Preserving the Management Company’s Security – part II

Case: The plaintiffs (=pl) are the sixty families of a kevutzat rechisha (a group that buys land and builds a housing project together), organized by a management company (=def2). Pl all signed two agreements: 1) A management agreement between them and def2; 2) A partnership agreement, signed by all of pl, in which their obligations as partners are spelled out. At the time of adjudication, pl were close to completing, after many years, the project. Def2 claimed outstanding fees (approximately 2.5 million shekels) from pl, and pl are planning a major countersuit against def2 for mismanagement. Pl are trying to receive outside funding to continue the project, which is now unfeasible because their lawyer (=def1) created a he’arat azhara (=he’az; an encumbrance) on behalf of def2, preventing pl from taking legal actions on their property, including putting a lien on it to a financial institution. Def2 is willing to remove the he’az only if pl put in escrow the amount of money def2 is suing for. Pl argue that def1 did not have a right to create the he’az for def2, as it was authorized only to be in def1’s name, as pl’s lawyer looking out for their interests against the possibilities of a partner not fulfilling his obligations to them.



Ruling: Last time we saw that the question of removing the he’az is on the assumption that def2 deserves to be paid.

P'ninat Mishpat (704)

Beit Din Eretz Hemda - Gazit

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605 - Preserving the Management Company’s Security – part I

606 - Preserving the Management Company’s Security – part II

607 - Promotion that Didn’t Fully Happen

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Def2 is not muchzak in the right for a he’az because def1, pl’s lawyer, has an irrevocable power of attorney to undo it, which he can do despite his close relationship with def2. On the other hand, pl’s attempt to revoke the he’az requires changing the status quo.

Beit din analyzed several passages in the partnership agreement. It mentions the need to pay third parties and that he’az is a means to ensure the payment of obligations, but no passage clearly says that a he’az should be used for a third party’s benefit and be put in his name. Everything is compatible with, although not explicit in support of, pl’s claim that the idea was to protect the group from individuals’ refusals to take part in paying third parties, as it would put the burden on remaining members. For that reason, the he’az was supposed to be in the name of def1, their lawyer.

There are several indications that the he’az was not intended as a security for def2. Def1 wrote a letter to pl explaining that he was forced to put the he’az in def2’s name because the Land Registry did not allow him to put it in his own name. He explained that it would not grant power to def2 because of the power of attorney def2 gave him to undo it. One of the financial institutions also referred to the arrangement in that way. Finally, if it were for def2’s benefit, it would have been mentioned in the management agreement (which focuses on def2’s rights).

A plaintiff can petition beit din to take steps to ensure there will be a means of his extracting payment from the defendant. However, beit din should do a "ma’azan nochot" to see which side’s needs are more pressing. In this case, all members of pl are responsible, if needed beyond their portion of ownership, to pay any award def2 might receive, and each owns property that can be used for this. Therefore, the danger to def2 of non-payment is negligible, and the claim that the he’az impedes pl’s ability to receive crucial financing is credible. Therefore, def2 must remove the he’az.