Rabbi Itamar Rosensweig
Debt, Equity, and the Tricky Case of the Iska
Introduction
Modern commerce relies on interest bearing loans. Large projects are financed through instruments of debt; without it, skyscrapers would not rise, startups would not be founded, railroads would not be laid, and most individuals would never own a home. Yet Jewish law prohibits interest-bearing loans between Jews.
Over the generations, halakhic authorities have sought mechanisms that would allow interest-like returns without violating the prohibition against charging interest. Among these, the Heter Iska has emerged as the most influential and widely adopted solution. By recasting a loan as a form of equity investment, the Heter Iska aims to preserve the economic benefits of debt without violating the prohibition of ribbit.
This article analyzes the Heter Iska through a recent dispute adjudicated by the Beth Din of America. [1] While much of the existing literature focuses on whether the Iska successfully avoids the prohibition against charging interest, this article shifts the inquiry in a different direction: whether the Iska adequately protects the lender’s economic expectations—specifically the return of principal and the receipt of fixed, interest-like payments.
Section I presents the facts of the case. Section II introduces the distinction between bailments and loans and develops the halakhic concept of an Iska. Section III takes up the prohibition against charging interest and explains how the Heter Iska seeks to reproduce the economics of an interest-bearing loan while avoiding the prohibition of ribbit. Sections IV and V examine the key provisions of the Heter Iska that mimic the core features of debt. Section VI analyzes the Beth Din of America’s decision in Spiro v. Fink.
The Beth Din’s decision brings into sharp relief the tension inherent in the Heter Iska: the more securely it protects loan-like economic expectations, the closer it comes to violating the prohibition against interest; the more rigorously it avoids the prohibition against interest, the less it secures the loan-like economic expectations. Section VII reflects on how modern finance and contemporary beit din jurisprudence exacerbate the fragility of an already delicate legal construct.
I. The Case: Spiro v. Fink
A dispute with the following facts came before the Beth Din of America. On January 1, 2024, the Plaintiff tendered a $500,000 check to the Defendant, which the Defendant deposited into a Chase brokerage investment account holding approximately $1.5 million, bringing the balance up to $2 million. The account statements reflect that over the next seven months, the account suffered significant trading losses, losing more than 75% of its value.
The Plaintiff claimed that the $500,000 check was tendered as an interest bearing loan and that he is entitled to recover his principal plus accrued interest. The Defendant countered that the check was an equity investment, and because the investment depreciated, most of Plaintiff’s equity evaporated with it.
The memo on the check only deepened the confusion, stating “Investment/Loan Per Agreement.”
At the end of August 2024, Plaintiff emailed Defendant:
Per our signed agreement I’m calling in the loan to be paid at 4% annualized interest. As of today $515,000.00 is owed for this specific loan. An excel file is attached with the updated calculation. Please schedule a wire transfer today.
Defendant responded:
As I have indicated several times there is a loss and I will document it for your review. Calculations for the portfolio for the month of August will be done on September 1 or shortly thereafter. Given your email today, if it is your desire to unwind and terminate I can use end of day valuations of the portfolio as of August 29. Please let me know by 9am tomorrow of what you want to do.
To this, Plaintiff responded:
It is in your best interest not to play these games. I have called in the loan. To avoid legal action it must be repaid in full along with 4% annualized interest in a timely manner.
The parties disagreed about the nature of their relationship. The Plaintiff claimed they were lender-borrower. The Defendant claimed they were investor-manager. Given the trading losses on the brokerage account, at stake was whether the Plaintiff could recover his principal plus accrued interest or whether his recovery would be limited to the approximately 25% surviving value of his equity investment.
The Executed Agreements
The Promissory Note
The confusion stems from the two documents the parties executed at the outset, in January 2024. They executed a promissory note, which displayed “Promissory Note” in bold letters at the top, consistently referred to Plaintiff as lender and Defendant as borrower, and contained the following unambiguous language:
Amount: $500,000.00
Date January 1, 2024
For value received, the undersigned borrower, [Defendant]… who shall hereinafter be known as “Borrower”, hereby promises to pay lender [Plaintiff]… who shall hereinafter be referred to as “Lender” the sum of $500,000.00 (“Principal Amount”) with interest at the rate of 4% per annum (“Interest”) on the unpaid principal…
The Principal Sum plus all accrued interest will be paid back within thirty days of a written request from the Lender. If no such request is made the Principal Sum plus all accrued interest will be paid back in full on January 1, 2025.
The note was signed by Plaintiff and Defendant on January 1, 2024.
The Iska Contract
The parties executed an Iska agreement simultaneous with the promissory note. This document declared “Iska Contract” in bold letters at the top. The Iska characterizes the relationship between Plaintiff and Defendant as investor-manager, and it unambiguously assigns all profits and losses to Plaintiff as the equity investor. The opening paragraphs of the Iska state:
I, the undersigned (the “Recipient”, or “Manager”), have received the sum of $500,000.00 (“Total Funds”) from [Plaintiff] (hereafter referred to as the “Investing Partner”), to be used for business purposes. I obligate myself to utilize these funds in any manner which I believe will generate profits… Any profits realized or losses sustained as a result of this investment shall be allocated to the Investing Partner.
The Iska agreement entitled Defendant to a management fee in the amount of 1.5% of the principal and 15% of investment returns:
An annualized one and half percent (1.5%) of the received sum plus fifteen percent (15%) of the profits shall be retained by the undersigned (the “Recipient”) for his services during the term of this Iska.
Both parties signed the Iska agreement on January 1st, the same day they executed the promissory note.
Significantly, the Iska document contained a supremacy clause declaring that the terms of the Iska prevail over any conflicting document that may have been executed in the course of the parties’ dealings. The clause provides,
In the event of any conflict between the terms of this Iska agreement and the terms of any other agreement signed by the two parties in regard to these funds, the terms of this agreement shall prevail.
Plaintiff’s Argument that the Promissory Note Controls
The dispute between the parties turns on which document controls the deal. The Plaintiff insisted that the promissory note controls. Therefore, the correct legal characterization of the relationship is creditor-debtor. In the August email correspondence we saw above, Plaintiff repeatedly refers to the money owed as “a loan” with “interest,” and he informs Defendant that he’s “calling in the loan to be paid at 4% annualized interest.”
In August 2024, Plaintiff hired a law firm to collect the debt from Defendant. In a demand letter sent that same month, Plaintiff’s attorney demanded payment of the amount owed “to the Lender, pursuant to that certain Promissory Note…. The principal amount and the accrued interest on the Note is due and payable to the Lender.”
The demand letter dismisses the Iska agreement with the following note:
Under Federal District Court legal precedent, it has been held that ‘Heter Iska agreements are designed as a compliance in form with Hebraic law… and do not alter the clear civil law terms of a note. Edelkind v. Fairmont Funding LTD 539 F. Supp. 2d 449.
Plaintiff also submitted into evidence an email he had sent to Defendant two weeks prior to executing the promissory note and Iska:
See heter iska document attached.
Helpful link related to heter iska: www.schlamstone.com/heter-iska-enforced-as-a-note-not-a-partnership-agreement/
The email linked an article explaining that U.S. courts disregard an Iska accompanying a promissory note and will enforce the note as a debt. The article also cited U.S. court precedent dismissing the Iska as a religious device of Jewish law designed to circumvent the prohibition against charging interest, emphasizing that “it has been specifically held that a Heter Iska agreement does not alter the clear civil law terms of a note.”
At the hearing before the Beth Din of America, Plaintiff insisted the Beth Din should recognize that the true relationship between the parties was creditor-debtor and therefore should enforce the promissory note just as a U.S. civil court would. The Iska, he argued, was merely a mechanism for permitting interest payments: The fundamental economic relationship between the parties was that of creditor-debtor, and it remained unaltered by the religious device of the Iska.
Defendant’s Argument that the Iska Governs
Defendant countered that the Iska genuinely structured the relationship as investor-manager. Therefore, the deposit was an equity investment, and the risk of loss sat with the investor. Defendant pointed to the supremacy clause in the Iska agreement establishing that the Iska–equity characterization prevails over conflicting documents.
Additionally, Defendant noted that the Iska required him to issue monthly profits and losses reports to Plaintiff: “By the 15th of every month beginning in January 2024, Recipient shall notify the Investing Partner in writing of the previous month’s profits, if any, of the Total Funds invested.” In fact, Defendant did issue monthly performance reports to Plaintiff. For example, he would write, “performance for February was 0.85%”. To which Plaintiff would respond “Good stuff. Thanks for the update.” Defendant argued this shows that the parties perceived their relationship as investor-manager, where the investor was interested in keeping abreast of the investment’s monthly performance, not borrower-debtor.
The Beth Din of America had to decide whether Plaintiff was correct that the promissory note governs and therefore the $500,000 check was a loan collectable regardless of investment losses or whether Defendant was correct that the Iska governs and the $500,000 check was an equity investment which Plaintiff lost (75% of) when the investment tanked.
II. Loans, Bailments, and Investments
This section lays the groundwork for the dayanim’s decision by explaining the nature of an Iska investment and how it structures the relationship between the parties. Central to the analysis is the distinction in Jewish law between debt and equity. To that end, this section examines how equity differs in Jewish law from debt and explores how halakha distinguishes these legal relationships from each other. This analysis will shed light on the relationship between Plaintiff and Defendant and sets the foundation for the Beth Din’s ruling.
Debt v. Bailment: Right of Consumption, Risk of Loss, and Ownership
Jewish law distinguishes loans (milveh) from bailments (pikadon).[2] The categories are delineated separately in the Torah, and they reflect distinct legal relationships.[3] A milveh (loan) involves a lender who provides funds to a borrower in exchange for a promise to repay. A pikadon (bailment) occurs when the owner of an object, the “bailor” (mafkid), deposits personal property (the bailment) into the physical possession of another, the “bailee” (shomer), for safekeeping. The bailor continues to own the object, but the bailee holds it in trust on behalf of the bailor and returns it at the end of the bailment.
The key feature of a loan is that the borrower has the right to consume the funds and use them as he sees fit, for his own benefit.[4] Title to the funds passes to the borrower, the money loaned now belongs to him. His sole obligation is to repay the lender when the debt becomes due. There is nothing in the borrower’s possession the lender can point to as “his” other than the borrower’s abstract legal obligation of repayment.[5]
By contrast, a bailment involves the physical transfer of a possession without a legal transfer of ownership.[6] The bailor continues to own the item; he just entrusts it to the bailee for safekeeping. Suppose I deposit my bike with a neighbor for safekeeping for the duration of my trip abroad. I continue to own the bike even after the neighbor takes possession. Upon my return, he is obligated to return it. Unlike a milveh, the bailee has no right to consume or dispose of the bailment for his own personal benefit.[7] To the contrary, he is expected to protect and safekeep it on behalf of the bailor. The bailor retains ownership over the bailment (pikadon).
Risk of Loss
The difference between a milveh and a pikadon is exemplified by the risk of loss. In a loan (milveh), the risk of loss is borne by the borrower. He must repay the full amount of the debt regardless of what happens to the money itself. If I borrow $1 million to purchase a house, I remain obligated to repay the loan even if the house gets destroyed by a tornado. With a pikadon, by contrast, the risk of loss is typically borne by the bailor (mafkid).[8] He continues to own the object, even though it sits in the possession of the bailee (shomer), so the risk of loss is his to shoulder. If I deposit my bike with a neighbor for safekeeping while I travel, and lightning incinerates it in his garage, the loss is mine to bear.
