Spizz v. Eluz

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

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In re: :

:

AMPAL-AMERICAN ISRAEL CORP., : Chapter 7

: Case No. 12-13689 (SMB)

Debtor. :

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ALEX SPIZZ, as Chapter 7 Trustee for :

Ampal-American Israel Corp., :

:

Plaintiff, :

:

―against― : Adv. Proc. No. 14-02110 (SMB)

:

IRIT ELUZ, :

:

Defendant. :

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MEMORANDUM DECISION AND ORDER

DENYING MOTION FOR RECONSIDERATION

A P P E A R A N C E S:

AKERMAN LLP

520 Madison Avenue, 20th Floor

New York, New York 10022

John P. Campo, Esq.

Darryl R. Graham, Esq.

Of Counsel

Attorneys for Plaintiff

COLE SCHOTZ P.C.

1325 Avenue of the Americas, 19th Floor

New York, New York 10019

Steven L. Klepper, Esq.

David S. Gold, Esq.

Of Counsel

Attorneys for Defendant

STUART M. BERNSTEIN

United States Bankruptcy Judge:

Count II of the chapter 7 trustee’s (“Trustee”) complaint alleged that Irit Eluz, the

Debtor’s CFO, breached her fiduciary duties of loyalty and due care by causing the

Debtor to pay certain management fees to Merhav (M.N.F.) Ltd. (“Merhav”) during 2011

without the authorization of the Debtor’s Special Committee of the Board of Directors

(“Special Committee”). She moved for summary judgment dismissing Count II, but the

Court denied the motion from the bench ruling that the contract governing Merhav’s

compensation was ambiguous. Eluz now moves for reconsideration,1 contending that

the Court overlooked controlling authority relating to the Trustee’s prima facie case,

and specifically, the requirement to demonstrate a loss. The Trustee opposes the

motion.2 The Motion is denied for the reasons that follow.

BACKGROUND

The background to this dispute is discussed in the Court’s prior decisions,

including Spizz v. Eluz (In re Ampal-Am. Israel Corp.), 543 B.R. 464 (Bankr. S.D.N.Y.

2016) and Spizz v. Eluz (In re Ampal-Am. Israel Corp.), Adv. Proc. No. 14-02110 (SMB),

2020 WL 5075992 (Bankr. S.D.N.Y. Aug. 25, 2020). I assume familiarity with these

1 See Memorandum of Law in Support of Defendant Irit Eluz’s Motion for Reconsideration of the

Court’s February 9, 2021 Order Denying Ms. Eluz’s Motion for Partial Summary Judgment, dated Feb.

10, 2021 (“Motion”) (ECF Doc. # 140-1); see also Reply Memorandum of Law in Further Support of

Defendant Irit Eluz’s Motion for Reconsideration of the Court’s February 9, 2021 Order Denying Ms.

Eluz’s Motion for Partial Summary Judgment, dated Feb. 19, 2021 (ECF Doc. # 146).

2 See Plaintiff’s Memorandum of Law in Opposition to Irit Eluz’s Untimely Motion for

Reconsideration Regarding the Court’s Denial of Her Motion for Summary Judgment on Count II, dated

Feb. 17, 2021 (ECF Doc. # 144).

prior decisions and limit the background discussion to those facts necessary to the

disposition of the pending Motion.

In 2010, the Debtor and Merhav entered into the Cooperation and Management

Agreement (“Superseding Agreement”)3 pursuant to which Merhav agreed to provide

certain management services to the Debtor and the Debtor agreed to compensate

Merhav in an amount to be determined by the Debtor’s Special Committee at or around

the end of the Debtor’s fiscal year on December 31. The Superseding Agreement

provided in pertinent part:

In consideration for Merhav’s services and undertakings, Ampal will pay

Merhav a Management Fee, which will be determined annually and shall

be equal to a percentage of the direct and indirect expenses incurred by

Merhav in connection with providing services to or for the benefit of

Ampal, to the extent not reimbursed or recouped from other parties . . . .

