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IN ARBITRATION BEFORE THE
AMERICAN ARBITRATION ASSOCIATION
________________________________________
Marcus Abrams Clearwater Ventures, Inc.,
Lisa Abrams, and the Lisa Marie Abrams
Revocable Trust,
Claimants, AAA Case No.
01-20-0007-3684
-against-
Russell Abrams, Sandra Abrams, and
“RussellCar and its related entities” defined in
The parties’ agreement as “Issuer”,
Respondents.
________________________________________
MEMORANDUM OF LAW IN SUPPORT OF CLAIMANTS’
DISPOSITIVE MOTION FOR LIABILITY ON THE CONTRACT CLAIMS
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Table of Contents
PRELIMINARY STATEMENT ............................................................................................. 1
FACTUAL BACKGROUND ................................................................................................. 2
I. The Outstanding Debt .................................................................................................... 2
II. Respondents Never Performed Their Contractual Duties .............................................. 5
III. The Claimant Prevailed in the Attachment Proceeding ................................................. 6
IV. Justice Cohen Considered the Likelihood of Success on the Merits
in the Attachment Proceeding ........................................................................................ 7
ARGUMENT ........................................................................................................................ 10
I. Respondents Materially Breaches the Agreement and as a Result the
Entire Outstanding Loan Balance and $1 Million in Missed Payments Is Due ........... 11
II. Respondemts Cannot Meet Their Burden of Showing Claimants Excercised Their
Conversion Option ....................................................................................................... 12
A. Respondents Do Not, and Cannot, Provide a Single Document
Demonstrating There Was a Conversion............................................................. 12
B. Russell’s Own Statements Demonstrate that Claimants Never Exercised The
Conversion Option .............................................................................................. 14
III. Marcus’ Ownership of the Aracar Shares was Separate and Apart from RussellCar .. 16
IV. Respondents’ Referenced Emails Were Written During the Lead-Up to Litigation and
Contain No Discussion of Conversion ......................................................................... 18
V. Respondents’ Entire Defense is Nonsensical ............................................................... 21
VI. Russell Is Not Credible and The Conversion Defense Is Nothing More Than A Stall
Tactic To Avoid Paying The Debt ............................................................................... 21
A. Russell Gave False Testimony During His Deposition and Tried
to Avoid Giving Truthful Answers by Disrupting the Deposition ...................... 22
B. Russell Has been Dishonest About the Marketability of Aracar Stock .............. 23
C. Respondents Routinely Avoid Paying Their Creditors ....................................... 24
CONCLUSION ..................................................................................................................... 26
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Claimants, Marcus Abrams (“Marc”) and Lisa Abrams (“Lisa”) as Trustee for the Lisa
Marie Abrams Revocable Trust (the “Trust”) (together the “Claimants”) by their attorneys, Kim
& Serritella LLP, submit this memorandum of law in support of their dispositive motion for
Claims 2-3 of their Statement of Claim against Russell Abrams (“Russell”), Sandra Abrams
(“Sandra”) and “RussellCar and its related entities” (RussellCar) (collectively, “Respondents”).
Claimants rely on the Affidavit of Lisa Abrams, executed on March 18, 2022, (“Lisa Aff.”), the
Affidavit of Marcus Abrams, executed on March 18, 2022 (“Marc Aff.”) and the Affirmation of
James R. Serritella (the “Serritella Aff.”), executed on March 18, 2022.
PRELIMINARY STATEMENT
This action concerns the collection of a debt that is indisputably owed to Claimants.
Respondents’ failed to repay Claimants a $1.463 million loan they made in 2016 (the “Loan”) and
failed to pay, for several years, millions of dollars in interest and payments based on the
performance of the entities known as “RussellCar”. Russell also gave a personal guaranty that a
minimum of $1 million would be repaid on the Loan within three years. Respondents do not
contest that they never repaid the Loan nor made any of the required quarterly payments. In this
motion, Claimants seek a ruling that (i) Respondents breached the contract at issue and therefore
are liable to Claimants for the principal balanced owed, i.e., $1,464,234, (ii) Claimants are entitled
to $1 million in payments for the first three years of the investment (2016 – 2019) based on
Russell’s guarantee, and (iii) that Claimants are entitled to additional damages to be determined at
the hearing. 1
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In addition to the principal balance on the Loan, Claimants seek damages resulting from the missed quarterly
payments, interest and attorneys’ fees. Claimants also reserve their right to prove their remaining claims at the
hearing.
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Recognizing that they have no meritorious defense to this action, Russell and Sandra
manufactured an argument that Claimants purportedly “in early 2018” exercised an option at
Claimants’ sole discretion to convert their debt into shares in “RussellCar” and then somehow
rolled those shares into another company, Aracar Holdings Corp. (“Aracar”). Respondents
brazenly argue the purported conversion excused Respondents’ debt, including all past and future
interest payments, as well as the guarantee made by Russell that $1 million would be paid to
Claimants within three years. As part of the Attachment Proceeding (defined herein) before Justice
Cohen, the parties briefed and argued the issue of the purported conversion extensively and Justice
Cohen rejected Respondents’ arguments.
Whether there was a conversion is a straightforward issue that can readily be decided as a
matter of law in a dispositive motion and need not wait for a hearing. Guided by well settled
principles of contract law, Justice Cohen correctly determined that the only way Respondents can
meet their burden of proving their affirmative defense is by, as a threshold matter, producing
formal documentation demonstrating that both Claimants exercised such an Option. Respondents
do not, because they cannot, put forth any such evidence because Claimants never exercised any
such Option. As discussed more fully below, Russell’s own statements and actions plainly
demonstrate that Respondents’ defense is completely without merit. Accordingly, the motion
should be granted.
FACTUAL BACKGROUND
I. The Outstanding Debt
In 2015, Russell and Sandra approached Claimants with an investment opportunity in a
taxi business in Argentina, RussellCar. Marcus Aff., ¶ 3. Russell and Sandra presented the
opportunity as a risk free “solution” to the Claimants’ cashflow needs, including large earnings
(100% of earnings from invested monies), quarterly payments, significant information rights, and
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a personal guaranty from Russell of $1,000,000 in payments within three years. Id. at ¶ 5. Russell
and Sandra represented that the company provided significant, yet riskless cashflows as the debt
was backed by specific working assets of the company and that it was on the verge of significant
growth, which included expansion into numerous other lines of business, including a lending
business enabled by a significant line of low-cost debt that Russell was finalizing from the Inter
Development Bank. Id. at ¶ 4. Russell enhanced the offer by adding a conversion feature and
basing the payment formula on full revenues of the company with less expenses deducted (e.g.,
Russell and Sandra’s compensation and administrative costs). Id. at ¶ 8. As a result, Russell and
Sandra promised Claimants between $300-$500k per year in cashflows. Id. at ¶ 4.
Russell and Sandra communicated the safety of the Loan and enhanced terms solicited to
Claimants verbally for over a year and expressly in emails immediately preceding the transmission
of the money and memorialized in a July 18, 2016 Purchase Memorialization (hereinafter,
“Agreement”, Ex. 1 2). See also Marcus Aff., ¶ 11. Pursuant to the offers and agreement, Claimants
wired $1,464,234 (the “Loan”) to Respondents for their taxi business venture, RussellCar, in the
form of convertible debt. Ex. 1. The terms of the note provided that they be paid based on their
receiving 100% of the designated working units cashflows after deducting for operating expenses.
Ex.1, § 1. They also had the ability to reinvest portions of the quarterly payments on the same
terms as the original amount based on their review of the monthly financial reporting. Id.
Lisa, as Trustee for the Trust, sent $500,000 to Russell on February 3, 2016 and another
$300,000 on April 6, 2016. Lisa Aff., ¶ 2. Marcus wired $200,000 to Russell on February 2, 2016
and contributed the final $460,000 on October 17, 2016. Marcus Aff., ¶ 12. To induce Claimants
to wire the money, Russell pledged his own personal funds, guaranteeing a minimum of
2
“Ex.” as used herein refers to the exhibits included in the List of Exhibits, which have been authenticated through
the applicable affidavits and the Serritella Affirmation.
