court to the rule that unclean hаnds does not bar a legal claim. The defense does not bar the Claims because they have no connection to the course of tortious conduct alleged in the TPC.
Finally, Jaksich v. Thomson McKinnon Sec., Inc.,
The Defendants’ brief also seemed to assert that the unclean hands doctrine may be applied differently in bankruptcy proceedings given their equitable nature. (See Opposing Memo at 21-22 (“The unclean hands doctrine is especially relevant and applicable in bankruptcy proceedings— Filing a proof of claim in bankruptcy court—a court of equity—triggers the possibility of an unclean hands defense under applicable non-bankruptcy law.”).) At oral argument, the Court аsked the Defendants’ counsel whether he was contending that unclean hands could bar the Claims notwithstanding the inapplicability of unclean hands to legal claims under New York law. (Transcript of June 2, 2015 Hearing at 36:2-13.) Counsel clarified that he was not making that argument. (Id. at 36:19-21 (“[Wje’re not asking for a deviation from what applicable law would have been.”).)
Accordingly, unclean hands is not a defense to the Claims, and the Disallowance Claim is rejected.
2. Setoff Claim
“The right of setoff ... allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A.” Malinowski v. New York State Dep’t of Labor (In re Malinowski),
The Defendants are not entitled to setoff because the debts lack mutuality. The Claims are owed by Ampal to the Indenture Trustees (for the benefit of bondholders). Assuming the Equity Value Claim is valid, the debt is owed by the Indenture Trustees (and the other Third Party Defendants) to MAG, not Ampal, because Ampal assigned its rights in the Project to MAG on December 31, 2010. The Defendants nevertheless argue that the debts are mutual because “it is at least plausible given Ampal’s equity in MAG in 2012 that Ampal was harmed by [Third Party Defendants’] conduct.” (Opposing Memo at 26.) While this “conceivable effect” might support “related to” jurisdiction, see Ampal II,
The Setoff Claim is also rejected, and Count III is dismissed in its entirety.
C. Jurisdiction Over Counts I and II
The Court has entered judgment on the only claim brought by the plaintiff (MAG) and has dismissed Count III. This leaves Counts I and II, the Tortious Interference Claims. These claims lie between the Defendants and the Third Party Defendants, and the outcome will not have any conceivable effect on Ampal. The Court lacks “related to” jurisdiction over the Tortious Interference Claims,
Except as provided in subsections (b) and (c) or as expressly provided otherwise by Federal statute, in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties.
28 U.S.C. § 1367(a).
The exercise of supplemental jurisdiction is not appropriate, assuming that it is present. “[I]n the usual case in which all federal-law claims are eliminated before trial, the balance of factors to be considered ... will point toward declining to exercise jurisdiсtion over the remaining state-law claims.” Carnegie-Mellon Univ. v. Cohill,
Accordingly, the Court declines to exercise supplemental jurisdiction over the Tortious Interference Claims, and they are dismissed. In light of this determination, the Court does not reach the other grounds asserted by the Third Party Defendants in support of the dismissal of the Tortious Interference Claims.
Settle order on notice.
Notes
. "ECF Doc. #_” refers to documents filed on the electronic docket of this adversary proceeding.
. The Indenture Trustees are Hermatic Trust (1975) Ltd. ("Hermatic”), Reznik Paz Nevo R.P.N, Trusts 2007 Ltd. ("Reznik”), and Mish-meret—Trusts Company Ltd. ("Mishmeret”).
. The Background is derived from the TPC as well as those matters as to which the Court may take judicial notice.
. Citations to the TPC are denoted as “(¶_).”
, BNDES is the abbreviation for Banco Na-cional de Desenvolvimento Económico e Social.
. The TPC also alleged that the bondholders’ representatives informed the Israeli press that they intended to force a sale of Gadot (one of Ampal's portfolio companies). The very next day, Israel Discount Bank nominated a receiver for Gadot’s shares, and the appointment of a receiver caused Ampal to lose tens of millions of dollars in its investment in Gadot. (¶ 42.) The Defendants' opposition papers did not mention Gadot. Instead, the only harm to Ampal that they discussed related to the Project. Hence, to the extent the Defendants asserted Gadot-related claims against the Third Party Defendants, I deem those claims to have been abandoned. See Hanig v. Yorktown Cent. Sch. Dist.,
. The TPC implies that Psagot and Meitav filed рroofs of claim, (¶ 13), and Count III is also asserted against them. The claims register does not reflect that they filed claims, but . in light of the disposition of Count III, it is unnecessary to resolve this question.
.See Third-Party Defendants' Notice of Motion to Dismiss the Third Party Complaint, dated Feb, 26, 2015 (ECF Doc. #28) and Third Party Defendants' Memorandum of Law in Support of Their Motion to Dismiss the Third Party Complaint, filed Feb. 26, 2015 ("Moving Memo ") (ECF Doc, # 29),
. Third-Party Plaintiffs' Opposition to Third Defendants' Motion to Dismiss the Third Party Complaint, dated Apr. 13, 2015 ("Opposing Memo ") (ECF Doc. # 33).
. Third-Party Defendants’ Reply Memorandum of Law in Further Support of Their Motion to Dismiss the Third Party Complaint, filed May 26, 2015 ("Reply") (ECF Doc. # 36).
. The parties’ cited and discussed New York law on the issue of whether the unclean hands defense was available. (See Moving Memo at 30-31; Opposing Memo at 20-21; Reply at 15-56.) They also relied on New York law in discussing the viability of the setoff defense discussed later in the text. (See Moving Memo at 34-35; Opposing Memo at 25-26.) As a result, they have impliedly consented to the Court's application of New York law. Chau v. Lewis,
. In RST (2005) Inc. v. Research In Motion Ltd., No. 07 cv 3737(VM),
. “Related” proceedings are those whose outcome might have a “conceivable effect” on the estate. Publicker Indus., Inc. v. United States (In re Cuyahoga Equip. Corp.),
. The Second Circuit has ruled that bankruptcy courts may exercise supplemental jurisdiction. See Klein v. Civale & Trovato, Inc. (In re Lionel Corp.),
. Although the TPC does not disclose the defamatory statements, they were made in the Israeli press, and, I suspect, were in Hebrew. If so, this is another factor that weighs in favor of trying the Defendants’ Tortious Interference Claims in Israel.