The Management Fee shall be determined by the Special Committee . . . at

or around the end of each fiscal year . . . based on a presentation by

Merhav of expenses incurred in providing services hereunder during the

current year. The parties will review the amount of the Management Fee

annually in good faith and shall make such adjustments as they agree may

be reasonably appropriate in light of the work performed or to be

performed by Merhav.

(Superseding Agreement at Bates No. SPIZZ00059275.)

The Superseding Agreement did not fix a particular fee and the only criterion it

established was that the fee would be based on a percentage of Merhav’s Ampal-related

expenses, leaving to Merhav in the first instance the obligation to make a presentation of

its expenses to the Special Committee. For 2010, the Special Committee fixed the

management fee at 50% of Merhav’s Ampal-related expenses, totaling 24 million New

3 A copy of the Superseding Agreement is attached as Exhibit B to the Declaration of Steven L.

Klepper, dated Aug. 28, 2020 (ECF Doc. # 122-1).

Israeli Shekels (NIS). The Special Committee would have to make a new determination

regarding the 2011 management fee at or near the end of the 2011 fiscal year.

The Superseding Agreement was silent regarding Merhav’s right to advance

payments subject to a “true up” and award at the end of 2011. Advance quarterly

payments were apparently the practice followed in earlier years. In 2011, Eluz caused

the Debtor to continue to pay Merhav quarterly at the 2010 rate, but the Special

Committee never got around to approving a management fee for 2011. The Trustee

asserted in Count II of his complaint that Eluz breached her fiduciary duty to Ampal by

causing the Debtor to pay these management fees without receiving authorization from

the Special Committee. Eluz argued, inter alia, that she was authorized to make the

quarterly advance payments that would be subject to the “true up” and a fee approved

by the Special Committee at the end of 2011.

On August 28, 2020, Eluz moved for summary judgment on Count II. She

argued that the Trustee had failed to identify any non-speculative damages – a

necessary element of a breach of fiduciary duty claim for which the Trustee bears the

burden of proof. The Court denied Eluz’s motion at the November 19, 2020 hearing,

concluding that the allegedly unauthorized payments constituted the Debtor’s damages:

With respect to . . . Ms. Eluz’s motion . . . the trustee’s theory of the case is

she wasn’t allowed to make quarterly payments, and she wasn’t allowed to

make any payments unless payments were approved by special committee,

which never happened. Under those circumstances, it seems to me that

the estate has made a prima facie showing of damage. This is

distinguished or distinct from the cases Mr. Klepper has cited because no

amount was due under the trustee’s interpretation until the amount was

fixed by the board.

(Nov. 19, 2020 Hr’g Tr. at 47:4-13 (ECF Doc. # 135).) In the Motion, Eluz contends that

the Court overlooked controlling precedent requiring the Trustee to make a prima facie

showing of loss to the Debtor as a result of Eluz’s alleged conduct.

DISCUSSION

A motion for reargument or reconsideration is governed by Local Bankruptcy

Rule 9023-1. “The movant must show that the court overlooked controlling decisions or

factual matters that might have materially influenced its earlier decision.” In re Asia

Glob. Crossing, Ltd., 332 B.R. 520, 524 (Bankr. S.D.N.Y. 2005) (citation and internal

quotation marks omitted). Alternatively, the movant must demonstrate “the need to

correct a clear error or prevent manifest injustice.” Perez v. Progenics Pharm., Inc., 46

F. Supp. 3d 310, 314 (S.D.N.Y. 2014) (citation and internal quotation marks omitted).

“These criteria are strictly construed against the moving party so as to avoid repetitive

arguments on issues that have been considered fully by the court,” Griffin Indus., Inc. v.

Petrojam, Ltd., 72 F. Supp. 2d 365, 368 (S.D.N.Y. 1999), and a motion for

reconsideration is not an opportunity to present the case under new theories, secure a

rehearing on the merits, or otherwise take a “second bite at the apple.” Sequa Corp. v.