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$1,000,000 would be repaid to Claimants within three years from the initial investment date, and
thereby replacing the funds Claimants had removed from their respective accounts. Marc Aff., ¶
9. The day before the initial funding, Russell wrote Marcus to induce him to invest, saying “the
first 1 MM I will guarantee the principal [back] in three years”. Ex. 2. This was codified in the
agreement, under “3. Additional Covenants/ Information”:
In consideration for the swift timing of the investment Russell Abrams has
guaranteed the principal amount of the first $1,000,000 in three years. (See email
correspondence data Feb 1, 2016 at 2:26 p.m. between Russell and Marcus
Abrams [Ex. 3].)
Ex. 1. See also email from Russell, dated September 11, 2016, Ex. 4 (Russell stating that “[t]he 1
mm is guaranteed by me” and that Marcus has “the exact same upside as [Russell] with zero
downside….”) (Emphasis added).
Pursuant to the Agreement, Claimants were to receive quarterly payments and had the
option, based on the monthly financial reporting, to reinvest any portion of such payments, but in
no event would the payments be below 6% interest or a calculation based on performance of
specified RussellCar working assets (taxis). Ex. 1, § 1. The Agreement also required Respondents,
for purposes of the reinvesting feature, to “maintain the ongoing account balances for the Purchaser
and provide this information on its monthly report.” Id.
The Agreement (at § 2) also gave Claimants “the sole right to convert the investment into
equity shares” in RussellCar that would represent the payment formula applied across the
company, including all the new business lines being launched. Such conversion option (the
“Option”), as explained by Russell in an email in the days prior to the funding of the Loan, was
offered as a benefit to Claimants to induce them to invest. Ex. 3. Russell wrote:
It is a convertible note - so if you do not convert after 7 years you get the cash back
or you convert into the holding company. We can also agree you can extend the
conversation date by three years if you want. Realistically if the business is doing
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well you are going to convert and if the business is not growing as it should getting
your cash back would be the right choice.
Ex. 3. In the same email thread, Russell told Marcus that “you can also partially convert.” Id.
II. Respondents Never Performed Their Contractual Duties
Respondents never provided Claimants with the financial reports, never made a quarterly
payment on the Loan, and never repaid the Loan as required under the Agreement. Lisa Aff., ¶ 3;
Marcus Aff., ¶ 44. Respondents also never provided Claimants with any financial statements, as
required under the Agreement, or end of year tax statements, as required by law. Respondents do
not contest their failure to provide the financial reports or the quarterly payments. In addition,
Russell has not honored the personal guaranty. Marcus Aff., ¶¶ 47, 49. Neither Marcus nor the
Trust ever exercised the conversion option under the Agreement. Lisa Aff., ¶ 5; Marcus Aff., ¶ 23.
Through numerous correspondence, and in particular, between September 2018 and
August 2019, Claimants demanded repayment and ultimately threatened legal action if repayment
did not occur. Marcus Aff., ¶ 47. Nonetheless, Respondents failed to honor their obligations and
repay the Loan. Id.
In response to Marcus’ and the Trusts’ requests for repayment and letters from their
attorneys, Russell made numerous promises to repay Petitioners by “cashing out” home equity
credit from refinancing the mortgage on his $18 million New York City Brownstone located at 45
West 70th Street, New York, New York (the “Property”). Marcus Aff., ¶¶ 48-49. For instance,
during a phone call, between Marcus and Russell on August 22, 2019, which was recorded and
transcribed, Russell stated “yes Okay. All right. I’m going to send it to you, thank you.” Ex. 5. In
the same phone call, Russell promised to take a loan on the Property and use a portion of the
proceeds to repay Claimants. Russell said, “Mark, we’re getting the mortgage. We’re giving it to
you. I promise you that.” Id. at 1. Russell and Sandra did obtain the mortgage on or about
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November 7, 2019 for $4 million (the “November 2019 Mortgage”), but failed to repay Claimants
with the proceeds despite Russell’s promises.
In another phone call between Marcus and Russell on or about June 29, 2020, which was
recorded and transcribed, Russell acknowledged that he failed to honor his promise but stated that
he was going to take out another mortgage and implied that he was going to repay Claimants with
the proceeds: “I did the mortgage and I had to put the money into fucking Aracar. That was the
whole point, is a piece of shit stint, but I didn't do the mortgage for enough money. Now I can
redo it.” Ex. 6. On or about April 8, 2021, Russell and Sandra obtained another mortgage on the
Property for $4.8 million (the “April 2020 Mortgage”, together with the November 2019
Mortgage, the “Mortgages”). Respondents failed to use any of proceeds of the 2020 Mortgage to
repay Claimants. According to www.zillow.com, on or about November 12, 2021, Russell and
Sandra listed the Property for sale for $18,700,000.
III. The Claimant Prevailed in the Attachment Proceeding
Pursuant to CPLR 7502(c), a party to an arbitration proceeding may seek an attachment
or equitable relief from the New York Supreme Court if he or she can demonstrate an arbitration
award would be rendered ineffectual without such relief. On December 7, 2021, Claimants
initiated a proceeding in the Supreme Court of New York, New York County (Index No.
658845/2021) seeking an attachment on the Property in aid of arbitration pursuant to CPLR
7502(c) (hereinafter, the “Attachment Proceeding”) and also sought a temporary restraining order
(“TRO”) preventing Russell and Sandra from selling the Property or in the alternative placing
$1.46 million from an sale of the Property in escrow pending a determination on the Attachment
Proceeding. The Attachment Proceeding was prompted by several factors, including (i) Russell
and Sandra’s history of refusing to pay their debts and frustrating the enforcement of arbitration
awards, (ii) that Russell and Sandra abruptly moved to Uruguay in 2020, after Russell met with
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Claimants’ previous attorneys on this matter, (iii) that Russell and Sandra siphoned money out of
the Property through millions of dollars in Mortgages, sending the proceeds to South America, and
(iv) that they recently listed the Property for sale.
The Honorable Joel M. Cohen, of the Commercial Division of the Supreme Court of New
York, New York County, presided over the Attachment Proceeding. Justice Cohen entered a TRO
on December 14, 2021 and ultimately ruled in favor of Claimants on the application for the
attachment on January 13, 2022. See Exs. 7 and 8, respectively.
IV. Justice Cohen Considered the Likelihood of Success on the Merits in the
Attachment Proceeding
At the first hearing on the TRO, Justice Cohen made clear that he needed to determine a
likelihood of success on the merits before he could grant the TRO. His first substantive statement
on the record was as follows: “[I]t sounds like the alternative form of relief is similar [to] what
I’ve thought about in other cases where you don’t enjoin the actual sale as long as it’s a to a third
party, but if the merits justify it, to put the disputed amount aside.” See Ex. 9, at 3:18-22
(emphasis added). In addition, in response to Mr. Kirwin’s repeated declarations that everything
was excused through an alleged conversion, many of Justice Cohen’s questions to Mr. Kirwin,
who appeared on behalf of Respondents, were focused on deciding the issue of whether there was
a conversion. Indeed, Justice Cohen asked Mr. Kirwin whether he could produce “an unequivocal
exercise of the option by these two claimants.” Id. at 14:15-16. Mr. Kirwin disingenuously
responded: “There’s also emails where there’re talking about that it’s for both claimants, yes.” Id.
at 14:17-18. As a Supreme Court justice bound by the rule of law, 3 Justice Cohen was skeptical
3
Justice Cohen is a well-respected Commercial Division judge who has a reputation for being balanced yet adhering
to the law. When Mr. Kirwin inaccurately claimed that pre-judgment attachments are not allowed, Justice Cohen,
picked up a law book and immediately corrected Mr. Kirwin, stating “Oh, there’s lots of pre-judgment attachment
law out there, and you’d be surprised at the triggers, one of which is just being out of state, but there has to be some
reasonable grounds.” See Ex. 9 at 19:2-8.
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and responded immediately as follows:
Well, but e-mails, you know, what I’m asking is there’s a contract issue; right? So
when I see them, am I going to receive the formal language of, I hereby exercise
the option under Paragraph blank of agreement? Why? Because we’re talking
about exchanging what sounds like $7 million worth of stock. An e-mail talking
about it probably would not be sufficient, but I don’t know what it is because I don’t
have it in front of me.
Ex. 9 at 14:19-15:1 (Emphasis added).
Justice Cohen continued:
THE COURT: Do you have the e-mail that you're talking about? Do you have a copy of it?
MR. KIRWIN: I have many e-mails, yes.
THE COURT: No. The e-mail that you're talking about where you say they exercised this
conversion option, do you have that?
