Losses from Financially (and Morally) Bad Loans – part III | 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; pl ran the business, and def was the silent owner. Bus advanced cash 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 already given to 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. The return of the money he and his mother invested (350,000 NIS) and expenses he outlaid for bus (149,000 NIS). 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: We will now discuss pl’s responsibility for not keeping to the amount of credit he was allowed to give customers. Pl claimed that he did not receive enough training. Beit din rejects this claim, as he had clear lists and knew exactly what was beyond the limits. The amounts given were large and when given in installments, the installments were close together. Apparently, the hope for large profits from the high interest enticed pl to exceed limits.

Pl does have a better claim – that def had access to all the records in real time and allowed these large loans to go through, probably on purpose; at least he should have known about them. Def claims that he did not notice how large the credits were. However, from the testimony of Mr. P. and the records of guarantees that def arranged in certain cases, we see a pattern of def being aware and deciding when the amounts were acceptable to him. Under these circumstances, it is correct to divide responsibility for the failed loans, with def, the owner, being mainly responsible. Since it is impossible to know how to quantify, we will employ logical compromise positions (see Shulchan Aruch, CM 12:5). Beit din employed logic in each case and set a formula to deal with the possibilities that some portion of the money owed by defaulting borrowers will be recovered. Regarding the claims of expenses by pl, beit din accepted two thirds of the amounts.

Pl’s action of receiving cash from certain borrowers even though their checks were given to sup was unconscionable. Therefore, all damages to other parties that resulted will be only on pl.