GBJ Corp., 156 F.3d 136, 144 (2d Cir. 1998).

It has never been disputed that the Trustee must make a prima facie showing of

damages to establish his breach of fiduciary duty claim. Sea Trade Mar. Corp. v.

Coutsodontis, 744 F. App’x 721, 725-26 (2d Cir. 2018) (summary order) (the plaintiff

must prove “non-speculative damages”). The Court ruled that the Trustee had satisfied

this burden. Under the Trustee’s reasonable interpretation of the Superseding

Agreement, any payments to Merhav were unauthorized absent Special Committee

approval and the Special Committee never approved a fee for 2011. The unauthorized

payments proximately caused the Debtor to suffer an injury in the sum of NIS 24

million, and Eluz’s participation in the payment of unauthorized fees to Merhav in 2011

established a prima facie claim of breach of fiduciary duty. See Breslin v. Superior

Steakhouse Sys. Holding Corp., 2 N.Y.S.3d 191, 194 (N.Y. App. Div.) (50% shareholder

and partner in business venture breached his fiduciary duty when he paid unauthorized

management fees to a separate entity controlled by him and to his son for services

rendered), leave to appeal denied, 43 N.E.3d 375 (N.Y. 2015); SantiEsteban v.

Crowder, 939 N.Y.S.2d 28, 29-30 (N.Y. App. Div. 2012) (“Since defendants’ payments to

themselves were unauthorized, as a matter of law, they are liable for breach of fiduciary

duty.”); see also Hirsch v. Pennsylvania Textile Corp. (In re Centennial Textiles, Inc.),

227 B.R. 606, 612 (Bankr. S.D.N.Y. 1998) (unauthorized payments in violation of

Bankruptcy Code § 549 stated claim for breach of fiduciary duty for the loss suffered in

the amount of the unauthorized payments).

Once the Trustee demonstrated the unauthorized payments to Merhav, the

burden shifted to Eluz to show that the loss was less because Merhav was entitled to

some compensation from the Debtor for the services rendered in 2011. In the leading

case, N.Y. Teamsters Council Health & Hosp. Fund v. Estate of DePerno, 18 F.3d 179

(2d Cir. 1994), an ERISA trustee hired two cooks who worked at an inn owned by his

son as maintenance men at the Fund during the winter months when they were not

needed at the inn. Id. at 181. Their hiring doubled the number of maintenance men

employed by the Fund and the corresponding expenses borne by the Fund. Id. The

Plaintiffs contended that the trustee hired the cooks to ensure their continued

employment at the son’s inn. Id. The District Court concluded that the trustee and his

son, who was also an attorney for the Fund, had violated ERISA but awarded only one

dollar in nominal damages because the plaintiffs “did not prove that the Fund had not

received fair value for the payments, i.e., the benefit of the work performed by the

cooks.” Id.

The Second Circuit reversed on this point, noting that once the plaintiffs proved

the payments to the two cooks/maintenance men, the burden shifted to the fiduciaries

to show any offsets:

We conclude that after the plaintiffs sustained their burden of showing the

defendants’ violation of their fiduciary duty to the Fund and the payment

of money as a result of that violation, the burden should have shifted to

the defendants to demonstrate factors mitigating the costs incurred by the

plaintiffs.

Id. at 180-81 (emphasis added). Citing the law of trusts that “once the beneficiaries have

established their prima facie case by demonstrating the trustees’ breach of fiduciary

duty, ‘the burden of explanation or justification ... shift[s] to the fiduciaries,’” Nedd v.

