Merhav Ampal Group, Ltd. v. Merhav (M.N.F.) Ltd. (In re Ampal-American Israel Corp.)
Docket: Case No.: 12-13689 (SMB); Adv. P. No. 14-02385 (SMB)
Court: United States Bankruptcy Court, S.D. New York; February 29, 2016; Us Bankruptcy; United States Bankruptcy Court
A memorandum decision granted the Third Party Defendants’ motion to dismiss the Third-Party Complaint (TPC) filed by Merhav Ampal Group, Ltd., an indirect subsidiary of Ampal-American Israel Corporation, in an adversary proceeding to recover a $20 million note. The court had previously ruled in favor of MAG, resulting in a judgment exceeding $28 million against the Defendants, including pre-judgment interest. The Defendants subsequently filed the TPC against three Indenture Trustees, two bondholders (Psagot and Meitav), and attorney Ofer Shapira, alleging tortious interference and objecting to the Indenture Trustees’ bankruptcy claims. The Third Party Defendants moved to dismiss on grounds of lack of jurisdiction and failure to state a claim. The court dismissed Count III due to failure to state a claim and declined to exercise supplemental jurisdiction over Counts I and II, leading to the TPC's complete dismissal.
Background details include Ampal's origins as a New York-based holding company, its chapter 11 bankruptcy filing that was later converted to chapter 7, and its investment strategy focused on energy and chemicals. Maiman, the majority shareholder of MNF and Ampal's chairman and CEO, was involved in financing operations through the issuance of three series of debentures worth $268.7 million, held in trusts by Indenture Trustees for bondholders. The document also outlines the development of an ethanol processing project in partnership with MNF, which included a $20 million loan from Ampal and subsequent agreements regarding loan terms, personal guarantees, and conditions for converting debt into equity, contingent upon securing project financing by December 31, 2010. Failure to secure this financing would result in the loan becoming due.
On December 31, 2010, Ampal assigned its rights in the Loan and Guaranty and the Option Exercise Agreement to MAG. Subsequently, Ampal and MNF extended the Option Exercise Agreement twice, until December 31, 2012. During 2011-2012, the Defendants advanced the Project by acquiring nearly 30,000 acres of land, securing a “Tax Free Zone” designation for the refinery, obtaining a port development license on the Magdalena River, and negotiating with a Brazilian contractor. MNF also received backing from Seguradora Brasileira de Crédito Exportagáo for $270 million in Project Financing from the Brazilian Development Bank (BNDES), contingent upon raising additional equity.
Despite progress, Ampal struggled due to financial issues stemming from the Arab Spring, which affected its major investments and hindered dividend payments. Consequently, Ampal failed to meet debt service obligations on Debentures, initiating negotiations with Indenture Trustees and bondholders for alternative repayment terms. These negotiations lasted about eight months without success due to unreasonable bondholder demands.
During this time, Third Party Defendants launched a public smear campaign against Ampal's directors, disseminating defamatory articles that falsely accused them of misappropriating corporate funds and failing to fulfill obligations to bondholders. They also connected the political unrest in Egypt to Ampal's leadership. This campaign aimed to undermine negotiations with potential Project investors, thereby leveraging Ampal's precarious financial situation.
Aware of ongoing negotiations for Project equity investment necessary for BNDES financing, the Third Party Defendants sought to influence these discussions by spreading misinformation, which ultimately led to the withdrawal of all potential investors from the Project. This withdrawal thwarted the BNDES financing and prevented the conversion of a $20 million Loan into a 25% equity stake in the Project for Ampal.
The Third Party Defendants recognized that without conversion, MNF and Maiman could not repay the Loan and Guaranty. Following unsuccessful negotiations with bondholders, Ampal filed for Chapter 11 bankruptcy on August 29, 2012. The Third Party Defendants’ actions obstructed Project Financing, resulting in the failure to complete the Project, which would have granted Ampal or MAG a 25% ownership stake in a potentially profitable asset.
The Third Party Complaint (TPC) includes three claims: Count I, alleging tortious interference with the Loan and Guaranty, contends that the dissemination of defamatory statements about Ampal and its associates caused potential investors to withdraw, preventing the financing from closing. Count II claims tortious interference with prospective business relations, stating that similar actions led to investor withdrawals or hesitations, forcing MNF to abandon the Project. Counts I and II are categorized as the “Tortious Interference Claims.”
Count III seeks to disallow and expunge the Indenture Trustees’ proofs of claim under 11 U.S.C. § 502(b)(1), arguing that Ampal would have gained an equity interest in the Project if it had succeeded, but the Third Party Defendants' misconduct thwarted this opportunity. This count is divided into a “Disallowance Claim,” based on the Third Party Defendants’ alleged immoral conduct, and a “Setoff Claim,” which seeks to reduce or offset the Claims by the value of the equity interest Ampal would have received.
