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Secular Law Enforcement of the Heter 'Iska
Kenneth H. Ryesky, Esq.

IV. Secular Courts' Treatment of the Heter 'Iska:

Disputes involving Heter 'Iska arrangements have on occasion been brought before the secular courts. A sampling of postures of the various secular courts towards the Heter ‘Iska is instructive.

In a footnote to a decision, the United States Court of Appeals for the Ninth Circuit (which covers the western United States) characterized a Heter 'Iska as "... a religious document purporting to characterize the bank and those to whom the bank charges interest as a 'venture' in order to avoid violation of religious law." 38

In the case of Barclay Commerce Corp. v. Finkelstein,39 the Appellate Division of the New York Supreme Court found the Heter 'Iska to be "... merely a compliance in form with Hebraic Law...", and went on to find that the defendant's counterclaim of a joint venture raised what was "... at best a `phantom' issue [which was] clearly without merit." The same Court maintained its stance more than thirty years later, when it cited its own Barclay opinion in Arnav Industries, Inc. Employee Retirement Trust v. Westside Realty Associates,41 another dispute involving a Heter 'Iska.

In the Arnav Industries case, one of the defendants had executed a mortgage note in secular format, and had written above his signature the Hebrew phrase "AI Pi Heter 'Iska."42 No Shtar 'Iska document was ever executed, however, and furthermore, the mortgage note specifically provided that:

[nothing herein or in the mortgage is intended to create a joint venture, partnership, tenancy-in-common or joint tenancy relationship between Borrower and Lender, nor to grant Lender any interest in the Mortgage Property other than that of creditor or mortgagee.

Presented with a written agreement that appeared complete and unambiguous on its face, the Court was constrained to rule as it did in the Arnav Indtustries case because it could not consider oral evidence to contradict the terms of the written document. 44 The result might arguably have been different if the parties had in fact executed a Shtar 'Iska in written form.

In Leibovici v. Rawicki ,45 the issue before New York City Civil Court in New York County (Manhattan) was whether the transaction between the parties was usurious under the New York secular law (if it was "usurious", then the plaintiffs' claim would be defeated). As noted earlier, the concept of "usury" in the American secular law is dependent not upon whether interest is charged, but rather, upon the rate of the interest. The Court found that the defendant could not raise the defense of usury because he himself had promoted the investment given to him by the plaintiffs. While the Court did view the transaction to be in the nature of a joint business venture rather than a loan, the resulting decision was based upon the terms set forth in the relevant document, regardless of whether the transaction could be characterized as a loan, joint venture, or anything else. Applying the terms of the written document, the Court found that the plaintiff could withdraw the principal with three-months' notice, and therefore, the Court awarded the plaintiffs their principal investment of $5,000.00, plus interest from what ostensibly was the would-be withdrawal date.

In a similar case, Bollag v. Dresdner,47 the Court found that the defendant could not interpose the defense of usury and awarded the plaintiff his $15,000.00 investment. The Court further found that the plaintiff's own admission that his religious beliefs forbade the charging of interest precluded any recovery af interest on the loan, but did not bar the plaintiff from recovering interest after the court entered its judgment. The Bollag decision effectively enforced the halachic prohibition against ribit, but only up to the date of the Court's decision. Following the entry of the Court's decision, the court specifically applied the secular statutory interest to the debt.

In light of the Leibovici and Bollag decisions, it seems that the secular court decisions involving a Heter 'Iska would ultimately impose interest even under the most favarable circumstances when the secular courts affirmatively attempt to respect or defer to halacha. Those courts that do not give regard to halachic considerations can be expected to render decisions that comport all the less with halachic norms.

A most blunt and revealing secular court attitude towards the Heter 'Iska is set forth in a decision handed down by the New York Supreme Court of Kings County (Brooklyn) in the case of Berger v. Moskowi tz:50

Defendants, if they chose, may call this instrument a business transaction and the ten percent owing on the principal, profit, not interest, but the intent as well as the end result is still the same: the subject agreement is an instrument for the payment of money only and the ten percent represents interest. Despite all of defendants' objections, the note itself requires the defendants to make certain payments and nothing else.

