Losses from Financially (and Morally) Bad Loans – part I | Beit Din Eretz Hemda - Gazit | Beit Midrash

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Case: The plaintiff (=pl) and the defendant (=def) were the primary players in a business (=bus) that provided large high-risk, high-interest loans to individuals (=bor); pl ran the business, and def was the silent owner. Bus advanced cash to individuals at interest rates of up to 8% monthly in return for much higher post-dated checks. After its own initial investment of funds, bus received cash from another business (=sup) to whom they gave those checks for a lower rate (2.1%) of interest (bus’s profits were from the margin); pl and/or def served as cosigners to sup. Pl got some borrowers to give cash instead of honoring the checks, even when their checks were by sup. Several of the borrowers have defaulted, bus has closed, and pl and def now owe sup and other investors many hundreds of thousands of NIS. Pl demands the following: 1. To be released from debts as a cosigner to sup (441,000 NIS) and Mr. P. (400,000 NIS), because he was improperly pressured. 2. To have money he and his mother invested (350,000 NIS) and expenses he outlaid for bus (149,000 NIS) returned. 3. Back-pay for months of work. Def claims that pl caused great losses by surpassing the amount of credit def agreed to, especially for some very large loans. Pl admitted in discussion with Mr. P, who mediated, that he should pay for much of the losses (1.25M NIS plus interest). Def claims to have not promised pl a salary, just 15% of profits.

Ruling: First we express our disgust with bus. The Torah strictly forbids taking interest on loans. Although many people legitimately rely on the heter iska to reframe loans so that the lender can be compensated for putting out money, this should not cover cases of ridiculously high interest, to individuals in need or businesses. Chazal say that one who lends with interest can expect his finances to crumble.

The first issue to decide is whether pl is a worker or a partner and whether that makes a difference. Pl says that he was just a worker and therefore is not responsible for losses and should not be a cosigner, whereas def says that he was a partner. Regarding purposeful mismanagement, i.e., giving more credit than he was allowed, it does not make a difference, as a worker who takes the business’ money without permission is responsible for it. Nevertheless, the determination will have some impact on certain points.

It is not accurate to call pl a simple worker. He was bus’s main active person, the business was known publicly as his, and he received 15% of net profits. Therefore, he can be seen as a partner on some level.

Nevertheless, pl is entitled to a salary, even for the final months during which there were not profits. First of all, the type of relationship, in which the business is essentially owned by def, makes it appropriate that pl would receive a salary, and the reason this was not initially done in a classic set payment was on technical grounds (not one that pl should be proud of). Furthermore, in the mediation paper prepared by Mr. P., there is a large sum earmarked for pl’s salary, and it is apparently marked with a check by def. We do not accept def’s convoluted explanation for agreeing to salary payment.