MR. KIRWIN: They don't use that legal language,
THE COURT: What do they –
MR. KIRWIN: What they say is, I want to sell my shares and things like that.
Id. at 15:13-23.
Given that Respondents had not yet put in their opposition papers prior to the TRO
hearing and based on Mr. Kirwin’s representations that he had documents purportedly showing
what the judge asked for, Justice Cohen, gave Respondents two business days to produce such
documents:
THE COURT: -- I’m inclined to give them the temporary relief until a hearing, but if you can
tell me that you'll provide documentary evidence without a fancy brief, just something to
substantiate the idea that these folks, both of them, converted the loan into stock of another
company, and/or that there are bank accounts with all sorts of money in the US –
MR. KIRWIN: I can do that.
Id. at 30:20-25, 31:1.
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***
THE COURT: If you tell me that you can send me these core documents tomorrow, or Monday
at the latest, then I’ll hold off…. Otherwise I am going to issue this today.
Id. at 31:11-13
Contrary to Mr. Kirwin’s inaccurate statements at the TRO hearing, there are no documents
demonstrating an unequivocal exercise of the Option. After the TRO hearing, recognizing that
they would not be able to satisfy Justice Cohen’s request, Respondents, through their new counsel,
Mr. Gregory Tuttle, who appeared on their behalf in the Arbitration Proceeding, consented to an
entry of a TRO. 4
Sandra and Russell filed their opposition to the attachment application on January 6, 2022.
Their submission was voluminous and focused heavily on the disputed issue as to the merits of the
arbitration. Specifically, Respondents claimed that in “early 2018” Claimants purportedly
exercised the Option and then subsequently converted the Loan into share of RussellCar and shares
of Aracar, another South American company. 5 As part of their submission, respondents put forth
all of their evidence in connection with this defense. Claimants filed reply papers responding to
and discrediting each of Respondents’ arguments. The parties’ submissions in connection with
the Attachment Proceeding are being submitted herewith.
In Russell and Sandra’s opposition, they argued forcefully that Justice Cohen needed to
address the merits of this arbitration in order to grant the relief requested. Claimants took the
position that under CPLR 7502, a court does not need to address likelihood of success on the merits
4
Although Mr. Tuttle represented Russell and Sandra in the Attachment Proceeding, as of the date of this
submission, he has not appeared in this arbitration on their behalf. Instead, he appeared on behalf of several “related
entity” respondents.
5
Sandra is the co-founder of Aracar and was CEO of RussellCar, however in messages to Claimants has
disingenuously claimed that she no knowledge of the transaction that is the subject of this case. Marcus Aff., ¶ 50.
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in order to determine whether arbitration award would be rendered ineffectual without an
attachment or equitable relief. However, the Court still needed to make a determination on the
likelihood of success in order to set the amount of the attachment, and therefore, Claimants
responded to Russell and Saundra’s arguments on the merits. Moquinon, Ltd. v. Gliklad, 2017
N.Y. Misc. LEXIS 1498, *14 (Sup. Ct. N.Y. County 2017) (“Having found that [Petitioner] has
met its burden of establishing grounds for an attachment, the Court must next consider the
likelihood of success on the merits of the underlying claim in order to fix the amount of the
attachment.”).
Justice Cohen did not find Respondents’ arguments convincing as to the rendered
ineffectual standard and the merits of their defense in this arbitration. He granted Claimants’
application and ordered the relief they sought in making the TRO permanent. Justice Cohen was
concerned “that there is a time series of monies being dissipated,” see Ex. 10 at 26:21-22, and
“there is certainly a decided drift to countries where it may not be possible to get an award
satisfied.” Id. at 41:16-17. Justice Cohen further stated that “upon closing sale” of the property,
the Respondents had to “place the amount of $1,464,234 of the net proceeds into an escrow account
held by a mutually agreeable escrow agent.” Id. at 43:12-16. Given that Justice Cohen ordered
that the full principal balance of the amount owed should be held in escrow should Russell and
Sandra sell the Property, he thereby determined that Claimants are likely to succeed on the merits
of their breach of contract claims in their entirety.
ARGUMENT
Rule 33 of the AAA Commercial Rules gives the arbitrator discretion to “allow the filing
of and make rulings upon a dispositive motion only if the arbitrator believes that the moving party
has shown that the motion is likely to succeed and dispose of or narrow the issues of the case.”
For the reasons discussed below, Claimants easily meet this standard as to whether Respondents
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are liable to Claimants on their breach of contract claims and Respondents have failed to meet their
burden of proving their affirmative defense.
I. RESPONDENTS MATERIALLY BREACHES THE AGREEMENT AND AS A
RESULT THE ENTIRE OUTSTANDING LOAN BALANCE AND $1 MILLION
IN MISSED PAYMENTS IS DUE
Respondents materially breached the Agreement by failing to ever perform any of their
obligations, including making any required payments. As a result of these material breaches, the
entire loan balance is due regardless of the 2023 maturity date. In any event, Respondents have
made it clear that they never intend to make a payment and therefore the entire amount owed is
due. See Alloy Advisory v.503 W. 33rd St. Assocs., 195 A.D.3d 436, 436-437 (1st Dep’t
2021) (“[W]hen one party repudiates a contract, the other party is entitled to claim damages for a
total breach by the repudiating party, and any future performance by the nonbreaching party is
excused.”); American List Corp. v. U.S. News & World Report, Inc., 75 N.Y.2d 38, 44 (1989)
(“[A] wrongful repudiation of the contract by one party before the time for performance entitles
the nonrepudiating party to immediately claim damages for a total breach.”).
Respondents’ baseless conversion argument does not absolve them of the missed payments
they concede were never made to Claimants. Moreover, Respondents’ assertion in the Attachment
Proceeding that Russell’s personal guarantee did not accrue until the maturity date is wrong and
contraindicated by the Agreement and Russell’s own statements. Pursuant to the Agreement, “[i]n
consideration for the swift timing of the investment Russell Abrams has guaranteed the principal
amount of the first $1,000,000 in three years.” See Ex. 1. Further, the Agreement referenced an
email Russell sent at 2:16 PM on February 1, 2016, wherein he stated “the first 1 MM i will
guarantee the principal in three years”. Ex. 2; see also Ex. 4.
Accordingly, Claimants are entitled to a ruling that Respondents are liable to them, at
minimum, for $2,464,234, which includes the principal balance on the Loan ($1,464,234) and the
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$1 million in missed payment from 2016-2019 based on Russell’s guarantee. Claimants will seek
an award for their remaining damages, including missed quarterly payments from 2019 to the
present, interest and attorneys’ fees at the hearing.
II. RESPONDEMTS CANNOT MEET THEIR BURDEN OF SHOWING
CLAIMANTS EXCERCISED THEIR CONVERSION OPTION
A. Respondents Do Not, and Cannot, Provide a Single Document Demonstrating
There Was a Conversion
Respondents do not contest that they never performed under the Agreement. Instead,
Respondents’ entire defense to this action rests on a baseless and manufactured defense that
Claimants purportedly exercised a conversion of the Loan into equity in RussellCar, per the
Agreement, and then somehow exchanged the supposed RussellCar shares into shares in Aracar.
Respondents have the burden of proving this affirmative defense. Leopold v. Baccarat, Inc., 239
F.3d 243, 245 (2d Cir. 2001) (“It is well-established that a defendant… bears the burden of proving
its affirmative defense.”); Peguero v. 601 Realty Corp., 58 A.D.3d 556, 559 (1st Dep’t 2009)
(noting that at trial a defendant has “the burden of proof on his affirmative defense…”).
The conversion option was at Claimants’ sole discretion, and thus, as Justice Cohen stated,
in order to prove their defense, Respondents would need to produce a document with “the formal
language of, I hereby exercise the option under Paragraph blank of agreement.” See Ex. 9 at
14:19-15:1 (emphasis added). Undoubtedly, Justice Cohen was guided by the legal principal
that formal contemporaneous documentation for a transfer of stock is required as a matter of
law. See, e.g., Del. Code Ann. Tit. 6, § 8-319, Zale v. Boxwood Coal, 1991 Del. Ch. LEXIS 198,
* 2 (Del. Ch. 1991) (stating, “oral transfers of stock are barred by the applicable Statute of
Frauds”); Waggoner v. STAAR Surgical Co., 1990 Del. Ch. LEXIS 33, * 17 (Del Ch. 1990); NY
CLS UCC § 8-307 (requiring transferor of a security to provide the “purchaser with proof of
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authority to transfer the securities” and if the transferor fails to do this within a reasonable time,
then the “purchaser may rescind the transfer.”).
