Shabbat Parashat Teruma 5785

P'ninat Mishpat: How Far Does a Lien Go?

Case: The three plaintiffs (=pl1, pl2, pl3) independently lent similar amounts of money (cumulatively, 1,455,000 NIS) to the defendant (=def) to enable him to buy property. Other people did similarly, but only for pls did def put a lien on the property to ensure payment. The development of the property fared poorly, and def was unable to pay all of the investors. Def went through the process of a “creditor settlement” (an alternative to bankruptcy) with other investors, according to which the property would be sold and, after payment to pls due to their liens, the rest would be distributed among the other creditors. The property was sold for 1,580,000 NIS, and after paying pls the 1,455,000 NIS, the rest was put in escrow. Pls demand to receive the rest of the money because they are still owed for the interest on their loans, for which a heter iska was written. While pl1’s contract states that the lien is for the interest as well, this is not explicit in the loan documents of pl2 and pl3. There is also a dispute as to whether the heter iska can be used to justify interest in a case like this in which the investment in which the loan money was put clearly lost money.

Ruling: While the main clause on the liens of pl2 and pl3 do not mention the interest, the clause on the timing of exercising the lien refers to “the loan and/or the interest.” Therefore, pls all have rights to the lien for their interest.  

The question is whether they have rights to interest at all when there were no profits. According to the terms of the heter iska, while half of the funds given were a loan and half were an investment, in theory it would not even be necessary to pay all of the principal when the investment lost money. However, according to the terms of the heter iska, two witnesses must testify that money was lost. Regarding the denial of profits, the “borrower” needs to take a formal oath (which, as a rule, is not administered in our times). While the court-appointed trustee confirmed that there was loss on all of the properties that def bought in the relevant time period, it is unclear if the trustee’s findings are equivalent to witnesses of fact, because it is possible to deceive a trustee.

More importantly, many heter iskas, including the one used here, relate the money lent to any profitable interest of the borrower at the time. Therefore, even if the main investment for which the people had in mind was not profitable, we must consider the possibility that there were gains in other of def’s holdings. Therefore, the d’mei hitpashrut (amount set to approximate the profits made) are still a valid standard assumption in the face of inability to fully determine how much is due. Furthermore, there are opinions that debts can be updated according to the inflation rate, even without a heter iska. Based on compromise, beit din gave pls rights to 35% of the inflation rate from the time the debt was due. This comes to, cumulatively, 103,016 NIS (most but not all of the money in escrow).

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