United Mine Workers of Am., 556 F.2d 190, 210 (3d Cir. 1977), the Second Circuit

expanded on its holding:

The plaintiffs have shown that the defendants breached a fiduciary duty to

the Fund by expending $45,484.15 over five winters on two maintenance

employees who were “parties in interest.” Proof of that expenditure alone,

even without the further proof that the employment of these two workers

doubled the number of maintenance workers ordinarily employed at the

Fund building, was sufficient to shift to the defendants the burden to show

that the employment of these two workers, and the corresponding

expense, was “fair and reasonable under all of the circumstances.” See

Brink, 667 F.2d at 426. If the defendants cannot persuade the trier that

the services rendered by the two additional maintenance workers were

reasonably necessary, the fund is entitled to its entire payment. If the

workers were reasonably necessary, then the defendants must prove that

the value of their reasonably necessary services at least equaled the sums

paid; otherwise, the plaintiffs are entitled to recover damages for the

difference.

DePerno, 18 F.3d at 182-83; see Stella v. Graham-Paige Motors Corp., 232 F.2d 299,

302 (2d Cir.) (Frank, J.) (“[O]nce a cestui shows a breach of such a duty and prima facie

proof of a maximum amount of profits made by the fiduciary, then the fiduciary has the

burden of proving to what extent the profits were less than this maximum— especially

where the fiduciary’s breach is responsible for the difficulty or impossibility of proving

the amount with certainty— and that consequently, if the fiduciary’s proof leaves the

amount uncertain, judgment goes against him for the maximum figure.”), cert. denied,

352 U.S. 831 (1956).

Litigants sometimes misread DePerno as shifting the burden to disprove

damages once the plaintiff has demonstrated a breach of fiduciary duty even without

evidence of a non-speculative loss. E.g., Fed. Ins. Co. v. Mertz, 12-cv-1597-NSR-JCM,

2016 WL 164618, at *2-3 (S.D.N.Y. Jan. 12, 2016); Salovaara v. Eckert, No. 94 Civ.

3430 (KMW), 1998 WL 276186, at *3-4 (S.D.N.Y. 1998), aff’d, 182 F.3d 901 (2d Cir.

1999). These cases, however, are distinguishable because they did not involve the type

of unauthorized payments present in DePerno and Ampal’s case. For example, in

Salovaara, the plaintiff charged that the defendant had breached his fiduciary duties by

competing with the investment fund that they both managed. The plaintiff argued,

citing DePerno, that the proof of improper competition was sufficient to establish the

breach of fiduciary duty claim and shift the burden to disprove damages to the

defendant. See Salovaara, 1998 WL 276186, at *3. The Court rejected this

interpretation and distinguished DePerno, observing that the breach of fiduciary duty in

DePerno involved improper payments resulting in the loss. Id. at *4 (“In DePerno,

plaintiffs clearly established both a breach and loss to the fund (that is, the expenditures

to pay the two additional maintenance workers), before the burden shifted to

defendants.”). Because Salovaara was unable to prove that the competition damaged

their fund, the Court granted summary judgment dismissing the breach of fiduciary

duty claim seeking damages.

Similarly, in Mertz, the plaintiff insurance companies (“Chubb”) hired Mertz to

provide independent estimates for the repair costs of the insureds’ homes. Chubb

claimed that Mertz fraudulently inflated the estimates, then solicited the insureds to

hire Mertz for the repair work at a lower cost and pocketed the difference. Mertz, 2016

WL 164618, at *1. Chubb argued, relying, inter alia, on DePerno and Stella v. Graham-

Paige Motors Corp., that once it proved a fiduciary breach, the burden shifted to Mertz

to prove what portion of the claim payment reflected Mertz’s actual cost to make the

covered repairs. Id. at *2. Distinguishing DePerno and Stella, the District Court stated

that because Chubb admitted that “at least some of the insurance payments were spent

on repairs, Stella would require Chubb to prove the amount of profits derived by Mertz