Given that a convertible note is at issue, in order to meet their burden, Respondents need
to show through documentation that Claimants (i) assented to the amount of the loan that would
be converted into securities, (ii) assented to the value of the securities they were to receive and (iii)
assented to the type of security it was converted into, i.e., preferred or comment stock and (iv)
assented to the conversion ratio to be used. Respondents’ position that there were two sets of
transfers of securities (debt to RussellCar to Aracar) requires that they prove two sets of the
required assents.
Respondents have not produced any documents whatsoever demonstrating that Claimants
exercised the Option because no such documents exist. Specifically, Respondents have produced
no agreements or assents, no stock certificates in RussellCar or other transaction documents
demonstrating that Claimants ever held any shares in RussellCar, no tax documents regarding
Claimants’ cost basis and the value received as a result of the conversion, and no communications
(even informal) in writing demonstrating Claimants were exercising the Option. If there truly was
a conversion, RussellCar and Aracar would have been required to provide claimants with tax
documents showing their cost basis, which would have to be based on the value of the conversion.
Respondents produced no such documents. In addition, pursuant to the Aracar articles of
formation, “no share may be issued until it is fully paid. A share is fully paid when: (1)
consideration is provided to the Company for the issue of the share by… (c) money; and (2) the
value of the consideration received by the Company equals or exceeds the issue price set for the
share under Article 3.1.” Ex. 11, § 3.4. Respondents have produced no documents demonstrating
that Aracar received money or consideration for the shares Claimants purportedly received through
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exercising their Option. Accordingly, Respondents have failed to meet their burden of establishing
their affirmative defense.
Respondents are attempting to turn the lack of documentation into a “heads, I win, tails,
you lose” proposition. Had Aracar performed well, then they could argue that there was no
conversion, and hence, limit Claimants to the 6,500 shares of restricted stock that Marcus earned
through sweat equity. Since Aracar performed poorly, Respondents are instead trying to revise
history through their empty conversion argument in order to avoid their repayment obligations to
Claimants.
B. Russell’s Own Statements Demonstrate that Claimants Never Exercised The
Conversion Option
As demonstrated by the three emails discussed below, Russell’s statement that there was
conversion in “early 2018” 6 is actually contradicted by Russell’s very own statements in 2019.
1. In a September 2019 Email Russell Asked Claimants if They would like
to Exercise the Conversion Option
In an email dated September 11, 2019, Russell specifically tries to convince Marcus to
accept both cash and Aracar common shares in exchange for the “russellcar note.” Russell writes:
There is a formal offer to purchase 5,000 Aracar common shares using a price of
1,000 per share. There is only so much work I can do without a fully executed
written contract by you. You can sell a minimum of 3,000 shares and up to 5,000
shares at $1,000 per share. The executed purchase agreement would occur
sometime next week and the actual transfer in 90 days. the (sic) executed agreement
requires you to decide from options A, B and C
1) you will convert your russellcar note into one of the following:
a) 3 million dollars and 3,500 Aracar common shares
b) 4 million dollars and 2,500 Aracar common shares
c) 5 million dollars and 1,500 Aracar common shares
I hope this is clear.
6
See Affirmation of Russell Abrams, dated January 6, 2022, at ¶7, which was submitted in connection the
Attachment Proceeding, and is being submitted herewith.
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See Ex. 12 (Emphasis added).
The verb “will convert” in this context means that conversion is still a future possibility
and has not yet occurred. Further, it also is a recognition that the Loan is a completely separate
instrument that is unrelated to the issuance of 6,500 restricted common shares of Aracar, which
happened nine months prior. See Aracar stock certificate, Ex. 13. Russell also states that “[t]here
is only so much I can do without fully executed written contract by you.” In the context of
soliciting his brother for an equity conversion, this statement is an acknowledgement by Russell
that such a contract does not yet exist. Thus, this email conclusively demonstrates that Russell
knew Claimants never exercised the Option and that his statement regarding a purported exercise
in “early 2018” is not believable and merely an attempt to revise history.
2. In a June 2019 Email Russell Acknowledged Claimants Did Not
Exercise their Conversion Option
On June 13, 2019, Russell sent an email to Lisa in order to encourage her to agree with the
conversion. In the email, Russell acknowledges that “Marc owns shares in Aracar for which he
invested zero money and have a value over 6 million dollars”. Ex. 14 (emphasis added). This is
entirely consistent with Claimants’ position that Marcus did not buy the 6,500 restricted common
shares of Aracar, but instead earned them by working with the company. Later in the same email
chain, Russell solicits the conversion: “Thus you and Marc need to decide which you claim: 1)
1857 shares in Aracar and a 1 million dollar loan to me or 2) 6500 shares in Aracar and no loan
from me.” Id. Russell’s own statements demonstrate that there has been no final, executed
agreement relating to this desired conversion and that he was merely attempting to lure Claimants
into papering one up after the fact to serve his purposes.
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3. In an August 2019 Email Russell Acknowledged Claimants Did Not
Exercise Their Conversion Option and that a Conversion Needs to Be
Formalized Through a Signed Document
On August 22, 2019, Russell wrote to Lisa an email, which acknowledged there was no
conversion:
Lisa
It was my understanding you and Marc wanted to have the
aracar shares instead of the russellcar shares as the
conversion mechanism for your investment. We will also
need to formalize this in the documents we sign for the
aracar share sale.
Ex. 15 (Emphasis added). Russell acknowledged that no written conversion agreement existed as
of the date of the email, and that, at the least, there would need to be formal written exercise of the
Option in for it to be effective.
III. MARCUS’ OWNERSHIP OF THE ARACAR SHARES WAS SEPARATE AND
APART FROM RUSSELLCAR
As an initial matter, it is undisputed that the Trust has never held shares in Aracar. See
Lisa Aff., ¶ 6. Marcus holds 6,500 restricted common shares of shares of Aracar solely in his
name. See Aracar stock certificate, Ex. 13. Marcus received his Aracar stock as his compensation
for helping build the company and not as part of a conversion. Marcus Aff., ¶¶ 17-18. The fact
that Marcus received his Aracar shares on December 17, 2018 (see Ex. 13), completely undercuts
Russell’s false statement that a conversion purportedly occurred in “early 2018”. Specifically,
the Aracar shares were issued to Marcus in exchange for working at the company without salary
for a year and a half. Marcus Aff., ¶ 17. Marcus chose compensation in the form of equity
believing his family could forgo his receiving an initial salary because they would be receiving
significant payments from the Loan. Marcus Aff., ¶ 17. This is confirmed in an email sent on
March 5, 2020 by John Ogle, the former Chief Operating Officer of Aracar. Marcus Aff., Ex. 16.
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Ogle states, “you only have common shares that were granted for service so there is no conversion
for that.” Id.
The distinction between receiving 6,500 restricted common shares of Aracar as opposed to
preferred shares is an important one. Per the Agreement, the conversion mechanism required that
the “equity shares equivalent in all respects to those held by Russell and /or Sandra Abrams or any
other investor in conformity with the objectives of a Most Favored Nation provision”.
An example of stock issuance or preferred shares is shown by the agreement between
Aracar and Mitchell Marks, dated March 5, 2018 (“Marks Agreement”). Ex. 17. Per the Marks
Agreement, in consideration for investing $2,000,000, Mr. Marks received the “Most Favored
Nation Right” in addition to pre-emptive rights with regard to ownership dilution. Id., ¶¶ 2, 3. By
contrast, Marcus did not have any of these special rights as he only had common stock of Aracar.
If he had received the stock through the conversion mechanism, then his shares should equal rights
to those owned by Mr. Marks.
This is further corroborated by a January 10, 2020 WhatsApp conversation between Russell
and Marc. Ex. 18. In it, Russell writes, “Nobody is stealing your money - we are closing with
lending capital and he (sic) people for the series B who also want to purchase founder common
equity.” (Emphasis added). Emphasized is the language that what is being offered in the Series
B is founder common equity for Aracar. In this context, Russell is acknowledging that Marcus
has founder common equity for Aracar.