There is a tendency to think the distinction between milveh and pikadon should turn on the type of article changing hands–to wit, that a milveh essentially involves the deposit of money whereas a pikadon involves the deposit of personal possessions (e.g., a watch, shovel, bike, book). But Jewish law slices the distinction differently. The halakhic categories allow for a milveh of personal property and for a pikadon of money.
Indeed, the Mishnah (Bava Metzia 5:9) discusses a milveh involving wheat and other commodities: If I ask my neighbor for a milveh of a dozen eggs, I have the right to consume and destroy them–I become the owner of those eggs–but I am obligated to repay my neighbor one dozen eggs. The risk of loss is borne by me, the borrower, and so is the opportunity for gain. If Avian Flu causes the retail price of eggs to skyrocket, I can sell the eggs and pocket the profits so long as I ultimately provide my neighbor one dozen eggs at the agreed upon date.[9]
Contrariwise, the Tosefta discusses bailments of money, where the bailee is prohibited from consuming the money for his own benefit and where the risk of (no-fault) loss remains with the bailor.[10] The bailee is entrusted to safeguard the cash, and he is obligated to return it to the bailor at the end of the bailment. Title to the money stays with the bailor. If you hand your cash-filled purse over to a coatcheck attendant at a dinner venue, the money inside is a bailment for safekeeping, not a loan to the coatchecker.[11]
In summary, Jewish law distinguishes loans (milveh) from bailments (pikadon). The categories are distinguishable from each other based on several properties, including who possesses title, who bears the risk of loss, and who holds the right of consumption. Having introduced the categories of milveh and pikadon, we can now take up the concept of an Iska.
The Iska
Consider an investor seeking to derive profit from his capital. He writes a check for $1 million to his entrepreneurial neighbor and says I want you to take my $1 million and grow it for me. The profits generated shall accrue exclusively to me, but I will pay you a salary for your expertise and work. Jewish law would characterize this as a pikadon (bailment). The investor retains ownership over the capital and therefore reaps the value of its appreciation.
Legally, halakha views this investment of capital as identical with an investment of personal property. Suppose I hand the keys to my 30,000 mile old sedan over to my entrepreneurial neighbor and say: do whatever it takes to spruce up the car–fit it with new tires, hit it with a fresh coat of paint, swap out the bent fender–and shop it around used car markets until you can sell it at a premium markup. I’ll pay you for your labor and effort, but whatever profits are made from the sale of the car shall belong to me.
Here too the capital appreciation of the car accrues to me, the owner. The entrepreneurial neighbor serves as my agent to improve the car and manage its sale. Ultimately he is a bailee who holds the car in trust on my behalf. The same holds true when I invest a sum of money with him and task him with growing it on my behalf.
The term used in Jewish law to characterize this type of investment of capital or merchandise in the hands of a manager/agent with the intention of generating profits is “Iska”, literally a “business investment.” At its core, the Iska is just a special type of bailment. The novel feature of the Iska arrangement is that the bailor/investor’s ownership survives the bailment’s conversion from one asset class to another. I hand $1 million to my entrepreneurial neighbor and tell him to use the money to generate profits for me. He takes the money and, having determined that investing in real estate will yield profits, he purchases a rental home, with an eye toward rental income and long term capital appreciation. The manager has now converted my bailment from cash to real property, and my ownership interest has converted with it. Instead of owning $1 million of cash, I now own real estate.
In this sense, an Iska differs from a typical bailment. In the typical case, the bailee is charged with safekeeping the bailment and is barred from investing it or converting it into a different asset class. In the case of an Iska, however, the bailee is authorized ab initio by the bailor to serve as his agent to manage, invest, and convert the bailment from class to class in pursuit of profits. Whatever asset the capital is converted into or exchanged for (real estate, stocks, commodities, membership interests) belongs to the bailor, who continues to bear the risk of loss and reap the benefit of gain.[12]
The underlying legal principle is the same. An Iska is a bailment where the manager holds the funds/asset in trust on behalf of the investor-bailor, and he acts as the investor-bailor’s agent and fiduciary. The investor continues to hold title to the funds, bearing the risk of loss and reaping the benefit of gains. This simple Iska structure–where the investor bears the entire risk of loss and holds all the opportunity for gain–is called kulo pikadon.
The Half Loan Half Bailment Iska
In talmudic times it was apparently common for an investor to hand merchandise or capital to an agent with instructions to “shop it around, sell it for a profit” with the stipulation that “the proceeds shall be shared between us” without a clear allocation of ownership rights and liabilities in the contributed capital.
For example, it is not clear if the investor and manager are now 50/50 partners in the contributed capital and merchandise. And if they are, does the manager have the right to consume his 50% portion of it? If the merchandise depreciates en route and is sold off at a loss, who takes the hit? Because of the uncertainty of the arrangement, the sages sought to disambiguate the rights, ownership interests, and liabilities of each party. They instituted that wherever the investor contributes capital or merchandise with an agent/manager with the stated goal of splitting profits 50/50 without specifying ownership interests and without allocating liabilities, Jewish law would characterize the contribution as a half milveh half pikadon (chatzi milveh chatzi pikadon).[13]
This means that 50% of the contributed capital is characterized as a loan to the manager while the other 50% is characterized as a bailment. Applying the principles presented above, it follows that the risk of loss and the prospect of gain for the 50% bailment inures to the investor as his pikadon, while the risk of loss and prospect of gain for the 50% halva’ah inures to the manager/agent as his money (with a duty to repay the principal).[14]
Let’s work some numbers. Suppose I hand you $1,000,000 with the instructions to generate profits to be split 50/50. Jewish law would characterize $500,000 of this as a bailment owned by me, and $500,000 as a loan, which is now owned by you (though you promise to repay me that amount). Suppose you take the $1,000,000 and invest it in real estate which appreciates to $1,300,000. We would say that my bailment has appreciated $150,000 for a total value of $650,000, and your money has appreciated $150,000, for a total of $650,000. When the venture is unwound, I retake possession of my (appreciated) bailment $650,000, and you take possession of your appreciated money $650,000, but you still must make good on your promise to repay the loan amount of $500,000, which you pay back to me. This means that I emerge with $1,150,000, while you emerge with $150,000.
If the goal were just to split profits, the half loan half bailment structure would be extravagant. The real purpose of the half loan half bailment structure is to distribute the risk of loss. Suppose my $1,000,000 investment depreciates down to $800,000. This means my $500,000 bailment has depreciated to $400,000, and your money has depreciated down to $400,000. But you still remain obligated to repay the $500,000 loan. In effect, then, I walk away with my $400,000 bailment plus the repaid loan of $500,000. Each of us bears the loss of $100,000, or 50% of the depreciation. You emerge negative $100,000, while I emerge with $900,000, but each of us absorbs a $100,000 loss.
The All Bailment Iska
Although the sages instituted that the default profit-splitting investment should take the form of a half loan half bailment, the parties are free to structure the Iska in other ways.[15] They can structure it as a 1/3rd milveh 2/3rd pikadon, where the profits, risk of loss, and use rights are allocated accordingly. The Iska can also be structured as 100% pikadon (kulo pikadon), where the risks and benefits inure exclusively to the investor-bailor.[16] This was the structure we examined above where profits belong exclusively to the investor-bailor, and the Iska is just a special case of pikadon where the bailee is authorized to manage the capital and convert it into other assets.
Of course, the investor may agree to pay the manager either a fixed salary or index the salary to a performance metric, such as to a percentage of the principal investment or earned profits, but the point is that there’s no element of a loan and the manager has no financial equity or interest in the actual investment. In such a case, the manager would have an independent compensation package that is perhaps indexed to the investment’s performance but no equity in it. In the 100% pikadon investment, the risk of loss and prospect of gain belong entirely to the investor.
Debt vs. Equity
Let’s take stock of the distinction between a milveh and a pikadon. In contemporary economic terms, a milveh is a form of debt, while a bailment (pikadon) of money for the purpose of investment is a form of equity investment. And even though a typical bailment requires the return of the actual object, that is not a necessary feature of the legal category of bailments, as the special case of Iska demonstrates. So long as the bailment is held in trust for the investor, and he has authorized the manager to invest, convert, and exchange the bailment on his behalf, the investment remains a bailment and the investor continues to hold title to the invested funds and assets. Authorities converge on a simple test to determine whether a transaction is a loan or a bailment: Identify which party bears the risk of loss.[17]
III. The Prohibition Against Charging Interest and the Heter Iska
The Torah prohibits interest bearing loans between Jews. The prohibition is clearly stated in the biblical verse, and it is codified in all the authoritative treatises of Jewish law.[18] By definition, the biblical prohibition against interest bearing loans is limited to the financial instrument of debt. Loans and debts are the types of instruments that can bear interest. A pikadon does not bear interest–it can appreciate in value or can generate rental income–but it is a category error to describe these as interest payments.[19]
Black letter Jewish law allows me to charge you rent for the right to use my possessions. Indeed one of the four categories of bailments in Jewish law is that of a renter (sokher) who pays a sum of money in exchange for the right to use and temporarily possess an object that belongs to someone else.[20] It follows that there is nothing wrong with granting someone a bailment (pikadon) of money in exchange for fixed rent payments. This is nothing more than the classic case of a renter (socher) applied to a bailment of money.[21]
Of course, the terms of the bailment must be clear that the money has been deposited as a pikadon and not as a milveh. The terms must assign the downside risk of loss to the investor-bailor and prohibit the manager-bailee from consuming the capital for his own personal benefit. Under these conditions, there is no halakhic prohibition with the investor receiving payments in exchange for his funds. By definition, there is no violation of the prohibition against charging interest, for there is no loan and therefore no interest payments.[22]
Indeed, the Tosefta explicitly permits renting out money to a banker who desires funds to display in his office or to use for educational purposes–to teach an apprentice the technique and mathematics of money changing–or to keep on hand to project liquidity and financial security to his customers.[23] The Tosefta emphasizes that the risk of no-fault loss in this case sits with the bailor.[24]
Additionally, the Talmud reports that R. Chama would charge rent for the use of his capital.[25] As commentators explain, so long as the bailor-investor bears the risk of loss and the investor is barred from consuming the capital for his own personal benefit, there is no loan, and therefore no prohibition of ribbit.[26]
The upshot is that the characterization of the financial instrument is critical. There is no prohibition against an investor profiting from the appreciation of his capital or from deriving rental income or dividends from the money he invests. The prohibition of ribbit is limited to the financial instrument of milveh.[27]
The Heter Iska
If we focus on the risk of loss and opportunity for gain, a pikadon tracks the economics of an equity investment. The investor-bailor (mafkid) bears the risk of loss but also reaps the benefit of the investment’s appreciation.[28] If all capitalists were content with equity investments, the prohibition against charging interest would not interfere with business. However, not everyone seeks equity.
Like banks and commercial lenders, many investors prefer to forgo the benefit of market appreciation in exchange for the security of their principal and fixed interest payments. In other words, they prefer to profit from an instrument of debt. But profiting from debt is prohibited by Jewish law.
The idea of a Heter Iska is that there’s a way to structure a pikadon–an equity investment not subject to the prohibition of ribbit–to mimic the features of an interest-bearing loan (protection of the principle with fixed returns) while remaining a bona fide equity investment. The Heter Iska was designed to approximate the economics of an interest bearing loan without triggering the prohibition against charging interest. The challenge is how to achieve that. How do you structure an equity investment that guarantees a) return of the principal to the investor and b) fixed annual returns/profits above the principal amount. In a normal equity investment the principal investment is at risk of depreciating, and there is no guarantee that the venture will generate profits.
