Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?
HETER ISKA AND THE US COURTS
The nature and enforceability of a Heter Iska has been the subject of a number of NY court decisions with varying consequences. This is problematical in a number of respects. Of primary concern is the fact that these kinds of anomalous and unpredictable results are the bane of lenders and the capital markets. Furthermore, as shown below, the treatment of a Heter Iska by a US court may be wholly inconsistent with how the very same document would likely be treated under the Halacha.
To better understand the basis for these concerns, it is important to analyze a number of the seminal decisions under New York law in this area, which affected the way banks structure loans involving a Heter Iska.
One of the more important cases in this area of law is IDB v. Weiss & Wolf,[1] a 1985 NY State Supreme Court[2] decision. In that case, the Court held that a triable issue existed as to whether a Heter Iska defense was available to the borrower. As a result of this decision, banks no longer typically sign an individual Heter Iska. Instead, there is the Heter Iska on the wall, as it were.[3] Its presence on the wall, instead of in an individual loan file, says much about how serious an issue (i.e., the existence of a Heter Iska signed by the lender and borrower) was presented by the decision in the IDB case. Ever since then the banks have correctly balked at signing a Heter Iska. While the case is not reported to have gone to final judgment (presumably it settled), it did establish a precedent in practice. Thus, given that a properly drawn and executed Heter Iska could be enforced by the courts, banks therefore avoided doing so. The court’s finding that a triable issue existed was sufficient to case a chilling effect on entering into a Heter Iska on an individual basis. No bank wants to take the chance of having a borrower interpose a defense, which survives a motion for summary judgment, let alone conceivably lose any portion of the principal amount of the loan.
In 1986, the NY Supreme Court faced another case involving a Heter Iska in Bank Leumi Trust Company of New York v. Morris Spitzer.[4] In that case, the Court found that Spitzer did not know about the Bank’s Heter Iska, even though it was displayed on the wall, until well after the loan was made. The Court in the Leumi case granted summary judgment for the benefit of the bank (unlike in the IDB case). This is because, among other things, the borrower did not rely on the Heter Iska when he entered into the loan. Indeed, the borrower didn’t even have a copy of the Heter Iska. Moreover, the US Bank Leumi subsidiary of the Israeli parent bank did not ratify or sign the Israeli parent’s Heter Iska document. Neither did the borrower (Spitzer) sign a Heter Iska. The Court found that the bank had never executed and delivered the Heter Iska to the borrower, even though there was a form that was hung on the wall. On the other hand, the Court found there was a promissory note, which was signed and delivered by the borrower under US law. The Court weighed this against an unsigned Heter Iska, which the borrower was not even aware of and the bank had disavowed. The Court therefore granted summary judgment in favor of the bank. It found that a loan transaction existed, not a Heter Iska relationship.
There have been a number of other unique and interesting cases involving a Heter Iska. In Bollag v. Dresdner,[5] a civil court case in 1985, the lender sought to use a Heter Iska as a sword instead of a shield. Thus, the lender sought to collect a usurious rate of interest (in excess of 24% per annum) arguing that the arrangement was truly a profit sharing deal. The civil court held that substance controlled over form. It found that notwithstanding the Heter Iska, the arrangement was in fact a loan, which was subject to state usury laws. The prohibition against usury (excessive interest) could not be avoided by styling the loan as a Heter Iska relationship.
In Heimbinder v. Berkowitz,[6] the lender tried to use the Heter Iska document to assert personal liability against the shareholder in the corporate borrower, where none existed under US law. In that case, the borrower was a corporation, notwithstanding that the Heter Iska document was signed by the individual principals. The court found that the Heter Iska could not change a corporate loan into a personal loan.[7]
Arnav Industries, Inc. v. Westside Realty Associates, et al[8] involved a mortgagee, which sought to foreclose on its mortgage. The lower court denied summary judgment. It focused on the insertion of a Hebrew phrase in the mortgage, to wit: “al pi Heter Iska” (in accordance with a Heter Iska)[9] above the signature on the mortgage note and found that there was an issue of fact as to whether it created a partnership agreement between the lender and borrower. The Appellate Division disagreed and reversed the lower court decision. It held that the language could not be used by the borrower to vary the terms of the mortgage note. Among other things, there was no actual Heter Iska signed by the parties. The note also contained a provision to the effect that nothing contained therein was intended to create a joint venture or partnership.