Moreover, the fact that Marcus’ Aracar shares are “restricted”, see Ex. 13, conclusively
demonstrates that Marcus received the shares as compensation for work performed for the
company and not as part of a debt-to-equity conversion. See Accounting Hub, “Accounting for
Convertible Debt Issued With Stock Warrants”, (stating, “Common examples of convertible debt
17
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Preview
FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 IN ARBITRATION BEFORE THE AMERICAN ARBITRATION ASSOCIATION ________________________________________ Marcus Abrams Clearwater Ventures, Inc., Lisa Abrams, and the Lisa Marie Abrams Revocable Trust, Claimants, AAA Case No. 01-20-0007-3684 -against- Russell Abrams, Sandra Abrams, and “RussellCar and its related entities” defined in The parties’ agreement as “Issuer”, Respondents. ________________________________________ MEMORANDUM OF LAW IN SUPPORT OF CLAIMANTS’ DISPOSITIVE MOTION FOR LIABILITY ON THE CONTRACT CLAIMS 1 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 Table of Contents PRELIMINARY STATEMENT ............................................................................................. 1 FACTUAL BACKGROUND ................................................................................................. 2 I. The Outstanding Debt .................................................................................................... 2 II. Respondents Never Performed Their Contractual Duties .............................................. 5 III. The Claimant Prevailed in the Attachment Proceeding ................................................. 6 IV. Justice Cohen Considered the Likelihood of Success on the Merits in the Attachment Proceeding ........................................................................................ 7 ARGUMENT ........................................................................................................................ 10 I. Respondents Materially Breaches the Agreement and as a Result the Entire Outstanding Loan Balance and $1 Million in Missed Payments Is Due ........... 11 II. Respondemts Cannot Meet Their Burden of Showing Claimants Excercised Their Conversion Option ....................................................................................................... 12 A. Respondents Do Not, and Cannot, Provide a Single Document Demonstrating There Was a Conversion............................................................. 12 B. Russell’s Own Statements Demonstrate that Claimants Never Exercised The Conversion Option .............................................................................................. 14 III. Marcus’ Ownership of the Aracar Shares was Separate and Apart from RussellCar .. 16 IV. Respondents’ Referenced Emails Were Written During the Lead-Up to Litigation and Contain No Discussion of Conversion ......................................................................... 18 V. Respondents’ Entire Defense is Nonsensical ............................................................... 21 VI. Russell Is Not Credible and The Conversion Defense Is Nothing More Than A Stall Tactic To Avoid Paying The Debt ............................................................................... 21 A. Russell Gave False Testimony During His Deposition and Tried to Avoid Giving Truthful Answers by Disrupting the Deposition ...................... 22 B. Russell Has been Dishonest About the Marketability of Aracar Stock .............. 23 C. Respondents Routinely Avoid Paying Their Creditors ....................................... 24 CONCLUSION ..................................................................................................................... 26 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 Claimants, Marcus Abrams (“Marc”) and Lisa Abrams (“Lisa”) as Trustee for the Lisa Marie Abrams Revocable Trust (the “Trust”) (together the “Claimants”) by their attorneys, Kim & Serritella LLP, submit this memorandum of law in support of their dispositive motion for Claims 2-3 of their Statement of Claim against Russell Abrams (“Russell”), Sandra Abrams (“Sandra”) and “RussellCar and its related entities” (RussellCar) (collectively, “Respondents”). Claimants rely on the Affidavit of Lisa Abrams, executed on March 18, 2022, (“Lisa Aff.”), the Affidavit of Marcus Abrams, executed on March 18, 2022 (“Marc Aff.”) and the Affirmation of James R. Serritella (the “Serritella Aff.”), executed on March 18, 2022. PRELIMINARY STATEMENT This action concerns the collection of a debt that is indisputably owed to Claimants. Respondents’ failed to repay Claimants a $1.463 million loan they made in 2016 (the “Loan”) and failed to pay, for several years, millions of dollars in interest and payments based on the performance of the entities known as “RussellCar”. Russell also gave a personal guaranty that a minimum of $1 million would be repaid on the Loan within three years. Respondents do not contest that they never repaid the Loan nor made any of the required quarterly payments. In this motion, Claimants seek a ruling that (i) Respondents breached the contract at issue and therefore are liable to Claimants for the principal balanced owed, i.e., $1,464,234, (ii) Claimants are entitled to $1 million in payments for the first three years of the investment (2016 – 2019) based on Russell’s guarantee, and (iii) that Claimants are entitled to additional damages to be determined at the hearing. 1 1 In addition to the principal balance on the Loan, Claimants seek damages resulting from the missed quarterly payments, interest and attorneys’ fees. Claimants also reserve their right to prove their remaining claims at the hearing. FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 Recognizing that they have no meritorious defense to this action, Russell and Sandra manufactured an argument that Claimants purportedly “in early 2018” exercised an option at Claimants’ sole discretion to convert their debt into shares in “RussellCar” and then somehow rolled those shares into another company, Aracar Holdings Corp. (“Aracar”). Respondents brazenly argue the purported conversion excused Respondents’ debt, including all past and future interest payments, as well as the guarantee made by Russell that $1 million would be paid to Claimants within three years. As part of the Attachment Proceeding (defined herein) before Justice Cohen, the parties briefed and argued the issue of the purported conversion extensively and Justice Cohen rejected Respondents’ arguments. Whether there was a conversion is a straightforward issue that can readily be decided as a matter of law in a dispositive motion and need not wait for a hearing. Guided by well settled principles of contract law, Justice Cohen correctly determined that the only way Respondents can meet their burden of proving their affirmative defense is by, as a threshold matter, producing formal documentation demonstrating that both Claimants exercised such an Option. Respondents do not, because they cannot, put forth any such evidence because Claimants never exercised any such Option. As discussed more fully below, Russell’s own statements and actions plainly demonstrate that Respondents’ defense is completely without merit. Accordingly, the motion should be granted. FACTUAL BACKGROUND I. The Outstanding Debt In 2015, Russell and Sandra approached Claimants with an investment opportunity in a taxi business in Argentina, RussellCar. Marcus Aff., ¶ 3. Russell and Sandra presented the opportunity as a risk free “solution” to the Claimants’ cashflow needs, including large earnings (100% of earnings from invested monies), quarterly payments, significant information rights, and 2 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 a personal guaranty from Russell of $1,000,000 in payments within three years. Id. at ¶ 5. Russell and Sandra represented that the company provided significant, yet riskless cashflows as the debt was backed by specific working assets of the company and that it was on the verge of significant growth, which included expansion into numerous other lines of business, including a lending business enabled by a significant line of low-cost debt that Russell was finalizing from the Inter Development Bank. Id. at ¶ 4. Russell enhanced the offer by adding a conversion feature and basing the payment formula on full revenues of the company with less expenses deducted (e.g., Russell and Sandra’s compensation and administrative costs). Id. at ¶ 8. As a result, Russell and Sandra promised Claimants between $300-$500k per year in cashflows. Id. at ¶ 4. Russell and Sandra communicated the safety of the Loan and enhanced terms solicited to Claimants verbally for over a year and expressly in emails immediately preceding the transmission of the money and memorialized in a July 18, 2016 Purchase Memorialization (hereinafter, “Agreement”, Ex. 1 2). See also Marcus Aff., ¶ 11. Pursuant to the offers and agreement, Claimants wired $1,464,234 (the “Loan”) to Respondents for their taxi business venture, RussellCar, in the form of convertible debt. Ex. 1. The terms of the note provided that they be paid based on their receiving 100% of the designated working units cashflows after deducting for operating expenses. Ex.1, § 1. They also had the ability to reinvest portions of the quarterly payments on the same terms as the original amount based on their review of the monthly financial reporting. Id. Lisa, as Trustee for the Trust, sent $500,000 to Russell on February 3, 2016 and another $300,000 on April 6, 2016. Lisa Aff., ¶ 2. Marcus wired $200,000 to Russell on February 2, 2016 and contributed the final $460,000 on October 17, 2016. Marcus Aff., ¶ 12. To induce Claimants to wire the money, Russell pledged his own personal funds, guaranteeing a minimum of 2 “Ex.” as used herein refers to the exhibits included in the List of Exhibits, which have been authenticated through the applicable affidavits and the Serritella Affirmation. 