The section below discusses two strategies introduced by medieval authorities to protect the investor’s principal. The section after that considers strategies for securing fixed annual returns.
IV. Protecting the Principal
R. Baruch b. Isaac’s Strategy
R. Baruch b. Isaac, the author of the Sefer Ha-Terumah, and one of the central figures in the academy of Tosafot, proposed leveraging the halakhot governing an agent’s breach of trust to protect the investor’s principal. In an Iska, the manager serves as an agent of the investor. He is entrusted with the investor’s funds and he is obligated to manage the funds pursuant to the investor’s instructions. Under Jewish law, an agent who deviates from the terms of his agency by utilizing funds (or merchandise) entrusted to him in a manner inconsistent with the instructions of his agency becomes liable to pay restitution to the investor-bailor (meshale’ach) for any losses resulting from his breach. Yet any profits generated by the breach continue to inure to the investor.[29]
Suppose we have an agreement that you will invest my $100,000 in an index fund that tracks the S&P. You take the check and invest it instead in cryptocurrency. If the crypto investment goes down but the S&P goes up, you are liable to pay me restitution for the losses resulting from your breach. If crypto goes up and the S&P goes down, I remain entitled to reap the benefits of the investment’s gain.
R. Baruch b. Isaac proposes leveraging this principle from the Jewish law of agency to secure the investor’s principal, mimicking that feature of debt. The investor should deposit money with the manager as a pikadon bailment where the entire risk of loss sits with the investor, but agree to some profit sharing arrangement. The investor should instruct the manager to invest the money in highly secure and specific investments, with the foreknowledge that the terms are so specific and limiting that the agent will most certainly breach them in pursuit of a profitable return.
If the manager invests the funds in the secure asset as directed by the investor, the principal will almost certainly remain safe, given the secure nature of the asset. If the manager deviates from these terms and invests in other, riskier assets, he becomes liable under the rules of breach of trust to pay restitution to the investor for any resulting losses. And either way, if the venture succeeds following the agent’s breach, the profits are split based on the profit-sharing agreement between the investor and manager.
So even though the Iska is structured as a classic bailment where the risk of loss sits with the investor, his principal is secure. If the manager abides by the terms of the agreement, the funds will be invested in a secure asset. And if the manager breaches and invests in riskier ventures, the investor can recoup his investment through the Jewish law of breach of trust entitling him to restitution on his investment.[30]
Of course, this strategy doesn’t capture all the features of an interest-bearing loan. For example, if the investment generates no profits, the investor will receive no returns above his principal. The amount of profits may be variable. And it is always possible that even the investor’s instructed ‘secure’ assets may depreciate. Still, R. Isaac’s strategy does secure the principal for the investor more than a typical equity investment.[31]
R. Yisrael Isserlin’s Responsum
R. Yisrael Isserlin, the author of the Terumat Ha-Deshen, and one of the great poskim of late medieval Ashkenaz, offered a different strategy for structuring a kulo pikadon iska to mimic the features of debt. He received the following query:[32]
Question: Reuven wishes to deposit his money with Shimon, who will lend them out at interest. Reuven wants to stipulate with Shimon to receive fixed payments from him, and he also desires to have almost complete security in the principal, so that he won’t have any loss at all. How can this be done permissibly?
Let’s consider the underlying economic structure of the contemplated deal before we consider its legal structure. Shimon was going to take Reuven’s money and lend it out to a gentile at interest. Shimon would profit by collecting interest from the gentile borrower. Reuven would profit by collecting payments from Shimon for the right to lend out his capital and profit from it.
Were Shimon to borrow the money from Reuven as a milveh, the contemplated venture would be absolutely prohibited as ribbit, since Shimon would be paying Reuven fixed sums of interest beyond the principal to borrow capital.
R. Isserlin responds confidently that there is a way to structure the relationship to avoid the prohibition of ribbit. He cautions that his answer his subtle, and careful attention must be paid to the legal nuances:[33]
Answer: It is possible to find a solution and permissible ways to do this. However, I am apprehensive that perhaps through the subtlety of the analysis and by finding a device to permit business dealings involving interest, the words of Torah might appear as a mockery and a jest, a source of laughter and ridicule. Nevertheless, it is still said, “the righteous shall walk in them.”
Notwithstanding R. Isserlin’s initial hesitations that his subtle analysis would make the Torah seem like legal casuistry, he proceeds (citing the verse in Hoshea 14:10, “The wise will consider these words…the righteous can walk on them, while sinners stumble on them”) to offer his analysis to the wise (who will understand the nuance of his analysis and navigate the delicate path he has charted).
R. Isserlin advises that so long as Reuven deposits the money with Shimon as a pikadon, with Reuven bearing the risk of loss should anything happen to the funds, he can charge Shimon a fixed rate as rent for the right to profit off his funds.[34] Were Shimon to borrow money from Reuven as a milveh, the relationship would be prohibited as ribbit. But if Shimon rents the funds from Reuven as a bailment, then the transaction is permitted, for where there is no milveh there is no ribbit.
Different Types of Risk of Loss
R. Isserlin zeroes in on the risk of loss as the decisive factor distinguishing a milveh from a pikadon. So long as Reuven bears the risk of loss, the transaction is a pikadon. Where Shimon bears the risk of loss, the transaction is a milveh.
The term “bearing the risk of loss” requires clarification. The Jewish law of bailments distinguishes between different types of losses: losses stemming from uncontrollable force majeure occurrences (‘ones), losses arising from theft or misplacement of the object (genevah va-avedah), and losses associated with negligence of the bailee (peshi’ah). Depending on the type of bailment, the owner may bear the risk of some but not all of these categories of losses.
In a typical case of an unpaid bailee (shomer chinam), the owner bears the risk of losses arising from force majeure, and theft or misplacement, while the bailee bears responsibility only for losses arising from his own negligence. For a typical case of a paid bailee and for the case of a renter, the bailee/renter bears the risk of loss for his own negligence and for theft and misplacement of the object, while the owner/bailor bears the risk only for force majeure.[35]
R. Isserlin observes that the more risk the owner/bailor takes on, the more the transaction has the features of a bailment/pikadon and the more distant it is from a milveh where the borrower bears all the risk of loss. Therefore, R. Isserlin counsels Reuven the investor to accept substantially all of the risk of loss. Not just the risk of loss for force majeure, but also the risk of loss arising from theft and misplacement while the money is managed by Shimon, and even the risk of losses stemming from Shimon’s negligence.[36] Reuven’s contractual acceptance of so much risk would make it clear that the funds deposited remain his, and that the relationship with Shimon is certainly not that of a lender-borrower. By Reuven accepting virtually all of the risk, the transaction steers as far away as possible from a milveh and any prohibition of ribbit.[37]
R. Isserlin advises that Reuven should leave Shimon liable, however, for one type of risk: for losses arising from Shimon’s gross negligence, negligence that is equivalent in its egregiousness to Shimon recklessly and tortiously destroying the investment with his own hands.[38] In effect, Reuven accepts the risk for every type of loss other than those cases where Shimon is grossly negligent.
Protecting the Principal: Raising the Standards of Evidence
Thus far R. Isserlin explained how to avoid the prohibition against charging interest. Recall, however, that Reuven also wanted to secure his principal regardless of how the investment performed under Shimon’s management, just as a lender would recover his principal regardless of how the borrower spent it. For example, suppose the non-Jewish borrower to whom Shimon lent the money at interest defaulted on his payments to Shimon, Reuven wanted the right to recover his principal from Shimon in any event.
Here R. Isserlin counsels to leverage a rule from the Jewish law of contracts which allows parties to stipulate to higher standards of evidence to govern their agreement. For example, the Talmud allows parties to a loan to stipulate stricter standards of proof the borrower would have to meet in order to prove the debt has been repaid. The Talmud discusses agreements stipulating that the borrower must repay the loan in the presence of two designated witnesses, Reuven and Shimon, and that only their testimony will constitute valid evidence of repayment.[39] They can also agree to certain presumptions and allocate burdens of proof, such as ‘there will be a presumption that the loan has not been repaid and the lender will always be believed when he asserts as much, unless the borrower can prove otherwise on the basis of the testimony of Reuven and Shimon.’[40] These stipulations and similar ones were often adopted to give the lender the upper hand in the event of downstream disputes about whether the loan was repaid.
Drawing on this principle, Rabbi Isserlin counsels Reuven and Shimon to stipulate that if any loss occurs to the principal amount, it will be presumed that Shimon was grossly negligent, and Shimon will have to pay restitution to Reuven for the losses. The parties should further stipulate that should Shimon seek to rebut this presumption, only the direct testimony of the rabbi and chazan would be credible to establish the facts of the loss. All other testimony and evidence will be deemed invalid for the purpose of this deal.
In effect, Shimon the manager will always be held liable for the loss of the principal, unless the rabbi and chazan are able to testify as to the circumstances of the actual losses—that the principal was lost or depreciated in some manner other than through Shimon’s gross negligence. Reuven thereby sets an artificially difficult standard of evidence to meet, because it is “almost certain” that the rabbi and chazan will have no idea where the funds were invested or how they depreciated, basically ensuring that Shimon can never adduce their testimony. Shimon the manager will remain liable to the investor under the presumption that his gross negligence was the reason for the loss.[41] This strategy makes it extremely difficult for Shimon to meet his burden of proof to demonstrate that he is not liable to compensate Reuven for the loss of his principal.
R. Isserlin’s approach structures a pikadon/iska in a way that protects the investor’s principal. Even though the investor has formally accepted the risk of loss for virtually all types of losses that may occur—standard negligence (peshi’a), theft and misplacement (genevah va-’avedah), force majeure (‘ones); everything except for losses resulting from the manager’s gross negligence–procedurally it becomes exceedingly difficult for the manager to escape liability to defeat the presumption of gross negligence, given the stipulated burden of proof.
Simplifying R. Isserlin’s Approach
Later authorities simplified R. Isserlin’s approach. Instead of distinguishing between losses arising from the manager’s gross negligence and all other losses, they realized it was sufficient to assign the entire risk of loss to the investor but to impose a high burden on the manager with regard to proving that there were losses in the first place. This approach makes it exceedingly difficult for the manager to prove that the investment depreciated.[42]
Although the modification appears to be insignificant, it does alter the halakhic mechanism of the Heter Iska. R. Isserlin’s approach triggers the manager’s duty to pay restitution as a negligent bailee. The modified version triggers the bailee’s responsibility to return the investor’s bailment that he has been holding onto on his behalf.[43] In other words, R. Isserlin’s approach treats the manager as liable for causing losses through gross negligence. The modified approach of later poskim treats the Iska as never having suffered losses in the first place.
Naming Witnesses vs. Any Two Qualified Witnesses
Some authorities believe that R. Isserlin’s strategy of restricting the witness pool to the rabbi and chazan makes it too difficult for the manager to establish losses, rendering the transaction too loan-like and too similar to charging interest and therefore in violation of the prohibition of ribbit. Some insist that the designated witnesses must be somewhat knowledgeable in the commercial dealings of the investor and manager. At a minimum, these views hold, it must be plausible that the witnesses would actually attest to business losses.[44]
Other authorities believe that the Iska should not designate specific witnesses at all because limiting the pool to two individuals makes it virtually certain that they will be unable to testify about the actual losses. Instead, the Iska should simply require that all losses be established by the testimony of any two kosher, reputable witnesses.[45]
Although this standard of proof may sound easy to meet in comparison with limiting the witness pool to two specified individuals such as the rabbi and the chazan, it still succeeds in raising the evidentiary bar quite significantly above the normal standards of evidence for a monetary dispute. In a typical monetary dispute, the claimant bears the burden of proof; in the case of an Iska (without stipulating to a higher burden of proof), the manager would ordinarily be believed to claim the investment depreciated, and the investor would bear the burden to demonstrate otherwise.[46] Thus, requiring losses to be established by the testimony of two kosher witnesses shifts the burden to prove losses onto the manager, compared to the default rule governing comparable monetary disputes.
