Does a Heter Iska Increase the Risk of Litigation? - Canada
Many Orthodox Jews involved in commerce face a challenge in complying with the Biblical prohibition against charging interest. Recognizing the problem the Rabbis created a legal document recharacterizing the "loan" as a commercial agreement & lender as an investor and the interest as shared profit. This agreement is called the Heter Iska. Given the different rights that flow from a loan the author poses the question -is there a litigation risk to a lender who signs a Heter Iska?
Would an Ontario court enforce a Heter Iska? When a religious Jew lends another Jew money they often enter into an agreement called a Heter Iska. Faced with the biblical prohibition against charging interest on loans (FN1) and the reality that lenders are more likely to lend people money when interest can be charged, the Rabbis created a halachic (FN2) mechanism to still allow a lender to profit from the loan and not charge interest. This halachic document is called the Heter Iska. The Heter Iska characterizes the lender as an investor who provides capital for a business venture. The Heter Iska provides that the investor transfers ˝ of the money as an interest-free loan, is to be repaid even in the case of total loss; the other ˝ of the money is the investor’s share of the business venture, which entitles the investor to receive profit that not coincidentally is equivalent to the interest a lender would charge. Thus, at the end, the investor’s money would be returned, and any profits (or losses) would be shared (FN3). This halachic mechanism serves to ensure that Jews will not have a financial disincentive to loan one another money.
So I pose the question – is there a litigation risk to a lender who signs a Heter Iska?
For many people of faith their religious principals are not limited to the four corners of their synagogue, mosque or church. It is of vital importance to their self definition and view of their own integrity to comply with the religious obligations imposed upon them by their faith. The question arises when there is an inconsistency with a commercial document signed and a side agreement that purports to be a commercial document.
When the parties sign both a standard loan agreement and a Heter Iska would an Ontario court see the exchange of money as a loan or an investment? I posed this question to several law professors, rabbis and lawyers. Many thought that the judge would recognize that the Heter Iska as only a religious document not meant for review or enforcement by a secular court. Many felt that a secular judge would recognize the Heter Iska as a legal fiction created to permit Orthodox Jews to participate in a modern economy and not enforce the terms of a Heter Iska. That view is supported by a number of cases in the United States. For example, in Barclay Commerce Corp. v. Finkelstein (FN4), the Appellate Division of the New York Supreme Court said that the Heter Iska was not relevant and only a ‘phantom’ issue because it was only meant to permit a technical compliance with religious law (FN5). Let’s see how one Ontario judge answered this question in 625882 Ontario Limited and Batya Wagner v. Hacohen (FN6).
Batya Wagner (the plaintiff), and Ilan and Ronit Hacohen (the defendants) were religious Jews. Batya made three loans to the Hacohens with the last one evidenced by a signed agreement consolidating all three loans. At the outset the parties signed a Heter Iska agreement as well. Ilan and Ronit stopped repayments and Batya brought a law suit in the Ontario Superior Court of Justice. So certain was Batya of her case that she brought a motion for summary judgment which allows a judge to grant judgment right away because there was no genuine issue requiring a trial(FN7).
The defendants argued that this was not a proper case for summary judgment. They said that there were material facts in dispute which required a full hearing at trial. Hacohen’s lawyers made several arguments in order to persuade the judge that a full trial was required and summary judgment should not be awarded. For the purposes of this discussion I would like to focus on the Heter Iska defense. The Hacohens argued the payments they received from Batya were not really loans, but were investments under the "Heter Iska" agreement. Since there was no profit on the investments, they argued that no money was ever owing to Batya. Justice Low of the Ontario Superior Court rejected their argument – but not for the reason you might think.
The judge stated that for the purposes of the summary judgment motion there was no need to rule on the validity of the Heter Iska agreement. Yet, in an interesting turn, Justice Low held that even if the Heter Iska was the governing agreement, the Hacohens had to reimburse Batya because the defendants did not account for profits and losses in accordance with the Heter Iska. By the terms of the Heter Iska, the Hacohens failure to account meant that the "yield" is deemed to have been earned. This preserved Batya's interest entitlement. As to Hacohen’s argument that were no profits Justice Low found that by the terms of the Heter Iska, if there were no profits in any week, Batya was entitled to call for immediate repayment of the "Funds" (the principal) and any unpaid "yield" (interest) owing. Finally, Justice Low found that the Hacohens never demonstrated failure to achieve the "yield" by swearing to it during the public reading of the Torah in an Orthodox Synagogue and in compliance with the conditions set forth in the Heter Iska.
Justice Low’s examining whether the Hacohens complied with the terms of the Heter Iska might have had little to do with the ultimate enforceability of a halachic agreement. It might have had more to do with the fact that the test for summary judgment is whether or not there is a genuine issue for trial. To decide whether the Heter Iska was the governing agreement Justice Low would have had to determine if Batya and the Hacohens may have genuinely believed that their Heter Iska was not a legal fiction. Arguably, the parties may have agreed that Batya would be a silent partner providing capital for a business venture, and the Hacohens would actively run the business. As in every business venture at the end Batya would share any profits or losses. To make that determination would have been difficult for Justice Low because her relatively short review of the motion material at a summary judgment cannot compare to what happens at trial. By establishing that the Hacohens had to reimburse Batya even if the Heter Iska was the governing agreement Justice Low established that there was no genuine issue requiring a trial and she was able to grant summary judgment (FN8).