3 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 $1,000,000 would be repaid to Claimants within three years from the initial investment date, and thereby replacing the funds Claimants had removed from their respective accounts. Marc Aff., ¶ 9. The day before the initial funding, Russell wrote Marcus to induce him to invest, saying “the first 1 MM I will guarantee the principal [back] in three years”. Ex. 2. This was codified in the agreement, under “3. Additional Covenants/ Information”: In consideration for the swift timing of the investment Russell Abrams has guaranteed the principal amount of the first $1,000,000 in three years. (See email correspondence data Feb 1, 2016 at 2:26 p.m. between Russell and Marcus Abrams [Ex. 3].) Ex. 1. See also email from Russell, dated September 11, 2016, Ex. 4 (Russell stating that “[t]he 1 mm is guaranteed by me” and that Marcus has “the exact same upside as [Russell] with zero downside….”) (Emphasis added). Pursuant to the Agreement, Claimants were to receive quarterly payments and had the option, based on the monthly financial reporting, to reinvest any portion of such payments, but in no event would the payments be below 6% interest or a calculation based on performance of specified RussellCar working assets (taxis). Ex. 1, § 1. The Agreement also required Respondents, for purposes of the reinvesting feature, to “maintain the ongoing account balances for the Purchaser and provide this information on its monthly report.” Id. The Agreement (at § 2) also gave Claimants “the sole right to convert the investment into equity shares” in RussellCar that would represent the payment formula applied across the company, including all the new business lines being launched. Such conversion option (the “Option”), as explained by Russell in an email in the days prior to the funding of the Loan, was offered as a benefit to Claimants to induce them to invest. Ex. 3. Russell wrote: It is a convertible note - so if you do not convert after 7 years you get the cash back or you convert into the holding company. We can also agree you can extend the conversation date by three years if you want. Realistically if the business is doing 4 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 well you are going to convert and if the business is not growing as it should getting your cash back would be the right choice. Ex. 3. In the same email thread, Russell told Marcus that “you can also partially convert.” Id. II. Respondents Never Performed Their Contractual Duties Respondents never provided Claimants with the financial reports, never made a quarterly payment on the Loan, and never repaid the Loan as required under the Agreement. Lisa Aff., ¶ 3; Marcus Aff., ¶ 44. Respondents also never provided Claimants with any financial statements, as required under the Agreement, or end of year tax statements, as required by law. Respondents do not contest their failure to provide the financial reports or the quarterly payments. In addition, Russell has not honored the personal guaranty. Marcus Aff., ¶¶ 47, 49. Neither Marcus nor the Trust ever exercised the conversion option under the Agreement. Lisa Aff., ¶ 5; Marcus Aff., ¶ 23. Through numerous correspondence, and in particular, between September 2018 and August 2019, Claimants demanded repayment and ultimately threatened legal action if repayment did not occur. Marcus Aff., ¶ 47. Nonetheless, Respondents failed to honor their obligations and repay the Loan. Id. In response to Marcus’ and the Trusts’ requests for repayment and letters from their attorneys, Russell made numerous promises to repay Petitioners by “cashing out” home equity credit from refinancing the mortgage on his $18 million New York City Brownstone located at 45 West 70th Street, New York, New York (the “Property”). Marcus Aff., ¶¶ 48-49. For instance, during a phone call, between Marcus and Russell on August 22, 2019, which was recorded and transcribed, Russell stated “yes Okay. All right. I’m going to send it to you, thank you.” Ex. 5. In the same phone call, Russell promised to take a loan on the Property and use a portion of the proceeds to repay Claimants. Russell said, “Mark, we’re getting the mortgage. We’re giving it to you. I promise you that.” Id. at 1. Russell and Sandra did obtain the mortgage on or about 5 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 November 7, 2019 for $4 million (the “November 2019 Mortgage”), but failed to repay Claimants with the proceeds despite Russell’s promises. In another phone call between Marcus and Russell on or about June 29, 2020, which was recorded and transcribed, Russell acknowledged that he failed to honor his promise but stated that he was going to take out another mortgage and implied that he was going to repay Claimants with the proceeds: “I did the mortgage and I had to put the money into fucking Aracar. That was the whole point, is a piece of shit stint, but I didn't do the mortgage for enough money. Now I can redo it.” Ex. 6. On or about April 8, 2021, Russell and Sandra obtained another mortgage on the Property for $4.8 million (the “April 2020 Mortgage”, together with the November 2019 Mortgage, the “Mortgages”). Respondents failed to use any of proceeds of the 2020 Mortgage to repay Claimants. According to www.zillow.com, on or about November 12, 2021, Russell and Sandra listed the Property for sale for $18,700,000. III. The Claimant Prevailed in the Attachment Proceeding Pursuant to CPLR 7502(c), a party to an arbitration proceeding may seek an attachment or equitable relief from the New York Supreme Court if he or she can demonstrate an arbitration award would be rendered ineffectual without such relief. On December 7, 2021, Claimants initiated a proceeding in the Supreme Court of New York, New York County (Index No. 658845/2021) seeking an attachment on the Property in aid of arbitration pursuant to CPLR 7502(c) (hereinafter, the “Attachment Proceeding”) and also sought a temporary restraining order (“TRO”) preventing Russell and Sandra from selling the Property or in the alternative placing $1.46 million from an sale of the Property in escrow pending a determination on the Attachment Proceeding. The Attachment Proceeding was prompted by several factors, including (i) Russell and Sandra’s history of refusing to pay their debts and frustrating the enforcement of arbitration awards, (ii) that Russell and Sandra abruptly moved to Uruguay in 2020, after Russell met with 6 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 Claimants’ previous attorneys on this matter, (iii) that Russell and Sandra siphoned money out of the Property through millions of dollars in Mortgages, sending the proceeds to South America, and (iv) that they recently listed the Property for sale. The Honorable Joel M. Cohen, of the Commercial Division of the Supreme Court of New York, New York County, presided over the Attachment Proceeding. Justice Cohen entered a TRO on December 14, 2021 and ultimately ruled in favor of Claimants on the application for the attachment on January 13, 2022. See Exs. 7 and 8, respectively. IV. Justice Cohen Considered the Likelihood of Success on the Merits in the Attachment Proceeding At the first hearing on the TRO, Justice Cohen made clear that he needed to determine a likelihood of success on the merits before he could grant the TRO. His first substantive statement on the record was as follows: “[I]t sounds like the alternative form of relief is similar [to] what I’ve thought about in other cases where you don’t enjoin the actual sale as long as it’s a to a third party, but if the merits justify it, to put the disputed amount aside.” See Ex. 9, at 3:18-22 (emphasis added). In addition, in response to Mr. Kirwin’s repeated declarations that everything was excused through an alleged conversion, many of Justice Cohen’s questions to Mr. Kirwin, who appeared on behalf of Respondents, were focused on deciding the issue of whether there was a conversion. Indeed, Justice Cohen asked Mr. Kirwin whether he could produce “an unequivocal exercise of the option by these two claimants.” Id. at 14:15-16. Mr. Kirwin disingenuously responded: “There’s also emails where there’re talking about that it’s for both claimants, yes.” Id. at 14:17-18. As a Supreme Court justice bound by the rule of law, 3 Justice Cohen was skeptical 3 Justice Cohen is a well-respected Commercial Division judge who has a reputation for being balanced yet adhering to the law. When Mr. Kirwin inaccurately claimed that pre-judgment attachments are not allowed, Justice Cohen, picked up a law book and immediately corrected Mr. Kirwin, stating “Oh, there’s lots of pre-judgment attachment law out there, and you’d be surprised at the triggers, one of which is just being out of state, but there has to be some reasonable grounds.” See Ex. 9 at 19:2-8. 