Furthermore, in ordinary monetary disputes, a dayan has discretion to decide a case on the basis of evidence other than testimony. For instance, he can decide the case on the basis of documentary evidence, the comparative reasonableness of the parties’ claims, and the likelihood of various scenarios. He can also decide the case on the basis of testimony presented by non-kosher witnesses if he is persuaded they are telling the truth.[47] The stipulation of the parties to kosher witnesses blocks all that. It requires the fact of depreciation or loss of principal to be evidenced and affirmed by two kosher witnesses, to the exclusion of other forms of evidence and judicial inferences. Only the testimony of two kosher witnesses will suffice to demonstrate losses.
V. Ensuring Fixed Monthly Profits
So far we have explored strategies to protect the investor’s principal, allowing the equity investment to mimic that aspect of debt. A typical lender also wants to ensure fixed interest payments above the principal. He doesn’t just want to recover the amount he lent; he wants to be compensated for the opportunity cost of the lost use of his capital for the duration of the loan. R. Baruch b. Isaac, for instance, explained how to gerrymander a pikadon to protect the principal, but he provides no insight into whether the investor can guarantee fixed monthly payments comparable to a loan. The risk in any investment–unlike an interest-bearing loan–is that it may not bear fruit at all. Indeed, the medieval version of the Iska contemplated by R. Baruch b. Isaac did not guarantee profits. It focused exclusively on securing the principal. The investor would receive profits only if the investment generated them.[48]
Some sixteenth century scholars suggested extending the strategy R. Isserlin used to protect the principal to secure fixed returns as well. The idea was to have the manager and investor stipulate at the outset that the investment is expected to generate returns, for example, 4% a year, and that any claim rebutting that presumption would need to be established through the testimony of two specified witnesses, the rabbi and chazan. Again with the idea that the rabbi and chazan would not be able to testify to the actual returns on the investment, thereby securing the investor’s claim to 4% annual returns.[49]
R. Mordechai Yafeh (author of the Levush) and other authorities criticize this approach as an illegitimate extension of R. Isserlin’s strategy. They contend that there is a fundamental difference between stipulating to presumptive profits and stipulating to a presumptive no-loss on the principal. Whereas in the case of the principal there is a fixed amount known to both parties that has been invested at the outset, there is no way to know in advance what profits the investment might actually return.[50] Stipulating to presumed profits is a sham, they argue.
These authorities suggest a different strategy to ensure fixed payments of profits, leveraging the Jewish law of solemn oaths. The key idea is to require the manager to stipulate at the outset that any claim he makes about the amount of profits generated by the investment must be affirmed by a solemn oath (shevu’a). The strategy relies on a strong psychological aversion to swearing, deeply ingrained in Jewish ethics and social psyche, that it is always preferable to avoid undertaking a solemn oath, even a truthful one.[51] Stipulating to a solemn oath to verify claims about profits deters the manager from reporting actual profits to the investor. The parties therefore agree at the outset that the manager must take a solemn oath to affirm any claim about the profits, and if he declines or fails to take the oath, then he agrees to pay the investor a fixed amount of anticipated, presumed of profits, say 4%, in lieu of an actual reconciliation of earnings via oath.[52]
There are three views about how to characterize the 4% payment in lieu of actual profits. One view characterizes it as the stipulated presumed profits of the venture, rebuttable only by a solemn oath taken by the manager.[53] Another view characterizes it as a purchase option, contracted in from the outset, granting the manager the right to buy out the investor’s earnings at a pre-agreed upon price.[54] A third view characterizes it as a settlement payment that the parties agree to in advance as a reasonable amount to settle the manager’s oath obligation.[55]
Authorities differ regarding the best option among these possibilities. But the underlying strategy is the same. All of these approaches rely on the halakhic-psychological aversion to swearing to deter the manager from providing an actual accounting of profits with the investor via a solemn oath, pushing him instead to pay the agreed upon rate, 4%, in lieu of swearing and reconciling earnings.
The true risk for the investor lies in the possibility that the venture will not generate profits and the manager will exercise his right to take the solemn oath. Of course, it is precisely this possibility which preserves the bailment-investment characterization of the venture from collapsing into a loan. In theory, the manager can exercise his right to swear and defeat his obligation to pay 4%. He would instead pay the actual profits generated by the venture. If the venture generated zero profits, the investor would have to eat the loss.
There is one further bulwark that may block the manager from exercising his right to take the oath. The dayanim presiding over a dispute have discretion to determine whether they will administer an oath to a litigant. Here there are two primary considerations. First, there is an extremely strong presumption in Jewish law nowadays not to administer oaths at all.[56] In part this stems from the severe consequences of swearing falsely.[57] It also has to do with the fact that oaths have lost much of their probative value in modern society where litigants are not quite deterred from lying under oath.[58] It has become almost de rigueur for contemporary batei din to avoid administering oaths and to settle the dispute in some other manner–even where Jewish law would traditionally resolve the dispute via an oath.[59] Section 15a of the Beth Din of America’s Rules and Procedures provides, “the arbitrators (dayanim) shall not be required to take an oath or to administer an oath to any party or witness.”[60]
Second, Jewish law grants the dayanim discretion to determine whether the litigant before them is sufficiently credible and trustworthy to undertake an oath. If the dayanim find the manager to be unscrupulous, untrustworthy, or lacking integrity, they can bar him from taking an oath.[61]
In summary, the Heter Iska in theory allows for the manager to defeat his obligation to pay the stipulated profits by affirming the actual accounting of profits under oath. In practice, however, the Heter Iska relies on the psychological deterrent that the manager will never exercise his right and that he will opt to pay the agreed upon rate instead. And in case the manager should want to exercise his right and affirm the actual accounting of profits under oath, the Iska may lean as a backup on the beit din’s discretion to refuse to administer such an oath, especially under the norms of contemporary halakhic practice regarding oaths.
VI. Yoreh De’ah and Choshen Mishpat: A Zero Sum Game
The foregoing analysis reflects how the Heter Iska attempts to navigate narrow straits. It seeks to steer clear of the yoreh de’ah prohibition against charging interest by restructuring a loan into an investment without exposing the investor to the choshen mishpat risk of losing his principal or even his fixed returns. The straits are narrow. For the more one has safely secured their choshen mishpat interests, the closer they sail to the cliffs of ribbit, for the more substantively “loan-like” the economic relationship becomes. And the more cautious one is in avoiding the yoreh de’ah prohibition of ribbit, the less protected their choshen mishpat interests will be in securing their principal and profits.
The choshen mishpat and yoreh de’ah interests are essentially in tension. Poskim are clear that the Heter Iska succeeds in circumnavigating the prohibition of ribbit only because there is a real possibility the manager will produce witnesses to demonstrate losses on the investment or that he will exercise his legal right to swear to rebut the presumed profits.[62] The less real these possibilities are, the more the substantive economic relationship becomes that of a lender-borrower with interest payments violating the prohibition against charging interest. The Heter Iska attempts to strike a fine line between the parties’ choshen mishpat interests and their yoreh de’ah liabilities.
The Case Before the Beth Din
The case before the Beth Din of America captures this dialectic. The parties executed a promissory note, clearly contemplating to enter into a relationship resembling that of a lender-borrower with 4% interest payments. At the same time, they executed an Iska document to (re)structure their relationship into investor-manager to avoid the prohibition of ribbit. The Iska was designed (like any good Heter Iska) to mimic the economic terms of the note, attempting to secure the principal while also protecting the presumed 4% annual profits.
Recall that the Plaintiff and Defendant disagreed about the nature of their relationship. The Plaintiff argued that he had lent money at interest to the borrower, and their relationship was lendor-borrower. The promissory note controlled, in his view, and the Iska was just a religious device to avoid violating the prohibition of ribbit. Therefore, he concluded, he is entitled to recover the principal plus interest from the Defendant.
The Defendant claimed the Iska controlled and their relationship was investor-manager. Therefore, he argued, when the investment lost over 75% of its value, the investor’s equity diminished with it.
The Beth Din pointed to the Iska’s supremacy clause, which as we saw earlier provided,
In the event of any conflict between the terms of this Iska agreement and the terms of any other agreement signed by the two parties in regard to these funds, the terms of this agreement [i.e., the Iska] shall prevail.
On this basis, the Beth Din ruled that the Defendant was fundamentally correct: The Iska defined their relationship and its terms controlled, not the promissory note. Parties to an Iska sometimes execute a promissory note alongside the Iska. Because civil courts do not recognize the Heter Iska and its quirky provisions, some authorities permit executing a promissory note complementing the Iska in case the investor needs legal recourse through the civil courts to recover his investment.[63] If the manager refuses to return the investor’s capital, the civil courts will at least vindicate the investor’s rights under the note. The Iska contains the supremacy clause for exactly this reason. If the parties litigate in beit din—as they halakhically should—the documents are clear that the Iska prevails over the interest-bearing note.
The Plaintiff was wrong to characterize the Heter Iska as a religious device for permissibly charging interest. Instead, the Iska actually defined the relationship as investor-manager.[64] (If it didn’t, the parties would violate the biblical prohibition against charging interest.) The Beth Din now had to enforce the terms of the Iska, and to assess what protections the Iska put in place to secure the Plaintiff’s principal and presumed 4% returns.
The Terms of the Iska
The Iska executed by the parties provides:
I, the undersigned (the “Recipient”), have received the sum of $500,000.00 (“Total Funds”) from [Plaintiff] (hereafter referred to as “Investing Partner”), to be used for business purposes. I obligate myself to utilize these funds in any manner which I believe will generate profits…
Any profits realized or losses sustained as a result of this investment shall be allocated to the Investing Partner. However, an annualized one and a half percent (1.5%) of the received sum plus fifteen percent (15%) of the profits shall be retained by the undersigned (the “Recipient”) for his services during the term of this Iska.
Any claim of loss must be verified through the testimony of two qualified witnesses in, and under conditions acceptable to, an Orthodox Jewish court of law. Any claim regarding the amount of profit generated by these funds shall be verified under solemn oath, before and under conditions acceptable to, an Orthodox Jewish court of law.
It is agreed that if I return the above-mentioned principal to the Investing Partner, together with an additional 85% of the profits as determined solely by the Recipient or an annualized 4% of the principal, whichever is greater, as payment for the profits which are generated, then I will not be required to make any further payment nor will I be required to make an oath. The balance of the profits, if any, shall be my sole property…
This agreement shall follow the guidelines of Heter Iska as explained in Sefer Bris Yehudah.
The Iska was saved as a Microsoft Word document labeled “Heter Iska Kulo Pikadon.” That the Iska was structured as a kulo pikadon is also evident from the clause providing “any profits realized or losses sustained as a result of this investment shall be allocated to the Investing Partner.” In a half milveh half pikadon structure, the profits and losses would be split evenly between the investor and the manager. In the kulo pikadon structure, the manager serves as an agent of the investor. The Defendant-manager was entitled to a fee calculated in the amount of 15% of profits and 1.5% of funds managed, but strictly speaking, the capital and “equity” of the investment belonged entirely to the investor.
