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Genger v. Sharon

September 5, 2012

SAGI GENGER AND TPR INVESTMENT ASSOCIATES, INC., ON BEHALF OF AG PROPERTIES CO., THIRD-PARTY PLAINTIFFS,
v.
GILAD SHARON, THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.

OPINION AND ORDER

I. INTRODUCTION

Sagi Genger ("Genger") and TPR Investment Associates, Inc. (together "third-party plaintiffs") bring this motion for sanctions against Gilad Sharon and his counsel, Wachtel Masyr & Missry LLP ("Wachtel"), for litigating on behalf of dissolved entity Omniway Limited ("Omniway"), impeding discovery efforts regarding Omniway and then, after over a year, disavowing all knowledge of or authority over Omniway. Third-party plaintiffs seek an order precluding Sharon from denying responsibility for a judgment that Omniway is liable to third-party plaintifs and requiring Wachtel to pay attorneys' fees and costs incurred as a result of their unauthorized representation of Omniway.*fn1

II. BACKGROUND

A. The Underlying Dispute

The merits of the litigation are discussed only insofar as they are helpful to understanding the instant sanctions motion. Briefly, the lawsuit arises out of a Canadian real estate venture (AG Properties) between Sharon and Genger's father, Arie Genger.*fn2 Genger alleges that Sharon held his fifty percent interest through Omniway, a Cypriot company, which purchased the stake with a $1.25 million promissory note (the "Omniway Note") secured by its shares in AG Properties.*fn3 Sharon claims that he invested $25,000 in the venture, the same amount that Arie contributed, through Lerner Manor Trusteeships Limited ("Lerner"), an Israeli company.*fn4 Genger took over as President of AG Properties, in 2004 or 2005, but was not party to the initial transactions.*fn5 In 2005, Sharon sold his shares in AG Properties and walked away with approximately $1.5 million.*fn6

When AG Properties was unable to pay its debts, the company's largest creditor, Vladimir Gusinski, sued AG Properties in New York state court and won a judgment for $4,357,551.99.*fn7 Gusinski then sued Genger individually in this Court.*fn8 Genger filed a third-party complaint against Sharon, Omniway and Lerner, seeking contribution or indemnification.*fn9 The action between Gusinski and Genger settled,*fn10 and the third-party suit proceeded.The source and amount of Sharon's investment in AG Properties is the crux of the dispute.

B. Facts Regarding Sharon's Relationship to Omniway

Sharon's purported ignorance regarding Omniway has resulted in a dearth of information. However, testimony from Sharon's lawyers, accountants, business partner, and Sharon himself all point to Omniway being one hundred percent owned and controlled by Sharon throughout its existence.*fn11

Sharon testified that he believed Omniway was "my Accountant's idea of having uh, such a company as a structure for my holdings in the Canadian venture,"*fn12 and that "Omniway may have been incorporated on my behalf."*fn13 When shown the purported Omniway Note and related documents, Sharon stated, "I let my professional do that. . . . I didn't care about those documents. I never saw them before or if I did, I don't remember it."*fn14 He testified that he "never used Omniway to transact any business."*fn15 Sharon claims that in response to discovery requests, he "searched his own records, and contacted his Israeli professional advisors, but no records relating to Omniway were found."*fn16 With regard to authorizing legal representation of Omniway in this lawsuit, Sharon stated that he did not "recall any discussion about representing Omniway, but I intended that these lawyers represent my interests in this lawsuit."*fn17

The lead accountant for Raines & Fischer, LLP, the accounting firm for the AG Properties venture, testified that "Omniway Limited is a corporation that I believe is owned by Gilad Sharon. Whether it's directly or indirectly I don't know, but I know that is certainly the context in which I know the name."*fn18 Arie Genger, Sharon's original partner in the venture, also testified regarding Omniway: "To me it's all Gilad."*fn19

Sharon's current counsel, William Wachtel, testified that conversations with Sharon and his Israeli counsel were the sole basis for his belief that Wachtel had authority to represent Omniway.*fn20 Wachtel explained that he believed he had authorization to represent Omniway based on his "understanding that, at least under New York law, a shareholder of a dissolved corporation may act for that corporation in litigation brought against it."*fn21 Sharon's former counsel at Mitchell Silberberg & Knupp LLP, testified that he appeared on behalf of Omniway because "I explained the uncertainty with respect to the status of Omniway, there was a discussion about what the consequences of a default against Omniway might be, and ultimately it was left to me to determine how to best protect Mr. Gilad Sharon's rights with respect to the Omniway status issue."*fn22

C. Facts Regarding Wachtel's Representation of Omniway

As with Sharon's relationship to Omniway, the details surrounding Wachtel's representation of Omniway are hazy but, where available, undisputed. On January 13, 2011, the law firm of Mitchell Silberberg entered separate appearances on behalf of Sharon and Omniway.*fn23 On March 25, 2011, Wachtel was substituted as counsel for Sharon, although not explicitly for Omniway.*fn24

From the outset Wachtel actively litigated on behalf of all third-party defendants.

Its first act was to accept service on behalf of all three defendants.*fn25 On April 14, 2011, Wachtel filed a Rule 7.1 Corporate Disclosure Statement on behalf of Omniway and Lerner, naming Wachtel as counsel for both.*fn26 On April 14, 2011 and December 5, 2011 respectively, Wachtel filed answers on behalf of all third-party defendants, both of which asserted affirmative defenses relating to Omniway.*fn27

During discovery, Wachtel submitted Rule 26(a) disclosures representing that defendants were in possession of "documents concerning the Purported Omniway Note" and that those documents would be produced in the course of the litigation.*fn28 In a December 12, 2011 telephone conference, Wachtel "agreed to make inquiry as to the existence and location of Omniway's documents responsive to your requests and to let you know if they exist and, if so, when they will be produced."*fn29 Just two days later, Sharon testified in his deposition, "I don't know if [Omniway] was ever formed."*fn30 William Wachtel later testified that this was the first time he heard Sharon claim to have no interest in Omniway.*fn31

Notwithstanding Sharon's explicit uncertainty as to Omniway's existence, on January 17, 2012, Wachtel submitted Responses to Plaintiffs' First Set of Interrogatories, which asserted on behalf of all third-party defendants that they were not in possession of, nor had they ever seen the original Omniway Note.*fn32 On February 14, 2012, in response to Genger's motion to compel Omniway to produce a 30(b)(6) witness, Wachtel informed Magistrate Judge Gabriel Gorenstein that the firm had "entered an appearance in this action for Omniway, even though Omniway does not now exist (and Mr. Sharon does not know if it ever existed)."*fn33 Yet Wachtel continued to actively litigate on Omniway's behalf as late as March 26, 2012, when it threatened to move for Rule 11(b) sanctions on behalf of all third-party defendants and, on the same day sought leave to move for summary judgment.*fn34 It was only during the April 10, 2012 hearing on summary judgment that Wachtel withdrew as counsel to Omniway, at the Court's suggestion, after William Wachtel announced that "Omniway does not exist. We do not know if it ever existed. We are aware of no one who represented Omniway."*fn35

Following Wachtel's withdrawal from representing Omniway, I entered a default judgment against Omniway on May 1, 2012. On May 8, 2012, I ordered the deposition of Wachtel on the question of "how and why [Wachtel] represented to Genger and this Court, for approximately one year, that it was counsel to Omniway." I explained that "[t]he relationship between Sharon and Omniway implicates questions of alter ego status" and "Genger and this Court have the right to know who instructed Wachtel to represent Omniway."*fn36 The deposition revealed that the only thing Wachtel did to "ensure that anything we ...


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