Shabbat Parashat Shemini 5776

Pninat Mishpat: Returning a Loan That Might Have Had Heter Iska – Part II

Case:  The plaintiff (=pl) lent $200,000 to the defendants (=def) at 12% interest annually so that they could invest it in a commercial project in the US, as spelled out in a loan agreement. For two years, def made interest payments. The project is stalled, and def have financial difficulties. Pl wants to receive the remaining interest and cancel the loan and receive the principal. Def #1 claims that the loan is payable only when they sell the business they invested in but admits that they will then have to pay in full. Def #2 argues that no heter iska was signed (although it had been planned), and it is therefore forbidden to pay interest. He is also willing to swear that the investment produced losses, in which case, the laws of iska dictate that they do not have to pay in full. That which was already paid should count as principal and subtracted from the $200,000. Pl says that there was a heter iska, even though he does not find it, and that this loan was to be paid even if the main enterprise sustained losses.

Ruling:  [Last time we saw that the monthly payment was for profits and was not payment of principal and that even without producing a heter iska, we can assume one existed].

According to classic heter iska documents, payment of the profits depends on the assumption of significant profits and payment of half of the principal depends on the assumption there have not been losses. In this case, both sides agree that the project mentioned in the loan agreement is presently not profitable. Poskim rule (see Brit Yehuda 38:(6)) that if appraisers agree that, for example, real estate bought with the investment money did not rise in value, the recipient is exempt from paying and swearing that there was no gain and that he was not negligent. This is assuming the heter iska refers to a specific investment. Some heterei iska state that if the main investment is not profitable, the recipient transfers rights to other properties of the investor, making it rarely feasible that he is exempt from the payment of the estimated profit.

In this case, we assumed there was a heter iska document even though it was not presented. However, we have no reason to assume that the heter iska was done in a manner that strengthens pl’s rights. Even if we assume (see Maharsham II:216) that a heter iska creates a lien on all of the recipients’ property, that does not mean that the profits are linked to them all. This is especially true in a case like this, where the loan agreement links the investment to a specific property.

Many contemporary heterei iska are based on the Chochmat Adam’s model, by whose terms the investment is renewed on a monthly basis, and silence is considered admission of profits. In a case like ours, where there were monthly installment payments of profits, it is more likely to view them as an admission of profit. (Admittedly, it is possible that he paid them as only down payments on the assumption of a future determination of profit).

Based on the uncertainty as to the arrangement between the sides, beit din rules that def should return all of the principal. Regarding interest, def should not pay any more but may not subtract that which was already paid from the full principal due.

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