The Stipulated Standard of Evidence to Establish Losses
The Iska sought to protect the Plaintiff’s principal by artificially raising the threshold of evidence required to establish losses: “any claim of loss must be verified through the testimony of two qualified witnesses in, and under conditions acceptable to, an Orthodox Jewish court of law.”
At the hearing, the Defendant argued that he can meet his burden by providing Chase’s monthly statements on the account reflecting the trading losses. Even though the Iska requires “the testimony of two qualified witnesses” to establish losses, the Defendant insisted that surely the Beth Din did not suspect Chase of fabricating losses on the account, so the statements should qualify as just as good evidence as the testimony of two qualified witnesses.
The dayanim rejected this argument, countering that the whole purpose of the Iska’s standard of evidence provision was to stipulate to a higher burden of evidence than would ordinarily be required to demonstrate losses. It is true that normally statements provided by a commercial bank and prepared in the ordinary course of business would constitute good evidence of losses on the account. But the entire purpose of the standard of evidence clause in the Iska is to make it more difficult for the manager to meet his evidentiary burden by specifically requiring the testimony of valid witnesses.
The Defendant responded that he was prepared to summon two Chase employees to testify that the account statements submitted into evidence were prepared in the ordinary course of business and were reliable. This, he argued, should satisfy his burden under the Iska.
Prima facie, the language of the Iska requiring “any claim of loss must be verified through the testimony of two qualified witnesses in, and under conditions acceptable to, an Orthodox Jewish court of law,” is broad enough and vague enough to accommodate the Defendant’s proposal. The Iska doesn’t explicate who counts as “qualified witnesses”, and it reasonably could be interpreted to give the Beth Din broad discretion in deciding that. Similarly, the Iska doesn’t define what it means for a loss to be “verified through… testimony”, and whether that requires the witnesses to possess immediate, first-hand knowledge of the venture’s losses—say, to have witnessed the transactions in real time and to have first hand knowledge of the losses—or whether it is sufficient to have witnesses affirm the evidence documenting the transactions and substantiating the losses.
If the Defendant were right, it would turn out that the Heter Iska fails to protect the lender-investor’s economic interests in choshen mishpat. So long as the manager can produce account statements and have qualified witnesses affirm they were prepared in the ordinary course of business, he can defeat his obligation to repay the “debt”. The Heter Iska would be useless anytime the manager-borrower parks the funds in an account supervised by a major financial firm.
The dayanim noted that the Iska signed by the parties provides “this agreement shall follow the guidelines of Heter Iska as explained in Sefer Bris Yehudah.” This offers some guidance in interpreting the vague standard of “two qualified witnesses.” The Bris Yehudah characterizes the Iska as requiring halakhically kosher and trustworthy witnesses (eidim kesherim ve-ne’emanim).[65] In Jewish law, the standard of a kosher witness is quite strict, and it is bound up with the unique conception of testimony in Jewish law.
In American civil law, testimony is viewed merely as a form of oral or written evidence that becomes part of the record for the court to consider in reaching a decision. In Jewish law, the idea of testimony is narrower. It refers to the power of two witnesses to prosecute a civil or criminal case solely on the basis of their testimony of the facts.[66] When two valid witnesses testify before a beit din, the court screens their testimony for inconsistencies and vets the witnesses to ascertain their credibility, but supposing the testimony passes this test, the witnesses’ testimony has the power to determine the outcome of the case decisively.[67] In other words, Jewish law accords great weight and deference to the testimony of two kosher witnesses. For this reason, it restricts who counts as a valid witness and is punctilious in insisting that the witnesses must see the facts first hand. It explicitly blocks witnesses from testifying based on inferences or circumstantial observations.[68]
Further, the Bris Yehudah’s analysis implies that the Iska clause requires the kosher witnesses to have first hand knowledge of the losses in order to testify about them. The witnesses would have to be present to observe where and how the funds were invested, and to witness the losses first-hand.[69]
Based on this, the dayanim held that the burden of proof stipulated to in the Iska–that ”any claim of loss must be verified through the testimony of two qualified witnesses in, and under conditions acceptable to, an Orthodox Jewish court of law”–requires the Defendant to procure two halakhically kosher witnesses to attest with first hand knowledge about the losses to Plaintiff’s deposit. For instance, the dayanim specifically asked the Defendant whether he deposited Plaintiff’s check in the presence of two valid witnesses to evidence that the losses in the account were indeed Plaintiff’s deposit. The Defendant conceded that he did not. He also conceded that he could not produce kosher witnesses to attest with first hand knowledge of the actual losses in the account, since all the trades were executed through JPMorgan’s electronic trading system. No witnesses observed the trades. The dayanim wrote in their pesak:
At the hearing, Defendant testified that there were no kosher witnesses present at all times that Defendant managed the portfolio. Defendant acknowledged that he could not provide kosher witnesses who could testify that Plaintiff’s money was deposited in the JPMorgan account or who could testify about the specific losses on the account.
The dayanim concluded that Defendant failed to meet his burden of proof under the terms of the Iska and was therefore obligated to return Plaintiff’s deposit. By ruling this way, the dayanim upheld the Iska: it succeeded in doing exactly what it was designed to do. It created an artificially difficult burden of proof, and the Defendant, by conducting his business investments without valid witnesses present to evidence the trades and losses, was unable to meet the burden of proof he had stipulated to in the Iska agreement.
The dayanim wrote:
Defendant claims that it should be sufficient for him to establish losses by providing statements from the Chase account. But this ignores the clear threshold of evidence required by the shtar iska. Admittedly, a beit din attempting to understand the facts of a case in order to adjudicate an ordinary monetary dispute will not typically adhere to such strict standards in requiring formal testimony by valid kosher witnesses possessing direct, first-hand knowledge of the facts. If we thought that a strict application of the provisions of the shtar iska did not reflect the intent of the parties, we might have relaxed the evidentiary requirements of the document under principles of peshara krova le-din or other operative halachic principles and come to a different conclusion. But the testimony of the parties and evidence presented leads us to the clear factual conclusion that the parties intended to structure their transaction precisely as it was memorialized in the documents they signed: as an Iska arrangement that would mimic the provisions of the promissory note, as facilitated by the high burdens of proof provided for in the shtar iska. Defendant himself proposed the standard promissory note that hints at the essential nature of their deal. Plaintiff’s December 26, 2023 email further demonstrates that there was no misrepresentation of the documents being presented, and that the parties knew, or should have known, what they were signing.
The Defendant didn’t raise the issue of taking a solemn oath (shevu’a) in beit din to rebut the presumption of profits. Perhaps he had no interest in doing so, or was naturally deterred by the prospect of a shevu’a. Or perhaps he believed the beit din wouldn’t administer one to him in any event. It’s also possible the Defendant believed that he would prevail on his claim of losses, making the issue of profits moot. In the absence of a shevu’a, the presumption of 4% profits remains. The dayanim ruled that Defendant was obligated to return the principal investment plus 4% annualized profits.
Summary of the Beth Din’s Decision
In summary, the Beth Din accepted Defendant’s argument to characterize the relationship as an investment, rejecting the Plaintiff’s contention that it was loan. However, the Beth Din held that the parties’ stipulation in the Iska to artificially raise the standard of proof for losses was valid, making it difficult for the Defendant to prove losses given the agreed upon standard. The key question before the Beth Din was how to interpret the standard of evidence, “any claim of loss must be verified through the testimony of two qualified witnesses in, and under conditions acceptable to, an Orthodox Jewish court of law.” The Iska doesn’t define whether “qualified witnesses” means biblically kosher ones. Nor does it define whether “verified through” means first hand knowledge of the trades or mere verification ex post facto of JPMorgan’s account documents and records.
The dayanim could have interpreted the clause in a way that would find for the Defendant. But they concluded, based on the nature of the Iska and the Bris Yehudah’s description of it–which the Iska in question cited as providing the rules of interpretation–that the best reading of the clause suggested that the burden of proof was quite strict. It required halakhically kosher witnesses to see the deposits and the trades first hand to establish losses. The Defendant had failed to procure such witnesses.
VII. The Heter Iska and Modern Finance
Reassessing the Standard of Evidence Clause for Modern Commerce
The case before the Beth Din of America underscores two problems with the current Heter Iska when used in modern finance. The key provision designed to protect the investor’s principal was sufficiently vague that the Beth Din had to determine whether the Defendant could meet his burden of proof by supplying account statements and having qualified witnesses verify they were prepared in the ordinary course of business or that they were otherwise reliable. Any lender seeking to protect his choshen mishpat interests and secure his principal should not want his legal claim to lie at the mercy of a judicial tribunal.
In its current formulation, there is a plausible reading of the key provision that would allow the manager-borrower to meet his burden of proof by supplying ordinary bank statements or general books and records, exactly as the Defendant in the case before the Beth Din attempted.[70] If so, the current form of the Heter Iska fails to decisively impose a difficult burden of proof on the manager.
Of course, the language of the Heter Iska was formulated in a different commercial context–before modern banking and well before electronic trading technology tracked account values in real time. Historically, if you wanted to verify losses on an Iska deal like the one before the Beth Din, you would have to have to summon two qualified individuals to witness the transfer of funds from the investor to the manager, and to witness the manager putting the funds to productive use (e.g, purchasing a fishing boat), and to witness the actual loss of the investment (e.g., the fishing boat being sunk by the great whale).
The reality of modern finance is different. Today, brokerage accounts or checking accounts save a scan of the banked check as it was deposited. The bank automatically records the manager’s conversion of the funds into shares of stock or options contracts. The depreciation of the stock or options contract is charted and recorded on the market index on which it is traded. In modern finance, there is an abundance of evidence available at each step. In contrast to the absolute dearth evidence–absent designating witnesses to attest to each moment–in the historical context for which the Iska provision was drafted.[71]
To the extent the manager can meet his burden of proof in modern commerce by supplying account statements and procuring witnesses to verify them, the Iska fails to protect the contemporary investor-lender’s interest in securing his principal. All a manager has to do is provide account statements to prove losses on the investment. The Iska would fail to meaningfully raise the manager’s burden of proof.
A lender-investor seeking to protect his principal–and not leave interpretation of the ambiguous clause to the discretion of a tribunal–can tighten the requirements in the losses clause in two meaningful ways. First he can tweak the clause to name two specific individuals as the only witnesses credible to attest to losses on the investment, consistent with R. Isserlin’s original advice.[72] Second, he can disambiguate the clause to require the two witnesses to possess first hand knowledge of losses, excluding them from testifying on the basis of documents or other second-hand information. Such a stipulation would make it significantly more difficult for the manager to meet his burden of proof through supplying account statements.
Modern Finance and the Possibility of First Hand Testimony
The case also highlights a second difficulty with the current Iska form. Grant that the dayanim reached the right interpretation of the Iska’s losses clause–that it requires direct first hand eye-witness testimony of losses. If that’s true, it is difficult to see how the manager could ever meet his burden of proof given the nature of contemporary commerce. Most financial transactions today occur by electronic transfers of funds in cyberspace between bank accounts. There is no “investment” or “deposit” for the witnesses to observe first hand. The investor hands the manager a check, which is nothing more than an authorization to draw funds from his bank account. When the check clears, the bank adjusts the total value assigned to the investor’s account, subtracting the amount of the withdrawal, and increases the total value assigned to the manager’s account. There is nothing to be observed in real time by the witnesses.