On February 26, 2015, the Third Party Defendants moved to dismiss the TPC, asserting that the court lacked subject matter jurisdiction over the Tortious Interference Claims, personal jurisdiction over them, and that the claims were time-barred as disguised defamation claims. The Indenture Trustees argued that the Defendants lacked standing to challenge the Claims and that the objections were meritless. The Defendants countered that jurisdiction existed due to the claims' relation to the Ampal bankruptcy and that the bondholders consented to jurisdiction. They maintained that the Tortious Interference Claims were separate from defamation and asserted standing for the Disallowance Claim, arguing that unclean hands should invalidate the Claims. Lastly, they defended the validity of the Setoff Claim based on the plausibility of Ampal's equity in MAG.
The Third Party Defendants reiterated their prior arguments during oral arguments heard by the Court on June 2, 2015. They acknowledged that Count III served as the jurisdictional basis for the Court to exercise supplemental jurisdiction over Counts I and II. The discussion centers on the standing of the Defendants to object to the Claims under Section 502(a) of the Bankruptcy Code, which states that a claim is deemed allowed unless a party in interest objects. Creditors are classified as "parties in interest," and both MNF and Maiman have filed proofs of claim, confirming their status as creditors of Ampal. However, the Third Party Defendants contended that the Defendants lack standing to object to the Claims in a Chapter 7 case until the trustee has refused to do so. The standing of creditors to object in Chapter 7 cases is contested, with courts generally allowing only the trustee to object unless granted permission by the court. The prevailing view is that while creditors have a right to object, this right is typically exercised by the trustee to ensure orderly case administration. In this instance, Spizz has not opposed the Third Party Defendants' attempts to disallow or reduce the Claims and does not plan to file an objection.
Defendants in Ampal I opposed the retention of Tarter Krinsky, Drogin LLP as substitute counsel for Spizz and sought to disqualify him as trustee, arguing that Spizz failed to pursue claims against Third Party Defendants related to the same conduct alleged in the Third Party Complaint (TPC). Spizz countered that he found no merit in these claims, highlighting that Maiman did not address the alleged wrongful conduct during his management of Ampal, and that a lengthy bankruptcy declaration omitted any reference to the ethanol project or wrongdoing by the bondholders or Shapira. This led Spizz to conclude that the Defendants' timing appeared to be a litigation tactic. Furthermore, the Defendants did not specify any defamatory statements supporting their claims, and pursuing actions against the Third Party Defendants could jeopardize MAG's claims against the Defendants under the Loan and Guaranty.
Regarding Count III, the Disallowance Claim, Section 502(b)(1) of the Bankruptcy Code dictates that a court must determine and allow claims unless they are unenforceable due to reasons other than being contingent or unmatured. Indenture Trustees filed claims related to unpaid Debentures, which MNF and Maiman argued should be disallowed based on the unclean hands doctrine regarding the Third Party Defendants' conduct. The parties debated whether unclean hands could serve as a defense against non-payment of the Debentures. This doctrine requires that the plaintiff’s misconduct be significantly related to the claim asserted. Under New York law, equitable relief can be denied if the defendant shows the plaintiff engaged in immoral conduct that the defendant relied upon and suffered injury from. However, unclean hands does not bar legal claims seeking damages. The doctrine of in pari delicto parallels unclean hands, suggesting courts should avoid intervening in disputes where both parties share fault.
Courts interchangeably apply the doctrines of unclean hands and in pari delicto to deny legal relief when a plaintiff's misconduct is closely related to the litigation's subject matter and caused harm to the party invoking the doctrine. The Indenture Trustees' claims against Ampal stem from its failure to pay Debentures. For unclean hands to bar these claims under New York law, the Trustees' misconduct must directly connect to the claims. However, the current bondholders, who represent the Trustees, purchased the Debentures for value provided to Ampal and later engaged in alleged tortious conduct unrelated to their claims, which undermines the unclean hands defense. Defendants assert that legal standards are “unsettled” and cite precedents that purportedly support their argument, but these cases do not substantiate their position. In Ins. Co. of N. Am. v. Milberg Weiss, the court allowed equitable defenses despite the legal nature of the claims, but subsequent cases like Readco and Mallis clarified that unclean hands does not apply unless the plaintiff's conduct is directly linked to the claims. In particular, Mallis reinforced that unclean hands is only a defense when a plaintiff seeks to benefit from their immoral actions. Two New York Appellate Division cases cited by the Defendants involved plaintiffs whose misconduct was intertwined with their claims, leading to the dismissal of their complaints. In Ta Chun Wang v. Chun Wong, the plaintiff's involvement in a fraudulent scheme barred all actions against the defendants, illustrating that engaging in deceitful conduct forfeits legal recourse regarding related disputes.