7 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 and responded immediately as follows: Well, but e-mails, you know, what I’m asking is there’s a contract issue; right? So when I see them, am I going to receive the formal language of, I hereby exercise the option under Paragraph blank of agreement? Why? Because we’re talking about exchanging what sounds like $7 million worth of stock. An e-mail talking about it probably would not be sufficient, but I don’t know what it is because I don’t have it in front of me. Ex. 9 at 14:19-15:1 (Emphasis added). Justice Cohen continued: THE COURT: Do you have the e-mail that you're talking about? Do you have a copy of it? MR. KIRWIN: I have many e-mails, yes. THE COURT: No. The e-mail that you're talking about where you say they exercised this conversion option, do you have that? MR. KIRWIN: They don't use that legal language, THE COURT: What do they – MR. KIRWIN: What they say is, I want to sell my shares and things like that. Id. at 15:13-23. Given that Respondents had not yet put in their opposition papers prior to the TRO hearing and based on Mr. Kirwin’s representations that he had documents purportedly showing what the judge asked for, Justice Cohen, gave Respondents two business days to produce such documents: THE COURT: -- I’m inclined to give them the temporary relief until a hearing, but if you can tell me that you'll provide documentary evidence without a fancy brief, just something to substantiate the idea that these folks, both of them, converted the loan into stock of another company, and/or that there are bank accounts with all sorts of money in the US – MR. KIRWIN: I can do that. Id. at 30:20-25, 31:1. 8 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 *** THE COURT: If you tell me that you can send me these core documents tomorrow, or Monday at the latest, then I’ll hold off…. Otherwise I am going to issue this today. Id. at 31:11-13 Contrary to Mr. Kirwin’s inaccurate statements at the TRO hearing, there are no documents demonstrating an unequivocal exercise of the Option. After the TRO hearing, recognizing that they would not be able to satisfy Justice Cohen’s request, Respondents, through their new counsel, Mr. Gregory Tuttle, who appeared on their behalf in the Arbitration Proceeding, consented to an entry of a TRO. 4 Sandra and Russell filed their opposition to the attachment application on January 6, 2022. Their submission was voluminous and focused heavily on the disputed issue as to the merits of the arbitration. Specifically, Respondents claimed that in “early 2018” Claimants purportedly exercised the Option and then subsequently converted the Loan into share of RussellCar and shares of Aracar, another South American company. 5 As part of their submission, respondents put forth all of their evidence in connection with this defense. Claimants filed reply papers responding to and discrediting each of Respondents’ arguments. The parties’ submissions in connection with the Attachment Proceeding are being submitted herewith. In Russell and Sandra’s opposition, they argued forcefully that Justice Cohen needed to address the merits of this arbitration in order to grant the relief requested. Claimants took the position that under CPLR 7502, a court does not need to address likelihood of success on the merits 4 Although Mr. Tuttle represented Russell and Sandra in the Attachment Proceeding, as of the date of this submission, he has not appeared in this arbitration on their behalf. Instead, he appeared on behalf of several “related entity” respondents. 5 Sandra is the co-founder of Aracar and was CEO of RussellCar, however in messages to Claimants has disingenuously claimed that she no knowledge of the transaction that is the subject of this case. Marcus Aff., ¶ 50. 9 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 in order to determine whether arbitration award would be rendered ineffectual without an attachment or equitable relief. However, the Court still needed to make a determination on the likelihood of success in order to set the amount of the attachment, and therefore, Claimants responded to Russell and Saundra’s arguments on the merits. Moquinon, Ltd. v. Gliklad, 2017 N.Y. Misc. LEXIS 1498, *14 (Sup. Ct. N.Y. County 2017) (“Having found that [Petitioner] has met its burden of establishing grounds for an attachment, the Court must next consider the likelihood of success on the merits of the underlying claim in order to fix the amount of the attachment.”). Justice Cohen did not find Respondents’ arguments convincing as to the rendered ineffectual standard and the merits of their defense in this arbitration. He granted Claimants’ application and ordered the relief they sought in making the TRO permanent. Justice Cohen was concerned “that there is a time series of monies being dissipated,” see Ex. 10 at 26:21-22, and “there is certainly a decided drift to countries where it may not be possible to get an award satisfied.” Id. at 41:16-17. Justice Cohen further stated that “upon closing sale” of the property, the Respondents had to “place the amount of $1,464,234 of the net proceeds into an escrow account held by a mutually agreeable escrow agent.” Id. at 43:12-16. Given that Justice Cohen ordered that the full principal balance of the amount owed should be held in escrow should Russell and Sandra sell the Property, he thereby determined that Claimants are likely to succeed on the merits of their breach of contract claims in their entirety. ARGUMENT Rule 33 of the AAA Commercial Rules gives the arbitrator discretion to “allow the filing of and make rulings upon a dispositive motion only if the arbitrator believes that the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues of the case.” For the reasons discussed below, Claimants easily meet this standard as to whether Respondents 10 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 are liable to Claimants on their breach of contract claims and Respondents have failed to meet their burden of proving their affirmative defense. I. RESPONDENTS MATERIALLY BREACHES THE AGREEMENT AND AS A RESULT THE ENTIRE OUTSTANDING LOAN BALANCE AND $1 MILLION IN MISSED PAYMENTS IS DUE Respondents materially breached the Agreement by failing to ever perform any of their obligations, including making any required payments. As a result of these material breaches, the entire loan balance is due regardless of the 2023 maturity date. In any event, Respondents have made it clear that they never intend to make a payment and therefore the entire amount owed is due. See Alloy Advisory v.503 W. 33rd St. Assocs., 195 A.D.3d 436, 436-437 (1st Dep’t 2021) (“[W]hen one party repudiates a contract, the other party is entitled to claim damages for a total breach by the repudiating party, and any future performance by the nonbreaching party is excused.”); American List Corp. v. U.S. News & World Report, Inc., 75 N.Y.2d 38, 44 (1989) (“[A] wrongful repudiation of the contract by one party before the time for performance entitles the nonrepudiating party to immediately claim damages for a total breach.”). Respondents’ baseless conversion argument does not absolve them of the missed payments they concede were never made to Claimants. Moreover, Respondents’ assertion in the Attachment Proceeding that Russell’s personal guarantee did not accrue until the maturity date is wrong and contraindicated by the Agreement and Russell’s own statements. Pursuant to the Agreement, “[i]n consideration for the swift timing of the investment Russell Abrams has guaranteed the principal amount of the first $1,000,000 in three years.” See Ex. 1. Further, the Agreement referenced an email Russell sent at 2:16 PM on February 1, 2016, wherein he stated “the first 1 MM i will guarantee the principal in three years”. Ex. 2; see also Ex. 4. Accordingly, Claimants are entitled to a ruling that Respondents are liable to them, at minimum, for $2,464,234, which includes the principal balance on the Loan ($1,464,234) and the 11 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 $1 million in missed payment from 2016-2019 based on Russell’s guarantee. Claimants will seek an award for their remaining damages, including missed quarterly payments from 2019 to the present, interest and attorneys’ fees at the hearing. II. RESPONDEMTS CANNOT MEET THEIR BURDEN OF SHOWING CLAIMANTS EXCERCISED THEIR CONVERSION OPTION A. Respondents Do Not, and Cannot, Provide a Single Document Demonstrating There Was a Conversion Respondents do not contest that they never performed under the Agreement. Instead, Respondents’ entire defense to this action rests on a baseless and manufactured defense that Claimants purportedly exercised a conversion of the Loan into equity in RussellCar, per the Agreement, and then somehow exchanged the supposed RussellCar shares into shares in Aracar. Respondents have the burden of proving this affirmative defense. Leopold v. Baccarat, Inc., 239 F.3d 243, 245 (2d Cir. 2001) (“It is well-established that a defendant… bears the burden of proving its affirmative defense.”); Peguero v. 601 Realty Corp., 58 A.D.3d 556, 559 (1st Dep’t 2009) (noting that at trial a defendant has “the burden of proof on his affirmative defense…”). The conversion option was at Claimants’ sole discretion, and thus, as Justice Cohen stated, in order to prove their defense, Respondents would need to produce a document with “the formal language of, I hereby exercise the option under Paragraph blank of agreement.” See Ex. 9 at 14:19-15:1 (emphasis added). Undoubtedly, Justice Cohen was guided by the legal principal that formal contemporaneous documentation for a transfer of stock is required as a matter of law. See, e.g., Del. Code Ann. Tit. 6, § 8-319, Zale v. Boxwood Coal, 1991 Del. Ch. LEXIS 198, * 2 (Del. Ch. 1991) (stating, “oral transfers of stock are barred by the applicable Statute of Frauds”); Waggoner v. STAAR Surgical Co., 1990 Del. Ch. LEXIS 33, * 17 (Del Ch. 1990); NY CLS UCC § 8-307 (requiring transferor of a security to provide the “purchaser with proof of 12 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 authority to transfer the securities” and if the transferor fails to do this within a reasonable time, then the “purchaser may rescind the transfer.”). Given that a convertible note is at issue, in order to meet their burden, Respondents need to show through documentation that Claimants (i) assented to the