Defendants (i.e., the amount of money received that was not spent on repairs) and

therefore requires more than just proof of gross payments made.” Id. at *3 (emphasis in

original); accord id. at *4 (“Chubb has the burden of showing the claim payments were

excessive or inflated, at which point Mertz Defendants will have to show the fairness and

reasonableness of such payments, in light of the costs to repair and/or replace the

properties.”).4 In other words, Chubb never claimed that the entire amount of the

4 The Mertz Court distinguished a third case, Gomez v. Bicknell, 756 N.Y.S.2d 209 (N.Y. App. Div.

2002), leave to appeal dismissed in part and denied in part, 796 N.E.2d 474 (N.Y. 2003), which involved

the theft of a plaintiff-employer’s corporate opportunity by the defendant-employee. The Mertz Court

noted that Mertz was Chubb’s consultant and not its employee or agent. Hence, the New York rule, that

payments were unauthorized, and in fact, was contractually obligated to pay the

reasonable costs. Consequently, it had to prove the amount it overpaid because of

Mertz’s fraud.

The pending case does not involve claims of breach of fiduciary duty without any

non-speculative loss caused by the breach. Under the Trustee’s interpretation of the

Superseding Agreement, the Special Committee’s approval of the management fee was

the condition precedent to its payment and the non-occurrence of that condition

precedent meant that no payment was contractually due or should have been made. The

Trustee does not contend that some amount was owed to Merhav, and Merhav was

overpaid. As in DePerno, the unauthorized payment, without more, was the breach that

caused the loss. This proof shifts to Eluz the burden to demonstrate that the payments

were fair and reasonable and the value of Merhav’s services to Ampal in 2011.

Before concluding, I turn to a contrary authority that research has revealed. In

SantiEsteban v. Crowder, 957 N.Y.S.2d 639 (N.Y. Sup. Ct. 2010), shareholders in a

cooperative corporation sued the actual or purported officers and directors who

managed the co-op and paid themselves $220,000 in compensation for their services.

The payments were never properly authorized. The lower court granted the plaintiffs’

summary judgment motion on the issue of the defendants’ liability for breach of

fiduciary duty, but added, without citation to any authority, that “it remains incumbent

upon the Plaintiffs to prove the actual damages caused to the corporation, if any,

the employer need not prove damages when the employee breaches her fiduciary duty, does not apply.

2016 WL 164618, at *3. In contrast to Mertz, Eluz was an employee of Ampal charged with the faithless

performance of her duties vis a vis the payment of Merhav’s 2011 compensation.

sustained by the improper payments at the time of trial.” Id. at *5. The Appellate

Division agreed, again without citation to any authority. 939 N.Y.S.2d at 29-30 (ruling

that while the defendants’ unauthorized payments to themselves established as a matter

of law that they were liable for breach of fiduciary duty, “as the motion court noted,

plaintiffs must prove the actual damages, if any, that these payments caused the

cooperative since defendants performed valuable services for the cooperative in

exchange for the remuneration.”).

I respectfully disagree because the decisions, which are not controlling, do not

reflect the law. The case involved unauthorized payments ─ the breach and the loss, as

in DePerno ─ and under the authorities discussed above, the burden shifted to the

breaching fiduciaries to show that the payments were fair and reasonable and the value

of their services.

Accordingly, the Court did not overlook controlling authority5 and Eluz has failed

to point to a clear error or manifest injustice. The Motion is, therefore, denied.

So ordered.

Dated: New York, New York

February 19, 2021

/s/ Stuart M. Bernstein

STUART M. BERNSTEIN

United States Bankruptcy Judge

5 Eluz also discussed two additional cases, Korean Am. Ass’n of Greater New York, Inc. v. Min, No.

17-cv-6857 (RJS), 2020 WL 57839 (S.D.N.Y. Jan. 3, 2020) and Sacerdote v. New York Univ., 328 F.

Supp. 3d 273 (S.D.N.Y. 2018). Eluz did not cite them during the summary judgment briefing and admits

they are not controlling precedent. (Motion at 8.) If they were never cited and are not controlling

precedent, I could not have overlooked controlling authority.