The Appellate Division in Arnav also cited its own decision in Barclay Commerce Corp. v. Finkelstein.[10] In the Barclay case, the Appellate Division noted that the Heter Iska constituted “merely a compliance in form…with Hebraic Law.”[11] It held a partnership is not created thereby and the issue is devoid of merit. A similar decision was made by the Federal District Court for Massachusetts in Edelkind, et al v. Fairmont Funding, Ltd., et al.[12]
The Appellate Division in LZG Realty LLC, et al v. HDW, et al[13] also dealt with an action for foreclosure of a mortgage. The defendant borrower failed to raise the matter of a Heter Iska and the binding rabbinical arbitration clause thereunder until 1½ years into the matter. The court held that it was too late to raise the issue at that point in the case. The court therefore did not reach the underlying issue of the Heter Iska in the case.
In Koenig v. Middlebury Land Associates, LLC, et al,[14] the court dealt with a Heter Iska that had a rabbinical arbitration clause. The court found, however, that it was not a binding arbitration clause.
The US Bankruptcy Court for the Southern District of New York In Re Venture Mortgage Fund, L.P., Debtor (and In Re David Schick et al Debtors)[15] ruled that the Heter Iska could not be used as a means to collect a usurious rate of interest of 27% interest per annum.
A recent noteworthy lower court opinion in the NY Supreme Court of Nassau County (dated January 11, 2012) involved the foreclosure of a mortgage. The name of the case is VNB New York Corp v. 47 Lynbrook LLC, et al (Index # 018467/2010). In case the mortgage made reference to the fact that to ensure compliance with Jewish law, the Bank has entered into a Heter Iska. The defendants sought to amend their answer to interpose a defense against a deficiency judgment based on the Heter Iska. The court noted that the note and mortgage made it clear that applicable civil law (i.e., NY law) was to govern. Accordingly, the court found that the existence of the Heter Iska did not alter the clear intent of the parties that NY law governs the enforcement of the mortgage documents. The Heter Iska was not ground for overturning the foreclosure judgment nor could the defendants defend against a corresponding deficiency judgment based thereon.
[1] NY State Supreme Court-1984, NYLJ 2/4/85 at page 14.
[2] The court of original jurisdiction in New York. This as distinguished from the US Supreme Court, the highest court of the land. The highest court in New York State is the Court of Appeals.
[3] It is said that when Rav Moshe Feinstein visited an American-Israeli bank, he noticed that there was a framed Heter Iska on the wall. He is reputed to have said “Kiknah de Heter Iska oif de Vant” (see the Heter Iska on the Wall).
[4] Unreported decision dated 9/18/86 by Judge Leonard N. Cohen in NY Supreme Court New York County under Index # 017734/1986.
[5] 130 Misc.2nd 221, 495 NYS2nd 560 (NY Civ. Ct. Kings County-1985).
[6] 175 Misc.2nd 808, 670 NYS2nd 301 (S. Ct. Kings County-1998).
[8] 180 AD2d 463, 579 NYS2d 382 (App Div 1rst Dept.-1992).
[9] An example of this kind of a text may be viewed online at sec.edgar-online.com regarding Allou 10-k annual report (dated 6/30/97)- Exhibit B: Section 1 (iii). The Exhibit is an Amendment to the Guaranty, which adds the following provision to Section 15 of the Guaranty: “Heter Iska: This Guaranty is being provided to BLT in accordance with BLT’s Heter Iska.” BLT is a reference to Bank Leumi Trust Company of NY.
[10] 11 AD2nd 325, 205 NYS2nd 551 (App Div 1rst Dept-1960). See also Leibovic v. Rawicki 64 Misc2nd 858, 316 NYS2nd 181 (NY Sup-App Term-1969).
[11] Ibid at page 328
[12] 539 F. Supp. 2d 449 (2007)
[13] 71 AD3rd 642 (App Div-Second Dept.-2010)
[14] 2008 Conn. Super. Lexis 1816 (July 23,2008)
[15] 245 B.R. 460 (2000) aff’d 282 F3rd 185 (2d Cir. NY-2002)
Leonard Grunstein 