amount of the loan that would be converted into securities, (ii) assented to the value of the securities they were to receive and (iii) assented to the type of security it was converted into, i.e., preferred or comment stock and (iv) assented to the conversion ratio to be used. Respondents’ position that there were two sets of transfers of securities (debt to RussellCar to Aracar) requires that they prove two sets of the required assents. Respondents have not produced any documents whatsoever demonstrating that Claimants exercised the Option because no such documents exist. Specifically, Respondents have produced no agreements or assents, no stock certificates in RussellCar or other transaction documents demonstrating that Claimants ever held any shares in RussellCar, no tax documents regarding Claimants’ cost basis and the value received as a result of the conversion, and no communications (even informal) in writing demonstrating Claimants were exercising the Option. If there truly was a conversion, RussellCar and Aracar would have been required to provide claimants with tax documents showing their cost basis, which would have to be based on the value of the conversion. Respondents produced no such documents. In addition, pursuant to the Aracar articles of formation, “no share may be issued until it is fully paid. A share is fully paid when: (1) consideration is provided to the Company for the issue of the share by… (c) money; and (2) the value of the consideration received by the Company equals or exceeds the issue price set for the share under Article 3.1.” Ex. 11, § 3.4. Respondents have produced no documents demonstrating that Aracar received money or consideration for the shares Claimants purportedly received through 13 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 exercising their Option. Accordingly, Respondents have failed to meet their burden of establishing their affirmative defense. Respondents are attempting to turn the lack of documentation into a “heads, I win, tails, you lose” proposition. Had Aracar performed well, then they could argue that there was no conversion, and hence, limit Claimants to the 6,500 shares of restricted stock that Marcus earned through sweat equity. Since Aracar performed poorly, Respondents are instead trying to revise history through their empty conversion argument in order to avoid their repayment obligations to Claimants. B. Russell’s Own Statements Demonstrate that Claimants Never Exercised The Conversion Option As demonstrated by the three emails discussed below, Russell’s statement that there was conversion in “early 2018” 6 is actually contradicted by Russell’s very own statements in 2019. 1. In a September 2019 Email Russell Asked Claimants if They would like to Exercise the Conversion Option In an email dated September 11, 2019, Russell specifically tries to convince Marcus to accept both cash and Aracar common shares in exchange for the “russellcar note.” Russell writes: There is a formal offer to purchase 5,000 Aracar common shares using a price of 1,000 per share. There is only so much work I can do without a fully executed written contract by you. You can sell a minimum of 3,000 shares and up to 5,000 shares at $1,000 per share. The executed purchase agreement would occur sometime next week and the actual transfer in 90 days. the (sic) executed agreement requires you to decide from options A, B and C 1) you will convert your russellcar note into one of the following: a) 3 million dollars and 3,500 Aracar common shares b) 4 million dollars and 2,500 Aracar common shares c) 5 million dollars and 1,500 Aracar common shares I hope this is clear. 6 See Affirmation of Russell Abrams, dated January 6, 2022, at ¶7, which was submitted in connection the Attachment Proceeding, and is being submitted herewith. 14 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 See Ex. 12 (Emphasis added). The verb “will convert” in this context means that conversion is still a future possibility and has not yet occurred. Further, it also is a recognition that the Loan is a completely separate instrument that is unrelated to the issuance of 6,500 restricted common shares of Aracar, which happened nine months prior. See Aracar stock certificate, Ex. 13. Russell also states that “[t]here is only so much I can do without fully executed written contract by you.” In the context of soliciting his brother for an equity conversion, this statement is an acknowledgement by Russell that such a contract does not yet exist. Thus, this email conclusively demonstrates that Russell knew Claimants never exercised the Option and that his statement regarding a purported exercise in “early 2018” is not believable and merely an attempt to revise history. 2. In a June 2019 Email Russell Acknowledged Claimants Did Not Exercise their Conversion Option On June 13, 2019, Russell sent an email to Lisa in order to encourage her to agree with the conversion. In the email, Russell acknowledges that “Marc owns shares in Aracar for which he invested zero money and have a value over 6 million dollars”. Ex. 14 (emphasis added). This is entirely consistent with Claimants’ position that Marcus did not buy the 6,500 restricted common shares of Aracar, but instead earned them by working with the company. Later in the same email chain, Russell solicits the conversion: “Thus you and Marc need to decide which you claim: 1) 1857 shares in Aracar and a 1 million dollar loan to me or 2) 6500 shares in Aracar and no loan from me.” Id. Russell’s own statements demonstrate that there has been no final, executed agreement relating to this desired conversion and that he was merely attempting to lure Claimants into papering one up after the fact to serve his purposes. 15 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 3. In an August 2019 Email Russell Acknowledged Claimants Did Not Exercise Their Conversion Option and that a Conversion Needs to Be Formalized Through a Signed Document On August 22, 2019, Russell wrote to Lisa an email, which acknowledged there was no conversion: Lisa It was my understanding you and Marc wanted to have the aracar shares instead of the russellcar shares as the conversion mechanism for your investment. We will also need to formalize this in the documents we sign for the aracar share sale. Ex. 15 (Emphasis added). Russell acknowledged that no written conversion agreement existed as of the date of the email, and that, at the least, there would need to be formal written exercise of the Option in for it to be effective. III. MARCUS’ OWNERSHIP OF THE ARACAR SHARES WAS SEPARATE AND APART FROM RUSSELLCAR As an initial matter, it is undisputed that the Trust has never held shares in Aracar. See Lisa Aff., ¶ 6. Marcus holds 6,500 restricted common shares of shares of Aracar solely in his name. See Aracar stock certificate, Ex. 13. Marcus received his Aracar stock as his compensation for helping build the company and not as part of a conversion. Marcus Aff., ¶¶ 17-18. The fact that Marcus received his Aracar shares on December 17, 2018 (see Ex. 13), completely undercuts Russell’s false statement that a conversion purportedly occurred in “early 2018”. Specifically, the Aracar shares were issued to Marcus in exchange for working at the company without salary for a year and a half. Marcus Aff., ¶ 17. Marcus chose compensation in the form of equity believing his family could forgo his receiving an initial salary because they would be receiving significant payments from the Loan. Marcus Aff., ¶ 17. This is confirmed in an email sent on March 5, 2020 by John Ogle, the former Chief Operating Officer of Aracar. Marcus Aff., Ex. 16. 16 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM INDEX NO. 654992/2022 NYSCEF DOC. NO. 50 RECEIVED NYSCEF: 02/25/2023 Ogle states, “you only have common shares that were granted for service so there is no conversion for that.” Id. The distinction between receiving 6,500 restricted common shares of Aracar as opposed to preferred shares is an important one. Per the Agreement, the conversion mechanism required that the “equity shares equivalent in all respects to those held by Russell and /or Sandra Abrams or any other investor in conformity with the objectives of a Most Favored Nation provision”. An example of stock issuance or preferred shares is shown by the agreement between Aracar and Mitchell Marks, dated March 5, 2018 (“Marks Agreement”). Ex. 17. Per the Marks Agreement, in consideration for investing $2,000,000, Mr. Marks received the “Most Favored Nation Right” in addition to pre-emptive rights with regard to ownership dilution. Id., ¶¶ 2, 3. By contrast, Marcus did not have any of these special rights as he only had common stock of Aracar. If he had received the stock through the conversion mechanism, then his shares should equal rights to those owned by Mr. Marks. This is further corroborated by a January 10, 2020 WhatsApp conversation between Russell and Marc. Ex. 18. In it, Russell writes, “Nobody is stealing your money - we are closing with lending capital and he (sic) people for the series B who also want to purchase founder common equity.” (Emphasis added). Emphasized is the language that what is being offered in the Series B is founder common equity for Aracar. In this context, Russell is acknowledging that Marcus has founder common equity for Aracar. Moreover, the fact that Marcus’ Aracar shares are “restricted”, see Ex. 13, conclusively demonstrates that Marcus received the shares as compensation for work performed for the company and not as part of a debt-to-equity conversion. See Accounting Hub, “Accounting for Convertible Debt Issued With Stock Warrants”, (stating, “Common examples of convertible debt 17 FILED: NEW YORK COUNTY CLERK 02/25/2023 06:16 AM