Don’t Cry For The Attorney

The Delaware Court of Chancery determined the ownership of an Argentinian company in an 129-page opinion that focused on the conduct of the company’s attorney

Trust is an asset that is often misappropriated. The risk of such misappropriation is higher when the trust one instills in another is so great that the trusted agent has the freedom to run rampant. In this case, the Court addresses such a misappropriation of trust after a successful media businessman expanded his operations to Argentina. To do so, he created a Delaware limited liability company to hold valuable media assets, including numerous subsidiaries created and operating in Argentina. A young attorney at the firm advising on the initial expansion efforts developed a rapport with the businessman and eventually became his right-hand man in Argentina. The attorney advised the businessman on Argentine law and served as the holding company’s formal legal representative in Argentina, quickly gaining the businessman’s unwavering trust.

To the businessman, the attorney was loyal and dedicated to doing right by the businessman and his company. But appearances can be deceiving. In the early days of their working relationship, the attorney identified and seized the opportunity to misappropriate the businessman’s trust for his own gain. The attorney knew that the businessman trusted that the attorney’s representations were accurate and, therefore, that the businessman would sign documents the attorney presented to him. Using his position of confidence, the attorney induced the businessman to sign documents stating that the attorney, not the businessman or his affiliate, was the company’s majority member.

Shortly after those documents were signed, a new Argentine law required that an Argentine hold the majority interest in media companies operating in Argentina. This inspired the attorney to make his paper trail more elaborate. He informed the businessman that it was necessary to ensconce the attorney as the holding company’s majority member to satisfy the new law. The attorney assured the businessman that the businessman would remain the company’s true majority member and that the attorney was simply a placeholder in a larger scheme to facially satisfy Argentine holding regulations. The businessman agreed, subject to a secret agreement memorialized in a “counterdocument,” which stated that the attorney would hold the majority interest in name only and for the businessman’s benefit, and that he would return the majority interest to its true owner upon request. The attorney assured the businessman that he would execute the counterdocument and that it would be effective. The businessman took the attorney’s word and believed the attorney would honor their agreement. The attorney did not.

After establishing himself as the company’s majority member, the attorney deserted his placeholder role to seize actual control over the company. Now, the attorney seeks this Court’s blessing, pointing to the paper trail that he carefully created to corroborate his control over the Company. But again, appearances can be deceiving. In this post-trial opinion determining the company’s ownership and management structure, I find that the documents in the paper trail are not binding contracts, and that if they were, the attorney fraudulently induced the businessman to execute those documents and has proceeded with unclean hands and in bad faith. I hold that the businessman and his deputy are the company’s managers and that the businessman’s affiliate is the company’s majority member.

The attorney had initiated the litigation

The Complaint seeks injunctive and declaratory relief arising from Defendants’ allegedly fraudulent attempt to strip Lynch, the attorney, of his ownership interest in Belleville.

Conclusion

Plaintiffs failed on all counts.

The defendant was awarded the declaratory judgment. 

The court noted that resolving the ‘he said – he said” outcome-determinative facts had been an “onerous” task

In view of the conflicting testimony and theories of the case, my credibility assessments of the witnesses tip the scales here.

The prevailing defendant

Gonzalez is an experienced acquirer and owner of media assets throughout Latin America. He owns and controls “Albavision,” the name for an informal conglomerate of Latin American media companies, including Televideo. Over nearly forty years in the industry, Gonzalez amassed over thirty radio and television stations in at least twelve countries.

He met the attorney in connection with an acquisition

In 2006, Gonzalez sought to expand the Albavision brand into Argentina by acquiring an Argentine media conglomerate, Inversora de Medios y Comunicaciones Sociedad Anónima (“IMC”), owned by Gerardo Daniel Hadad…

With discussions underway, Gonzalez retained an Argentine law firm, Santiago Lynch, to assist with negotiation and due diligence. Lynch’s uncle, a partner at the firm, was in charge of the firm’s relationship with Gonzalez.  Lynch was a junior attorney at the firm. His primary role was to hand deliver documents to Gonzalez that required his signature.  He did not have a meaningful role in the IMC acquisition.

The attorney went to work for the client after the purchase led to the creation of a Delaware limited liability company (“Belleville”)

Lynch initially worked alongside Casaleggio, but quickly rose to be the primary lawyer advising Gonzalez as to Belleville’s operations in Argentina. Because Gonzalez ran Belleville’s operations from afar, he relied on Lynch to advise on Argentine law and compliance, to act on Belleville’s behalf before the IGJ and other regulators, and to assist with Belleville’s subsidiaries and other operations.

Leading to a relationship of trust

Lynch became Gonzalez’s “right-hand man” in Argentina.

Equity and cleanliness

Turning to the cleanliness of Lynch’s hands, I find that Lynch has engaged in reprehensible conduct that threatens the integrity of this Court and “offend[s] the very sense of equity to which he appeals.” Declining to apply unclean hands as a bar to Plaintiffs’ relief would allow this Court and its equitable power to be “misused by a party who has not acted fairly and without fraud or deceit as to the controversy in issue.”

…Lynch conjured a scheme that deceived Gonzalez, Argentine regulators, and this State’s corporate governance officials, and he attempted to deceive this Court. Since Lynch began working for Gonzalez, he intended to defraud Televideo of its majority membership in Belleville. Building off of a regulatory issue, Lynch proposed the sham transfer and induced Gonzalez to execute documents naming Gonzalez as Belleville’s 65% member under the guise that they would be used to facially satisfy Argentine laws, while knowing and intending he would use them to attempt to seize that stake for himself.

Lynch’s premeditated plan upends any conclusion that Lynch and Gonzalez entered the sham transaction on equal footing. Rather than starting down the scheme’s path together, Lynch used pretextual reasons and false promises to induce Gonzalez to follow him; and unbeknownst to Gonzalez, Lynch was always steps ahead. And when Lynch reached the end of that path, he turned to this Court and its statutory mandate to attempt to finalize his wrongful control over Belleville, based on documents he knew to be false, and offered incredible testimony in support. Lynch has abused this Court and undertaken to make it “complicit in [his] fraudulent act[s].” The doors of equity are shut against him.

Vice Chancellor Zurn authored the decision. 

Legal Newsline reported on a discovery dispute in the case. (Mike Frisch)