Likewise when the manager invests the funds in stocks. When the brokerage account purchases shares of stock, funds will be electronically subtracted from the manager’s brokerage account in exchange for which the manager be assigned, also electronically, a membership interest in the stock. There is also nothing to witness first hand regarding the depreciation of the stock. As shareholders across the globe lose confidence in the company, they will look to sell their membership interests, with fewer interested buyers. The twin forces of supply and demand will lower the market price, causing the value of the investor’s ownership interest to plunge. There is no “event” for the witness to observe. The investment loss consists in invisible market forces and pricing mechanisms. And it is not at all clear what it would mean to witness this first hand.
In other words, the nature of modern commerce is that most transactions occur by transmitting code through cyberspace, injected through fiber optic cables or beamed by satellite. The action occurs behind doors closed to witness observation. There is nothing for the witnesses to observe first hand.
If this description is accurate, it undercuts the yoreh de’ah legitimacy of the Heter Iska in modern commerce. We saw that poskim permit the Heter Iska only because it is possible for the manager to meet his burden of proof to demonstrate losses. Where proving losses is not possible, poskim have held that the Iska is a sham because in substance it is economically identical to a loan, for the risk of loss sits entirely with the borrower-manager, and the “lender” is forbidden from taking payments in exchange for lending out his capital under the prohibition of ribbit.
From its inception, the Heter Iska attempted to navigate narrow straits, seeking to protect the investor’s choshen mishpat interests while also avoiding the yoreh de’ah prohibition of charging interest. Modern commerce, with automated computer banking systems and electronic trading technology, complicates an already difficult acrobatic act. If the dayanim were right in holding that the investor’s choshen mishpat interests were protected and that the manager could only meet his burden by supplying two kosher witnesses with direct knowledge of the investments, then it is doubtful that the manager can ever meet his burden. And we begin to wonder whether the Heter Iska succeeds in shielding the parties from violating the yoreh de’ah prohibition of ribbit: If the manager carries all the risk of loss, the relationship between the parties is more accurately characterized as debt rather than equity. On the other hand, if the dayanim were wrong and the manager could meet his burden by summoning witnesses to verify account statements, the Iska fails to protect the investor’s choshen mishpat interests; it fails to mimic the advantageous features of a loan the investor desires.
Contemporary Beit Din Practice and Solemn Oaths
A similar challenge to the Heter Iska arises from the profits clause. The terms of the Iska entitle the investor to actual profits, not fixed interest payments–which of course differs from a typical loan where the lender receives a fixed interest rate. We saw that the Iska protects the lender-investor’s fixed rate by requiring the manager to swear a solemn oath before offering an accounting of actual profits earned. In the absence of that oath, the manager pays an agreed upon rate of expected profits, designed to match the desired interest rate of a loan.
Traditionally, the Iska relied on a psychological aversion to swearing solemn oaths. It relied on the presumption that the manager would want to avoid swearing and would always prefer to pay the agreed upon rate of expected profits over taking a solemn oath. Nowadays, however, given the widespread use of the Iska for commercial loans, there are plenty of manager-borrowers who would leap at the opportunity to take a solemn oath on the actual profits, wherever the venture failed to generate returns, to defeat their obligation to pay their “lenders”. Exercising this option would free them from paying any “interest” on the money they “borrowed.” The theological severity of oaths that once held sway over a community of devout believers no longer deters the wide class of Iska users.
Insofar as a manager is happy to exercise his right to swear under the Iska to verify profits, the investor will lose his claim to whatever interest-like payments he was seeking whenever the investment fails to generate actual profits. Here too the Iska would fail to protect the investor’s choshen mishpat interests in collecting fixed annual returns.
The contemporary practice of batei din creates a further challenge to the profits clause of the Iska. Historically, oaths were central to Judaism’s system of adjudication. In the Middle Ages, Rishonim sought to limit the use of oaths that invoked the name of God. They ceased to administer such shevu’ot. The practice evolved such that nowadays oaths are virtually unheard of in batei din whether in Israel, the United States, or beyond.[73] Contemporary batei din have in effect adopted the policy to not administer oaths in any form, and they do not allow litigants to take them. This contemporary practice brings the likelihood of the manager swearing to rebut the presumed profits to zero.
But it also poses a problem for the Iska. If no beit din would allow the manager to swear to rebut profits, the Iska retains the substantive economics of a loan with fixed interest payments. For it is not possible for the manager to exercise his right to swear to rebut the presumed profits. It is dubious, therefore, whether the Iska effectively avoids the yoreh de’ah prohibition against charging interest, for there is no viable mechanism through which the manager can escape his obligation to pay fixed interest.
Conclusion
This article examined the operation of the Heter Iska in modern finance through a dispute adjudicated by the Beth Din of America. The case exposes the Iska’s central tension: its effort to deliver the economic certainty of a loan while maintaining the legal form of an equity investment. After outlining the parties’ disagreement over whether their relationship was governed by the promissory note or the Iska (Section I), the article traced the halakhic distinction between milveh and pikadon and the decisive role of risk allocation in defining that relationship (Section II). It then showed how the prohibition of ribbit is confined to loans and does not extend to bailments or equity investments, creating the conceptual space in which the Iska operates (Section III). The analysis of the Iska’s principal-protection mechanism (Section IV) and its return-guaranteeing provisions (Section V) highlighted the ways in which the instrument attempts to approximate a debt while preserving its formal investment character. The dayanim’s decision in Spiro v. Fink turned on how to interpret the Iska’s key burden-of-proof provision (Section VI). The Beth Din affirmed that the Iska’s burden of proof clause protected the investor’s principal even with meticulous bank statements and record keeping. The facts of Spiro v. Fink reflect how modern commercial practice and contemporary beit din jurisprudence strain an already fragile legal construct (Section VII). We are left to ponder whether the Iska can continue to secure the parties’ economic expectations while also shielding them from ribbit.
NOTES
- Beth Din of America, Spiro v. Fink, Reported Decision no. 17. ↑
- The English word ‘loan’ is somewhat ambiguous. Here I use it to refer to a debt, a sum of money that is borrowed with the intent of paying back. This is the classic case of a milveh in Jewish law. In English, ‘loan’ can also refer to borrowing personal property with the intent of returning it. As we shall see, in Jewish law the latter constitutes a pikadon not a milveh. In the text above, I use ‘loan’ to refer to debt, in the sense of milveh. ↑
- The laws of bailments are delineated in Shemot 22:6-14. Loans are covered in Devarim 23:20-21, Vayikra 25:35-39, and Shemot 22:24-26. ↑
- This principle is known as milveh le-hotza’ah nitnah. See Kiddushin 47a and Rashi there s.v. le-hotza’ah: להוצאה ניתנה – הלוה רשאי להוציאה בהוצאה ואינו חייב להעמידה בעיסקא שתהא מצויה בכל עת שיתבענו וכיון דלהוצאה ניתנה הויא לה כי דידה ולא יהיב לה מידי. ↑
- This principle is captured by the doctrine pri’at ba’al chov mitzvah, reflecting that the only legal basis to compel the borrower to repay is his mitzvah–his moral duty to remain true to his word. There is no property-right basis to compel repayment, for the lender has no property right claim against the borrower’s assets. See Ketubot 86a and Bava Batra 174a. See also Ritva Ketubot 86a s.v. le-didakh who characterizes the borrower’s obligation to repay as: ומצוה בעלמא הוא לדידיה דשעבודא לאו דאורייתא. The talmudic debate over shibud nekhasim is central to understanding the nature of a debt obligation. ↑
- See https://www.law.cornell.edu/wex/bailment: “A ‘bailment’ is defined as a non-ownership transfer of possession. Under English common law, the right to possess a thing is separate and distinct from owning the thing.” ↑
