Looting Joint Venture to Cost Russian Billionaire
(CN) - A Russian billionaire who siphoned money meant for a Ukrainian television network must pay another Russian tycoon $36 million, a New York appeals court ruled.
Vladimir Gusinski and Konstantin Kagalovsky had formed Iota Ventures LLP in spring 2008, after a series of meetings in London and New York, to develop and operate a Ukrainian television network called TVi.
While Gusinski had founded and operates one of Russia's largest private TV networks, Kagalovsky is a former deputy chairman of a Russian oil company.
They began bickering the next year over how to run the company, and Gusinski offered to buy out his partner.
Kagalovksy turned down the offer but soon began secretly draining the venture of all of its equity and transferring it into family trusts that he controls.
New York County Supreme Court Justice Charles Ramos held a trial and in late 2012 ordered Kagalovsky and the Ukranian network, which he now fully controls, to pay $31.7 million to New Media Holding Co., which controls Gusinki's half interest in the venture.
The defendants must pay an additional $4.6 million to Gusinki's television production company, which had licensed programming to the Ukranian network.
A unanimous panel of the Appellate Division's First Department affirmed last week, finding that Kagalovsky's actions breached the parties' contract and his fiduciary duty to Gusinski.
New York courts have jurisdiction over the case because a number of meetings in which plans for the venture were hatched took place in Gusinski's office in Manhattan, beginning in late 2007, according to the ruling.
"Kagalovsky and Iota LP admit, as they must, that Kagalovsky visited New York several times, and met during those visits with Gusinski or Gusinski's representatives," Justice Karla Moskowitz wrote for a five-member panel. "However, Kagalovsky and Iota LP adamantly denied at trial (and continue to deny on appeal) that any of the New York meetings involved TVi or discussions about the partnership agreement.... The trial court understandably found these protestations to be incredible and determined that, in fact, it had jurisdiction over defendants." (Parentheses in original.)
According to the terms of the partnership agreement signed in April 2008, both men were to own and control TVi equally. Through 2009, they each contributed about $12 million to develop and operate the network.
Moskowitz noted that, after rejecting the buyout offier, "Kagalovsky decided to force Gusinski's ouster by secretly diluting Gusinski's ownership interest."
"Through a series of allegedly clandestine transactions, Kagalovsky eventually transferred more than 99 percent of TVi's equity to companies that his family trusts owned," Moskowitz added.
Kagalovsky and his representatives also transferred TVi's trademarks to his family trusts and stopped paying licensing fees for programming that the Ukrainian network was obtaining from one of Gusinski's companies, according to the ruling.
Having completed the process of draining the joint venture of its equity by fall 2009, Kagalovsky and his representatives ousted Gusinski's representative at the Ukranian network. The defendants continued, however, to keep Gusinski in the dark about what had transpired, according to the ruling.
"Throughout October and November 2009, defendants continued to act as though the partnership still owned TVi," Moskowitz wrote. "For example, on October 16, 2009, Kagalovsky's attorney, [Alexis] Maitland Hudson, wrote a letter to Gusinski's counsel in New York, stating (falsely, by that time) that the partnership had 'a single potential asset ... namely its indirect shareholding' in TVi. In his letter, Maitland Hudson also described the partners as 'equal participant[s]' in the 'TVi business.'" (Parentheses in original.)
Gusinski's representatives first learned of the dilution and transfer of trademarks on Nov. 24, 2009, and Gusinski confronted Grant Brown, who managed Kagalovsky's trusts and business entities, to determine what had happened.
"Although Brown was aware of the relevant events, and in fact had been apprised of the dilution at the time it was occurring and immediately afterward, he denied that he knew about any transfer of TVi shares," Moskowitz wrote. "To further his deception, Brown created an email chain feigning ignorance of the transfers and purporting to make further inquiries about them."
The appellate panel upheld the calculation of damages and disagreed with Kagalovsky that the Ukrainian network was essentially worthless and on the verge of collapse when he began draining assets from the venture.
"First of all, the record provides no basis to support defendants' claim that TVi was worth absolutely nothing at the time of the dilution," Moskowitz wrote.
That claim is belied by the fact that the defendants "went to great lengths surreptitiously to acquire assets they now insist are worthless," she added.
"Even putting aside the fact that defendants' protestations on appeal make little sense in light of their own actions - none of which defendants seriously dispute - the evidence presented at trial could reasonably have allowed the court to conclude that, given the lengths that defendants traveled to remove TVi from plaintiff's control, funding for the network would have continued," Moskowitz wrote.
Gusinski did, however, fail to state a claim for tortious interference with the Ukrainian network, according to the ruling.
Since Kagalovsky controlled the partnership, he cannot be held liable for tortiously interfering with it, the court ruled.
The court also agreed with defendants and with the lower court that Gusinski's unjust enrichment claim cannot stand.
"The existence of the license agreements precludes a claim for unjust enrichment against Kagalovsky because the subject matter of the claim is covered by those agreements," the ruling states.