Where Could the Investment Money Go? – part II

Case: The plaintiffs (=pl) invested 200,000 NIS with the defendant (=def), an investment corporation owned by def2, in a project to build a commercial building. The following provisions are included in an investment agreement signed in 07.2015: 1. When def will receive a building permit, they will create a subsidiary for this project, in which pl will have a 6.6% stake. 2. If the project does not work (criteria detailed, but not in this presentation), pl’s investment will be used for another project, chosen by pl. 3. Until the subsidiary is formed, pl’s money will be kept in escrow. The property still lacks a building permit, and def has used pl’s money, not keeping it in escrow. Pl accuses def of being evasive about information, assuring them that the building permit is coming soon, and for a long time keeping as a secret that the money is not in escrow. Pl asked to have the money transferred to other investments, but def offered only a loan with interest, which pl turned down. Therefore, pl demand their money back along with expected profits of 7% annually, and compensation for their lawyer’s fee. Def2 responds that he told pl there was a potential for loss. The project became more complicated and expensive than envisioned, and pl’s money has been spent, and will not be available until the project is finished. Def2 claims that the clause about escrow was a technical mistake, as money needed for a project would be useless in escrow. Def2 also rejects pl’s demand that he accept personal liability since the contract was with def.

Ruling: [Last time we saw that def violated the agreement with pl and that pl did not relinquish their rights.]

Pl definitely has the right to get their principal back. While no profits were set, there are two mechanisms to justify def paying for use of pl’s money: 1. How much pl, who borrowed money from a bank to invest, would have gotten from his investment money with a simple investment, after the two years when he could have gotten the money from escrow. 2. The estimate of how much def benefited from using that money for his projects (see Chavat Da’at 168:14). It is difficult to determine how much the above comes to but we will estimate it, based on compromise, at 9%, which comes out to 18,000 NIS.

Def2 refuses to assume the obligations of def based on the rules of corporations. While this is generally correct, our arbitration agreement states that when a representative of a corporation acted in an irresponsible manner, which deserves personal liability, we can obligate him. In this case, def2 clearly misappropriated and endangered pl’s funds and therefore has personal liability. Since he is the sole owner of def, he has the means to pay himself back from def should he want.

Because of the inappropriate and elusive way that def2 acted in this matter, which forced pl to purse legal recourse, we obligate def/def2 10,000 NIS for pl’s legal fees.