Does a Heter Iska Increase the Risk of Litigation?

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 loans¹ and the reality that lenders are more likely to lend people money when interest can be charged, the Rabbis created a halachic² 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 ½ of the money as an interest-free loan, is to be repaid even in the case of total loss; the other ½ 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 shared³. 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? 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. Finkelstein⁴, 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 law⁵. Let’s see how one Ontario judge answered this question in 625882 Ontario Limited and Batya Wagner v. Hacohen⁶.

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 genuineissue requiring a trial.⁷

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 defence. 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 judgment⁸.

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.