In the Berger case, the plaintiffs presented to the Court a document written in Hebrew entitled "Shtar 'Iska", which was signed by the defendants, along with an uncontroverted English translation of the same.51 On the document, one of the defendants had signed his name beneath a statement that all "Laws of Guarantee" (" dinei arevut" in the operative Hebrew document signed by the parties) were applicable. 52 The defendants argued that the phrase "Laws of Guarantee" referred to Jewish law and that Jewish law should therefore be applied by the Court, 53 but that contention was apparently disregarded in the Court's ruling. 54 There is no indication in the record that the partles attempted to resolve the matter before a Beth Din, and apparently no specific written agreement [existed] between the parties that disputes arising in the course of the deal be submitted to arbitration, Beth Din or otherwise. One of the defendants did contend that the phrase "Laws of Guarantee" referred to the Jewish laws of guarantee and that the phraseology was used with the express purose that any dispute would be resolved before a Beth Din,55 but the Court apparently ignored that contention. 56 Had a provision for resolution of disputes by a Beth Din been set forth with specificity in the Shtar 'Iska document the Court probably would have enforced the provision.57

In the Leibovici case discussed earlier, the extent of any joint venture relationship between the parties was not particularly relevant to the Court's decision. It further must be noted that Leibovici was decided in the New York City Civil Court, one of the lowest tribunals New York State court system (albeit one of the busiest in the world). The American federal courts are required to apply the law of the state, and must defer to the highest court in the state in determining state law.59 Federal agencies, inecluding and especially the Internal Revenue Service, must likewise defer to the rulings of the highest court in a state over those of a lower court.60 Weighing the court decisions according to the ranks of the courts, the secular American law clearly views the Heter 'Iska arrangement as a loan transaction, according little if any significant recognition of any joint venture relationship between the parties.

Should the courts' postures ever shift towards recognition of a joint venture in the Heter 'Iska transaction, there would be potential implications that could further complicate the secular law's approach to enforcing such a transaction. For one thing, American secular law regards partners and other joint venturers as fiduciaries with respect to one another, and imposes upon such fiduciaries a standard of undivided loyalty, a higher standard of conduct than the standard of simple honesty that is imposed upon parties to common marketplace transactions. 61 Joint venturers may not exploit for themselves a business opportunity that rightly belongs to the joint venture unless the co-venturer is informed and gives approval. Such an "opportunity" may consist if nothing more than a "tangible expectancy" of a business advantage, and might even be usurped in certain situations by one co- venturer acquiring property in the same "line of business" engaged in by the joint venture.62 Thus, if the secular law would ever seriously view a Heter 'Iska arrangement as a joint venture, the parties to the arrangement might conceivably be saddled with responsibilities and liabilities above and beyond those placed upon borrowers and lenders.

Complicating the situation all the more is the fact that in a Heter 'Iska arrangement, the borrower is designated as the managing partner and the lender the silent partner. Thc fiduciary responsibilities imposed upon partners by the secular law are particularly applicable to managing partners."63 In most business ventures the managing partner tends to occupy the position of strength and power with respect to the silent partner. In most loan transactions, however, the borrower typically tends to be in a weaker position than the lender. If the secular courts were ever to emphasize the joint venture aspects of the Heter 'Iska arrangement, then there could potentially be a situation where the weaker party is treated at law as the stronger party would normally be treated, and vice versa.

Other implications could potentially arise from the secular courts' treatment of the Heter 'Iska arrangement as a joint venture, including tax implications dependent upon the characterization of the property interests and liabilities of the respective parties to the transaction. For example, in the context of the Estate Tax, deductions of debts from the gross estate are only allowable to the extent that the debt is enforceable at law.64 lf, arguendo, under state law the borrower is not obligated to pay the "profit" to the lender because the Heter 'Iska arrangement was a joint venture in which the lender assumed the risk, the debt would not be enforceable and therefore not available as a deduction from the gross estate.

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