- See Bava Metzia 69b, contrasting a bailment with a loan: מרא הדרא בעינא… זוזי לא הדרי בעינייהו. See Tosafot there s.v. mara: ה”פ מרא אינה מלוה כי לא ניתנה להוצאה ולהחזיר אחרת אלא צריך להחזיר בעינה. The classic rules of shlichut yad and sho’el shelo mida’at hold a bailee liable for wrongfully using or consuming the bailment. See Shulchan Arukh Choshen Mishpat 292. ↑
- Below we’ll distinguish between different types of risks of loss. For the present section, it is best to think in terms of no-fault risks of loss, meaning risks that do not arise from the bailee’s fault. These are borne by the bailor. (Whereas in a milveh they are borne by the borrower.) We should also carve out as an exception cases where there is a special reason to assign the risk of loss to the bailee, such as when he extracts beneficial use from the object such as in the case of she’elah. See, e.g., Rambam Moreh Nevukhim, 3:42. ↑
- It is precisely because the borrower holds the right of consumption in a milveh of a commodity that the transaction raises concerns of ribbit. If the dozen eggs I use to pay back the lender are worth more than the dozen eggs I borrowed, there is a concern that the repayment was greater in value than the initial loan amount. This is the problem of halva’ah se’ah be-se’ah. See Shulchan Arukh Yoreh De’ah 162:1: אסור ללוות סאה בסאה, אפילו לא קצב לו זמן לפרעון. וכן כל דבר, חוץ ממטבע כסף היוצא אז בהוצאה, דשמא יתייקרו ונמצא שנותן לו יותר ממה שהלוהו, אם לא שיעשנו דמים שאם יתייקרו יתן לו אותם הדמים. ↑
- Tosefta Bava Metzia 4:2 (Lieberman Edition): משכיר אדם מעותיו לשלחני להתנאות בהן ולהתלמד בהן ולהתעטר בהן נגנבו או אבדו חייב באחריותן ניטלו (נוטל) מלפניו באונס הרי הוא כנושא שכר. ↑
- Ironically, most people think of their checking account with their bank as a type of bailment, where they are putting their money for safekeeping. In fact, however, they are lending money to the bank. The bank receives the money and utilizes it for their own gain–for mortgage lending and for investments–in exchange for which they pay you (typically) a tiny interest rate. When you draw from the account you are not withdrawing your money, but the bank is paying down the debt it owes you.For discussion of checking accounts, and how people ordinarily conceive of them, see Timothy C. Harker, “Bailment Ailment: An Analysis of the Legal Status Of Ordinary Demand Deposits in the Shadow of the Financial Crisis of 2008”, 19 Fordham J. Corp. & Fin. L. 543 (2014). ↑
- See Terumat Ha-Deshen no. 302: ובתוס’ שרי להשכיר מעות לשולחני משום דמחזירים בעין. וה”ה אפילו אם השכירם להוציאם דשרי דכיון דאחריות על הנותן כשהמקבל מוציאם, וכ”כ ר”ת בתשובתו עכ”ל. See also Teshuvot Maimoniyot Mishpatim no. 29:ומוקי לה שנתנו לו לסחורה שלעולם הן בחזקת בעל הבית… שלא נתכוין להוציאם מחזקת בעלים כששינה כי אם להשתכר יותר נתכוון. ↑
- Bava Metzia 104b: אמרי נהרדעי: האי עיסקא, פלגא מלוה ופלגא פקדון. עבוד רבנן מילתא דניחא ליה ללוה, וניחא ליה למלוה. See also Rashi there s.v. hai: האי עיסקא פלגא מלוה ופלגא פקדון – המקבל פרגמטיא מבעל הבית ושמה לה כפי דמיה שהיא שוה כאן, והוא מוליכה למקום היוקר למחצית השכר – חצי אחריות אונסים עליו כמלוה, וחצי אחריותה על בעלים כפקדון. ↑
- In theory, the manager should have the right to consume the 50% milveh portion for his own benefit. And indeed, according to one opinion in the Talmud, he has that right. See Bava Metzia 104b: אי בעי למשתי ביה שכרא – שפיר דמי. And Rashi there: אם רצה להוציא חציה בהוצאת ביתו – מוציא, שהרי מלוה עליו היא.However, the Talmud records the opposing view of Rava who recognizes that the nature of the Iska venture is such that the investor wants all of the capital put towards the business investment thereby creating an implied condition of the venture prohibiting the manager from consuming the 50% milveh portion:רבא אמר: להכי קרו ליה עיסקא, דאמר ליה: כי יהבינא לך – לאיעסוקי ביה, ולא למשתי ביה שכרא. Authorities rule in accordance with Rava. See Shulchan Arukh Yoreh De’ah 177:30: הנותן מעות לחבירו להתעסק, אף על פי שהחצי יש לו דין מלוה אינו יכול להוציא החצי לצרכו ולהתעסק בחציו לבד לצורך חבירו, וכן אינו יכול לומר: אתעסק בחצי שלי ואניח החצי של פקדון בבית דין. ↑
- See Rambam Sheluchin ve-Shutfin Chapter 6. See also Brit Yehuda 37:1: הנותן מעות לעסקא סתם, תיקנו חז”ל שיהא חציו מלוה וחציו פקדון, אבל יכולים להתנות ביניהם על חלוקת מעות העיסקא באופן אחר. And Chelkat Binyamin, Ribbit, 177:24: כל סתם עסקא שנותן מעות לחבירו למחצית שכר הרי הוא פלגא מלוה ופלגא פקדון אבל יכולים להתנות בענין אחר לפי רצונם. ↑
- See Brit Yehuda Chapter 40 note 2. And Chelkat Binyanim, Ribbit, Kuntrus Heter Iska, Paragraph 24: סתם עיסקא שבגמרא הוא חצי מלוה וחצי פקדון… אך אפשר גם לעשות היתר עיקסא שכולו פקדון דהיינו שכל המעות הן באחריות הנותן. ↑
- See Teshuvot Maimoniyot Mishpatim no. 29: על אדם שקיבל מעות מחבירו למחצית שכר סתמא פלגא מלוה ופלגא פקדון… אבל אם פירש לו המפקיד הרי הן באחריותי ולא תתן לי רק החצי שכר…. אין כאן מלוה כלל שהרי הם באחריות המפקיד. Terumat Ha-Deshen no. 302: בגליון בתוס’ פ’ הריבית… וז”ל: ונראה דהיכא דכל האחריות על הנותן שרי אפילו לקצוץ דאין כאן מלוה אלא פקדון ושכר מעותיו נוטל. ובתוס’ שרי להשכיר מעות לשולחני משום דמחזירים בעין. וה”ה אפילו אם השכירם להוציאם דשרי דכיון דאחריות על הנותן כשהמקבל מוציאם, וכ”כ ר”ת בתשובתו עכ”ל. ↑
- Shemot 22:24, Vayikra 25:35-37, Devarim 23:21-22. For the codes, see, e.g., Rambam Sefer Ha-Mitzvot Lo Ta’aseh no. 235, 236, 237, and Hilkhot Malveh ve-Loveh Chapter 4. ↑
- See, e.g., https://www.law.cornell.edu/wex/interest: “Interest is a payment associated with borrowing or lending money.”See also Ritva Bava Metzia 69b s.v. ihu: אין רבית אלא בהלואה. ↑
- Bava Metzia 93a, Rambam Sekhirut Chapter 1. ↑
- As we saw earlier, Jewish law recognizes bailments of money and not just of personal possessions. ↑
- Ritva Bava Metzia 69n s.v. ihu: אין רבית אלא בהלואה.Terumat Ha-Deshen no. 302: ונראה דהיכא דכל האחריות על הנותן שרי אפילו לקצוץ דאין כאן מלוה אלא פקדון ושכר מעותיו נוטל.Teshuvot Maimoniyot Mishpatim 29: על אדם שקיבל מעות מחבירו… אם פירש לו המפקיד הרי הן באחריותי ולא תתן לי רק החצי שכר…. אין כאן מלוה כלל שהרי הם באחריות המפקיד. ↑
- Tosefta Bava Metzia 4:2 (Lieberman Edition): משכיר אדם מעותיו לשלחני להתנאות בהן ולהתלמד בהן ולהתעטר בהן. ↑
- Ibid: משכיר אדם מעותיו לשלחני להתנאות בהן ולהתלמד בהן ולהתעטר בהן… ניטלו מלפניו באונס הרי הוא כנושא שכר. ↑
- Bava Metzia 69b: רב חמא הוה מוגר זוזי בפשיטא ביומא, See Rashi there: מוגר זוזי בפשיטא ליומא – בלשון שכירות ולא בלשון הלואה: הנני משכיר לך זוז היום בפשוט דהיינו זוז מדינה, דהיינו שמינית שבצורי.Although the Talmud implies that R. Chama’s practice may have been problematic, many commentators explain that the criticism of R. Chama stems from the fact that he contractually shifted the risk of loss onto the renter. Had he preserved the traditional properties of a rental agreement where the bailor holds the risk of no-fault loss, the transaction would have been halakhically scrupulous. See e.g., Ritva there: תירץ מורינו ז”ל בשם ה”ר פינחס אחיו ז”ל כי רב חמא היה מתנה עמהן שאם לא ישתמשו בהן אלא להתעטר בעלמא שלא יהו חייבין באחריות אלא כדין שוכר כלי ואם ישתמשו בהן כלל שיהו חייבין באחריות, והיה תולה כי השכירות שהיה מקבל היה לאותו זמן שאין משתמשין בהן דאכתי לא הוו מלוה, ותלמודא קאמר דלא דמי למרא דאלו במרא אפילו בשנשתמשו בה הדרא בעינא וידיע פחתה משא”כ באלו, וכיון שעל דעת להוציאם ולהשתמש בהן מקבלים אותם זו הלואה גמורה היא ורבית קצוצה.See also Terumat Ha-Deshen no. 302 who argues that the criticism of R. Chama in the Talmud is because he only accepted partial risk of loss (only for losses arising from force majeure). Had he accepted the risk of loss resulting from theft and misplacement (genevah va-avedah), his practice of renting out money would have been beyond reproach:יש לומר וודאי דדוקא משום דלא הוי מקבל עליו רק אחריות אונסים ולא שאר אחריות כמו גניבה ואבידה, אבל אם היה רב חמא מקבל עליו אחריות גניבה ואבידה הוי שרי. והכי משמע להדיא בתשובת מור”ם בההיא פרקא על אחד שקצב עם בחור לתת לו ההוצאה ושילמוד עם בנו. וכן בא”ז דלעיל מוקי רב חמא שהשוכר קבל אחריות גניבה ואבידה משמע נמי דאי לאו הכי שרי. ↑
- See the previous note for commentaries emphasizing the risk of loss. For authorities emphasizing the consumption of the capital for personal use, see Tosafot Bava Metzia 69b: מרא אינה מלוה כי לא ניתנה להוצאה ולהחזיר אחרת אלא צריך להחזיר בעינה. See also Ritva Bava Metzia 69b: וכיון שעל דעת להוציאם ולהשתמש בהן מקבלים אותם זו הלואה גמורה היא ורבית קצוצה. ↑
- Which raises the intriguing philosophical question that lies beyond the scope of this article: What is the nature of the prohibition such that the Torah prohibits interest bearing loans but not other forms of profit from capital. ↑
- As Terumat Ha-Deshen, no. 302, explains, even if the bailment is going to be consumed (or, more precisely, exchanged), as long as it is not for the personal benefit of the bailee, but rather the consumption accrues to the benefit of the bailor, there is no loan but rather a permissible bailment with profits: ובתוס’ שרי להשכיר מעות לשולחני משום דמחזירים בעין. וה”ה אפילו אם השכירם להוציאם דשרי דכיון דאחריות על הנותן כשהמקבל מוציאם, וכ”כ ר”ת בתשובתו עכ”ל. והתוס’ והסמ”ג מוקמי ההיא דרב חמא דאוגיר זוזי בפריטי, שהיה רב חמא מקבל עליו אחריות אונסים, See also Mordechai Bava kamma 122 and Teshuvot Maimoniyot no. 29. ↑
