Bobby’s otherwise successful wholesale corporation sustained multiple losses and he reached out to Joe for a multi-million-dollar loan. Joe extended the loan on condition that Bobby returns the funds in six equal quarterly payments. As agreed, Joe secured the return of his money by placing a lien on one of Bobby’s commercial properties. Since the commercial site had outstanding late penalty fees due to violations, Joe first paid off nearly $100,000 in penalty fees, and then assumed the property as collateral for his loan. Although somewhat late, Bobby eventually paid off the loan in six installments, and requested of Joe that he remove the lien off his property. Bobby added that he had a serious buyer for the property and he needed the lien removed as quickly as possible. Joe was unwilling to remove the lien until Bobby reimbursed him the sum of $100,000 that he had paid in violation fees. Without available funds and in desperation, Bobby suggested that Joe remove the lien from his property in exchange for a $200,000 payment after the sale of the property was final. Alternatively, Bobby offered a smaller property he owned that could serve as collateral for the outstanding $100,000 debt. Joe rejected both suggestions claiming that the potential buyer was not a serious customer, and that he was uninterested in switching the lien to a smaller property.
Is Joe obligated to cooperate with Bobby? How should the Bet Din rule and why?
According to the ruling of the Shulhan Aruch, it is a positive commandment of our Torah to lend money to a fellow Jew in need. Furthermore, a loan extended to a borrower enabling him to maintain his livelihood or source of income is regarded as one of the greatest forms of charity. Notwithstanding, it is permissible for a lender to request collateral from a borrower at the time he extends the loan, in order to secure the return of his money. Likewise, it is permitted to extend a loan contingent on the borrower placing a lien on his property in case he defaults on his payments. It is, however, severely forbidden by Torah law for a lender and borrower to collect or pay interest on a loan.
In instances in which a lien is placed on a property and the borrower subsequently pays off the prescribed debt, the property is automatically redeemed. Hence, once all payments of the specific debt stipulated by the lender are satisfied by the borrower, the lender may not withhold the property on account of another outstanding debt he has with that same borrower. This ruling is applicable even if the outstanding debt is directly related to the original loan for which the property was pledged. In order to determine the scope of the debt included in the lien, a Bet Din
will refer to the relevant documents signed by the parties.
A lengthy debate is recorded by leading halachic authorities as to whether a borrower maintains the legal right to switch the pledged property to a smaller less valuable one after a substantial portion of the debt is paid. While the minority view allows a lender to force complete payment from a borrower by withholding the valuable pledged property until he pays in full, others disagree. According to the latter view of the majority, a borrower can redeem the pledged property with a smaller one, providing the second property value exceeds the balance due to the lender. It is customarily practiced by rabbinical courts to consent to a borrower seeking to transfer the lien to a less valuable property in compliance with the opinion of the majority. This opinion is as well the understanding of Rabbi Yosef Caro, author of the Bet Yosef and Shulhan Aruch.
As a general rule, a Bet Din will not award a party more than the amount of their claim or defense. Thus, if a defendant agrees to comply with a claimant, or if he suggests a compromise to resolve the matter amicably, a Bet Din will usually not inform him of his rights, and rule in compliance with their proposed agreement.
Free for Enterprise
Our Bet Din ruled in favor of Bobby, by consenting to his suggestion to transfer Joe’s lien to a smaller less valuable property. Upon transfer of the lien, Bobby was free to sell his valuable property to any potential buyer. As mentioned in Torah law, the majority of halachic authorities sanction the transfer of a lien to a less valuable property after a substantial portion of the debt has been paid. Upon verification that the value of Bobby’s second property clearly exceeded the balance of the $100,000 due, our Bet Din ruled accordingly. Furthermore, if not for Bobby’s willingness to propose collateral for the outstanding debt of $100,000, he was likely free from obligation. Seemingly, the pledged property for the lien only included the multi-million-dollar loan to the company and not the money extended by Joe to clear up the property violations. Our Bet Din did not research the documentation regarding this matter, as it was evident that Bobby wished to resolve the matter amicably. Our Bet Din rejected Bobby’s alternate desperate proposal to first sell the property and pay Joe double his $100,000 loan, since the proposal violates the Torah prohibition of interest. Finally, our Bet Din commended Joe for adhering to the mitzvot of the Torah by extending an interest free loan to Bobby enabling him to maintain his source of income.