So to answer our question, an Ontario judge may very well consider if a Heter Iska as an enforceable contract. Had the Hacohens accounted for profits and losses in accordance with the Heter Iska and demonstrated failure to achieve the "yield" by swearing to it during the public reading of the Torah in an Orthodox Synagogue Justice Low may very well have dismissed the summary judgment motion and ordered a full trial. That might have been necessary because the validity of the Heter Iska would be a live issue and in a summary judgment motion the limited amount of evidence before the court does not provide for the full evaluation of the evidence necessary to determine the case. While Batya may have won when the matter finally got to trial the legal costs may have made it a Pyrrhic victory.
This short overview of the law should not be taken as legal advice in the event that reader plans to use a Heter Iska or enter into a loan agreement. The reader would be well advised to retain a competent lawyer to work with his/her Rabbinic authority to assess, from both a legal and halachic perspective, how best to reduce legal exposure.
FN1. Shemot/Exodus Chapter 22 verse, 24; Vayikra/Leviticus Chapter 25, verses 36-38; Devarim/Deuteronomy Chapter 23 verse 20.
FN2. Halacha is a Hebrew term. As defined by the Encyclopedia of the Columbia University Press, in Judaism, all laws and ordinances evolved since biblical times to regulate worship and the daily in Judaism, the body of law regulating all aspects of life, including religious ritual, familial and personal status, civil relations, criminal law, and relations with non-Jews. Halakah is the term used to designate both a particular ordinance and the law in the abstract. The adjective halachic means “of a legal nature.” The plural, halakoth, designates a collection of laws. It usually refers to the Oral Law as codified in the Mishna and, in particular, to those statements of law that appear in categorical form without immediate regard for scriptural derivation. The most authoritative codifications of these laws are the Mishneh Torah of Maimonides and the Shulhan Arukh [the set table] by Joseph Karo. Halakah was the important unifying force in world Jewry until modern times, when its authority was challenged by religious reform and secular conceptions of a Jewish nation. Contemporary problems in halakah revolve around its application to technological change, especially in relation to medical issues and Sabbath observance. Halakah is contrasted with aggada (plural aggadoth), the literary, aesthetic elements in the Oral Law and in the Talmud, and Midrash generally, which elaborates scriptural meaning through legends, tales, parables, and allegories. Both the halakic and aggadic elements have been extracted and made the subject of commentary.
FN3. See What is a Heter Iska and how does it work, By Rabbi Meir Orlian, Faculty Member, Business Halacha Institute, Published in: Jewish Press. Publication Date: 05/13/2009. The article is available online at the website Businesshalacha
FN4. Barclay's Commerce Corp. v. Finkelstein, 11 A.D.2d 327, 205 N.Y.S.2d 551 (lst Dept. 1960). Leave to appeal denied, 11 A.D.2d 1019, 207 N.Y.S2d 995 (1960).
FN5. See the article “Secular Law Enforcement of the Heter 'Iska” by Kenneth H. Ryesky, Esq. which is available on line at the Jlaw website. Jlaw is a website dedicated to Examining Halacha, Jewish Issues and Secular Law, Founder & Publisher: Ira Kasdan; Editor: Evan Kusnitz.
FN6. 2011 CarswellOnt 9242; 2011 ONSC 5303, 206 A.C.W.S. (3d) 726, 90 B.L.R. (4th) 224;
FN7. See Combined Air Mechanical Services Inc. v Flesch 2011 ONCA 764 which reviews the law of summary judgments in Ontario;
FN8. Under Ontario’s rules of civil procedure a judge hearing a motion for summary judgment may now hear viva voce evidence. However, there are certain types of cases which, despite that ability to hear oral testimony will be more appropriate for a full trial as opposed to summary judgment. I refer the reader to paragraph 46 of Combined Air Mechanical Services Inc. v Flesch 2011 ONCA 764 where the court states, “What is it about the trial process that certain types of cases require a trial for their fair and just resolution? In Housen v. Nikolaisen, 2002 SCC 33,  2 S.C.R. 235, the majority decision of Iacobucci and Major JJ., at para. 14, quotes a passage from R.D. Gibbens in “Appellate Review of Findings of Fact” (1991-92), 13 Advocates’ Q. 445, at p. 446, which refers to the trial judge’s “expertise in assessing and weighing the facts developed at trial”. The quoted passage states: “The trial judge has sat through the entire case and his ultimate judgment reflects this total familiarity with the evidence.” The passage further notes that the trial judge gains insight by living with the case for days, weeks or even months. At para. 18, Iacobucci and Major JJ. go on to observe that it is the trial judge’s “extensive exposure to the evidence, the advantage of hearing testimony viva voce, and the judge’s familiarity with the case as a whole” that enables him or her to gain the level of appreciation of the issues and the evidence that is required to make dispositive findings.
ABOUT THE AUTHOR: Charles B. Wagner
Charles B. Wagner is a Certified Specialist in Estates and Trusts and a partner at Wagner Sidlofsky LLP. This Toronto boutique litigation law firm is focused on estate, commercial & tax litigation.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.