In the case involving Smith, the plaintiffs (the Smiths) and defendants (the Longs) formed a corporation and entered a shareholders’ agreement to allocate equity. The corporation's SBA loan application was denied due to the plaintiffs' ownership percentages and prior issues. To circumvent this, the plaintiffs transferred most of their shares to the defendants, reducing George Smith's ownership below 10%. Concurrently, they executed a buy-back agreement allowing the plaintiffs to reacquire their shares within eight years for $1.00, while an amendment maintained their rights under the original agreement, effectively negating the share transfer's impact.
Disputes arose, leading the plaintiffs to sue for enforcement of the buy-back agreement. Initially, they won a summary judgment for specific performance and damages, but the Appellate Division reversed, invoking the unclean hands doctrine. This doctrine prevents parties from enforcing agreements resulting from deceptive practices, as equity does not support claims based on immoral actions. The court referenced previous cases, noting that the unclean hands defense does not bar claims unrelated to the alleged misconduct.
The defense argued that the doctrine might be applied differently in bankruptcy proceedings, as these courts operate under equitable principles. However, the defendants clarified that they did not seek to deviate from applicable law. Ultimately, the court ruled that unclean hands did not apply to the claims in question, leading to the rejection of the Disallowance Claim.
The right of setoff permits entities with mutual debts to offset their obligations to each other, preventing scenarios where one party pays another while still being owed. Mutual debts must arise from the same parties in the same capacity. In the case at hand, the Setoff Claim argues for offsetting claims based on the equity value of a project from which Ampal was deprived due to the Third Party Defendants' actions. However, the Court determines that mutuality is absent, as Ampal's debts are owed to the Indenture Trustees (for bondholders), while any claims related to equity are owed by the Indenture Trustees to MAG, not directly to Ampal. Although the Defendants suggest that Ampal's equity in MAG in 2012 indicates a plausible mutuality, the Court clarifies that the indirect effects do not satisfy the mutuality requirement necessary for setoff. Consequently, the Setoff Claim is rejected, and Count III is dismissed entirely.
Regarding jurisdiction over Counts I and II, the Court notes that only MAG's claim has been addressed, leaving the Tortious Interference Claims involving the Defendants and Third Party Defendants. These claims do not impact Ampal, leading the Court to conclude it lacks related jurisdiction over them. The Defendants' counsel acknowledged during oral arguments that the jurisdiction for these claims relies on supplemental jurisdiction under 28 U.S.C. § 1367, which allows for the inclusion of related claims within a case that has original jurisdiction.
District courts may choose not to exercise supplemental jurisdiction over a claim if certain conditions are met: (1) the claim presents a novel or complex state law issue; (2) the claim significantly outweighs the claims under federal jurisdiction; (3) all original jurisdiction claims have been dismissed; or (4) other compelling reasons exist. Generally, if all federal claims are eliminated before trial, the court will likely decline jurisdiction over remaining state law claims. In this case, the court previously had jurisdiction related to bankruptcy matters, but those claims have been resolved. The Tortious Interference Claims, governed by Israeli law, should be addressed by an Israeli court, leading the court to decline jurisdiction and dismiss these claims. Other dismissal grounds raised by the Third Party Defendants are not addressed due to this determination. Furthermore, claims related to Gadot, which were not mentioned by the Defendants, are considered abandoned and dismissed. The claims register's lack of filings by Psagot and Meitav is deemed unnecessary to resolve given the disposition of Count III. The parties have impliedly consented to the application of New York law through their discussions regarding the unclean hands defense and the viability of the setoff defense.
In RST (2005) Inc. v. Research In Motion Ltd., a District Court judge criticized the Milberg court's reliance on the Mallis case, which dismissed an unclean hands defense without evaluating its applicability to the specific legal action. The judge referenced Judge Friendly’s ruling on New York's unclean hands doctrine, stating it could bar a legal claim if the plaintiffs' misconduct was closely tied to the litigation's subject matter. The excerpt elaborates on what constitutes related proceedings in bankruptcy, noting that such actions can affect the debtor's rights and the management of the bankrupt estate. The Second Circuit has affirmed that bankruptcy courts possess supplemental jurisdiction. Additionally, it mentions defamatory statements made in the Israeli press, suggesting a strong rationale for adjudicating the Defendants’ Tortious Interference Claims in Israel, particularly if the statements were in Hebrew.