- Talmud Bavli Bava Kamma 102a-b: תנו רבנן: הנותן מעות לשלוחו ליקח לו חטין ולקח מהם שעורין, שעורין ולקח מהם חטין… אם פחתו – פחתו לו, ואם הותירו – הותירו לו. Shulchan Arukh Choshen Mishpat 183:5:נתן מעות לשלוחו לקנות לו חטים, בין לסחורה בין לאכילה, והלך וקנה לו שעורים, או בהפך, אם היה בהם הפסד הוא לשליח; ואם היה בהם ריוח, הוא למשלח . הגה: והוא הדין אם נתן לו מעות במחצית שכר נמי דינא הכי. וכן אם שלחו עם סחורה להוליכה למקום פלוני והשליח הוליכה למקום אחר, אם הפסיד ההפסד לעצמו; ואם הרויח, הרווח לשניהם. ↑
- Teshuvot Maimoniyot Mishpatim no. 29: על אדם שקיבל מעות מחבירו למחצית שכר סתמא פלגא מלוה ופלגא פקדון כדאיתא פרק המוכר את הבית (ע ב)…. אבל אם פירש לו המפקיד הרי הן באחריותי ולא תתן לי רק החצי שכר ולא תלוום כי אם על משכונות טובים כסף וזהב או תקנה מהם סחורה פלונית והתנה כך כדי להפוך אחריות על המקבל אם שינה עתה אין בעל המעות יכול להפסיד כלום שאם יעשה המקבל כמו שהתנה לו אין כאן מלוה כלל שהרי הם באחריות המפקיד ואין לו לחוש למפקיד אם הם באחריותו דלא שכיח שיהא פסידא אם יעשה המקבל כמו שהתנה.ואם ישנה המקבל להלותם בע”א וחמד להרויח יותר ואפילו במזיד יכול לשנותם אם סבור להשתכר יותר ואינו עושה איסור כי המפקיד התנה כך כדי להפוך האחריות על המקבל בשינויו אז יכול ליתן חצי שכר לבעל המעות ואף על פי שהן עתה מלוה וכל האחריות על המקבל כדתניא פרק הגוזל קמא (קב ב) הנותן מעות לשלוחו ליקח מהן חטים ולקח מהן שעורים אם פיחתו פיחתו לו ואם הותירו הותירו לאמצע ומוקי לה שנתנו לו לסחורה שלעולם הן בחזקת בעל הבית כל זמן שישנן בעין ואף על פי שכל אחריות על המקבל ע”י ששינה כדקתני אם פחתו פחתו לו אפילו הכי אינו רבית במה שנותן לו חצי מה שהותירו לפי שלא נתכוין להוציאם מחזקת בעלים כששינה כי אם להשתכר יותר נתכוון. See also Mordechai Bava Kamma no. 122 citing this strategy in the name of Ri: הנותן מעות לשלוחו ליקח בהן חטין ולקח בהן שעורים כו’… מכאן פסק ר”י שיכול אדם להלוות לחבירו מעות בהיתר למחצית שכר והלוה מקבל עליו כל (*אחריות כמו) [*האחריות כגון] שיאמר שילוום על משכונות כסף וזהב וישמרם בקרקע אם הלוום בענין אחר אם פחתו פחתו לו ואם הותירו הותירו לאמצע כמו התנה ליקח חטין ולקח שעורים ואין בענין זה איסור רבית ליחשב קרוב לשכר ורחוק להפסד מאחר שאם היה עושה מה שמצוה לו היה קרוב לזה ולזה. ↑
- It is not obvious from the legal structure of the investment that it would be permissible for the manager to deviate from the investor’s instructions. In fact, the terms of the arrangement would imply that it is wrong for the manager to invest the money in any manner that diverges from investor’s directions. Nevertheless, R. Baruch permits him to deviate since the underlying understanding between the parties is that the money should be invested to make profits and that the manager would be liable in any event for restitution in the case of breach. See Teshuvot Maimoniyot no. 29: אפילו במזיד יכול לשנותם אם סבור להשתכר יותר ואינו עושה איסור כי המפקיד התנה כך כדי להפוך האחריות על המקבל בשינויו. And Shulchan Arukh Yoreh De’ah 177:5: הגה: ומותר למקבל לשנות לכתחלה, ולא אמרינן דהוי כגזלן בכך.And Taz there 177:10:ולא אמרינן דהוה כגזלן כו’. מאחר שאינו מכוין לגזול רק להנאת חבירו שירויח הרבה. ↑
- Terumat Ha-Deshen no. 302: שאלה: ראובן בקש למסור מעותיו לשמעון שילווה אותם בריבית, ורצה לקצוץ עמו בסך מבורר ושיהיה לו ג”כ כמעט בטחון גמור בקרן שלא יהא נפסד לו כלל האיך יעשה בהיתר? ↑
- Ibid: תשובה: יראה למצוא תקנה וצדדים לעשות בהיתר, אלא דמיסתפינא דשמא ע”י דקדוקי הללו ובקשות תחבולות להתיר מקח ומתן בריבית יהיה דברי תורה דומה לחוכא ואיטלולא שחוק והיתול, אמנם מ”מ אומרים וצדיקים ילכו בה. ↑
- Ibid: היכא דכל האחריות על הנותן שרי אפילו לקצוץ דאין כאן מלוה אלא פקדון ושכר מעותיו נוטל… וה”ה אפילו אם השכירם להוציאם דשרי דכיון דאחריות על הנותן כשהמקבל מוציאם, וכ”כ ר”ת בתשובתו. ↑
- See Rambam Sekhirut Chapter 1. ↑
- Terumat Ha-Deshen no. 302: ומעתה יש תקנה לעשות כל המבואר לעיל בשאילה בהיתר בדרך זה, שראובן הנותן יקבל עליו כל האחריות אפי’ של גניבה ואבידה ויפריז על המידה לקבל עליו שאפי’ אם יאבדו או יגנבו ויופסדו אפי’ בפשיעה יהיה באחריותו. ↑
- Ibid: דהיכא דכל האחריות על הנותן שרי אפילו לקצוץ דאין כאן מלוה אלא פקדון. ↑
- Ibid: אך אם שמעון המקבל פושע בממון כ”כ שדומה הוא כמזיק בידים יתחייב שמעון באחריותו. ↑
- Talmud Bavli Shevu’ot 41a-b. ↑
- See, e.g., Rif Shavuot 21a: דכי אמר ליה לא תפרען אלא באנפי ראובן ושמעון הא איפסילו להו שאר אינשי לגבי ההוא פורענא וכיון דקביל על נפשיה הדין תנאה תנאי ממון הוא וקיים דהא בהדיא אמרינן דאי א”ל מהימנת לי כבי תרי ואתו בי תרי ומסהדי דלא משגחינן בהו משום דפסלי’ בתנאה דקביל עליה והאי דינא נמי הכין הוא והדין הוא סברא דילן. ↑
- Terumat Ha-Deshen no. 302: גם יקבל עליו שלא יהא נאמן אפי’ בשבועה דאורייתא ואפי’ ע”פ עדים אפי’ הן ק’, שלא פשע בהן פשיעה גדולה שהוא כמזיק בידים, רק אם יעידו לו הרב והש”ץ וכה”ג אנשים יושבי אהלים בעיר שיש להם ידיעה במו”מ שבעיר, המה יהיו נאמנים להעיד בראיה וידיעה גמורה.ובדרך זה יהיה בטוח בקרן שלו כשירצה לעולם, שאם אבדו יטעון ראובן שהפסידו במזיד בידים ולא יוכל שמעון לאמת דבריו רק ע”פ הרב והש”ץ, וקרוב דקרוב הוא לודאי שלא ידעו כל האחריות. ↑
- See Nachalat Shiva, Shetarot no. 40, who formulates the manager’s burden of proof thus: אין אנחנו נאמנים לומר שהיה איזה הפסד ואחריות במעותיו של בעל השטר אם לא בעדים כשרים. See also Shakh Yoreh De’ah 167:1: ואם המלוה אינו מאמין ללוה על ההפסד בקרן או בריוח אזי יכתוב בשטר העיסקא שאין הלוה נאמן בהפסד הקרן כי אם ע”פ עדים כשרים מפורסמים. Taz Yoreh De’ah 167:1 curiously cites this approach in the name of Terumat Ha-Deshen himself: בת”ה סי’ ש”ב כתוב למצוא היתר בנותן מעות לחבירו למחצית שכר ורוצה שיהיה קרן שלו בטוח יכול לומר שהלוה לא יהיה נאמן על ההפסד רק על פי עדות הרב והש”ץ וכהאי גוונא אנשים יושבי אהלים בעיר. See also Brit Yehudah 37:9: מותר להתנות עם המתעסק שלא יהא נאמן בשבועה בלבד לפטור עצמו בטענת הפסד על הקרן, כי אם על פי שני עדים ידועים. ↑
- And even if the manager claims that the bailment is gone, he cannot prove it with adequate satisfaction, given the stipulated standard of proof in the agreement. ↑
- See Taz Yoreh De’ah 167:1: ואפי’ במקום שאין קציצה אלא נותן למחצית שכר דמותר לעשות כן תנאי זה שלא יהיה נאמן על הפסד הקרן רק בעדות הרב והש”ץ היינו בענין שהרב והש”ץ יש להם ידיעה קצת בעסק של זה הלוה… משא”כ באותן שבוחרים עדים שאינם יודעים מן המשא ומתן כלל ועושים כן כדי שא”א שיוכלו להעיד על ההפסד זה ודאי איסור גמור הוא דהוה קרוב לשכר ורחוק לגמרי מן ההפסד. ↑
- See Nachalat Shiva, Shetarot no. 40: ואין אנחנו נאמנים לומר שהיה איזה הפסד ואחריות במעותיו של בעל השטר אם לא בעדים כשרים. And Shakh 167:1: ואם המלוה אינו מאמין ללוה על ההפסד בקרן או בריוח אזי יכתוב בשטר העיסקא שאין הלוה נאמן בהפסד הקרן כי אם ע”פ עדים כשרים מפורסמים. See also Shulchan Arukh Ha-Rav, Ribbit and Iska, no. 45: מה עוד יש דרך אחרת שיהיה הקרן בטוח אף שכל האחריות על שניהם בשוה אלא שקיבל עליו המקבל שלא יהיה נאמן על שום הפסד מהקרן בשבועה כדינו שהוא שומר שכר וחייב שבועה על הפסד באונס רק שיברר בשני עדים כשרים שאירע לו הפסד באונס ואם לא יברר בעדים יתחייב לשלם כל ההפסד מן הקרן ואף שהנותן הוא רחוק להפסד מותר כיון שאם יוכל לברר בעדים יהיה קרוב גם להפסד כמו לשכר. ↑
- The investor lacks first-hand knowledge of the losses and the basis of the loss so he cannot advance a claim with certainty against the manager. Whether the manager is obligated to take an oath (shevuat ha-shutfin) to affirm his position is debated amongst authorities. See Shulchan Arukh Choshen Mishpat 93:4: וכן המקבל עסקא למחצית שכר, אף על פי שנותן לו שכר עמלו, צריך לישבע כשאר השותפין. ויש חולקין בזה. ↑
- See, e.g., Rambam Sanhedrin Chapter 24, and Rambam She’elah u-Pikadon 6:4. ↑
- R. Isserlin’s Iska does provide for the investor to receive fixed payments from the manager. He conceives of these payments as rental payments the manager pays the investor for the right to use his funds. By analogy, an Uber driver might lease his car from Uber in addition to splitting the revenue he earns from drives. Similarly, Shimon pays Reuven monthly rent for the use of his capital. Shimon (acting as Reuven’s agent) lends that money out to a gentile at interest, and shares the proceeds with Reuven (retaining some percentage for himself for his labor).See the discussion in Shulchan Arukh Yoreh De’ah 176:1: אסור לאדם להשכיר מעותיו, שיאמר לו: אשכיר לך י’ דינרין בדינר לחודש. והני מילי כששוכר להוציאם, אבל אם שכרם כדי להתלמד בהם, או ליראות, ומחזירם לו בעין, מותר. הגה:.. ואם קיבל עליו המשכיר כל אחריות, בין דגנבה ואבדה בין אחריות דאונסין, יש מתירין אפילו משכיר לו להוציאם (ת”ה סימן ש”ב). See also Rama Yoreh De’ah 177:6. ↑
- See Levush Yoreh De’ah 167:1: וראיתי אחד מן המורים שלמד המלוים לעשות כן, ורצה למצוא תחבולה שיהא המלוה בטוח שירויח… וסדר ותיקן לכתוב בשטר על זה הדרך, שכשהתנה שיתעסק הלוה במעות לריוח המלוה ובאחריותו עד שיהיו שני מנים יגבילו לו זמן ללוה לאותו ריוח, ויאמרו בתוך זה הזמן כגון בחדש או בשנים תרויח כך קצוב עד שני מנים… [ו]תשלם לי הקרן עם הריוח… דהיינו סך הכל שני מנים, ואחר כך צוה להתנות בתוך השטר צד ההיתר של בעל תרומת הדשן בסימן ש”ב עי”ש, ואמר… לא יהיה שום אדם נאמן לומר שהפסיד הלוה או שלא הרויח כל כך, רק פלוני ופלוני כגון הרב והש”ץ שיעידו שידעו הם שהפסיד ושלא הרויח בו, וכל זמן שלא יהיו לו עדים כאלו יכול המלוה לומר אני יודע שלא הפסדת ושהרווחת כל הסך, וצריך אתה לשלם לי כך בכלות השנה הקרן וגם הריוח שקצבת לי דהיינו שני מנים, עד כאן התחבולה שהמציא המורה. ↑
- See Taz Yoreh De’ah 167: ובלבוש האריך כאן ומחלק בין הקרן להריוח דעל הקרן יכול להתנות כן שיהיה בטוח שבבירור יש לו בידו הקרן רק שרוצה לפטור עצמו בטענת הפסד על זה יאמר איני מאמינך כי אם על פי עדים המיוחדים אבל לא על הריוח דספק מתחילתו אם יהיה שם ריוח כלל וחילוק נכון הוא. See Levush Yoreh De’ah 167:1 for the extended criticism: ועתה ראה טעות הגדול מזה המורה שבא להתיר ריבית גמור. כי טעותו מפורסמת, שאין זה דומה כלל לתקנת הגאון בעל תרומת הדשן ז”ל, שהוא ז”ל לא המציא תקנה זו, והיקל קצת רק כדי לתת מחיה לבני ברית שאינם בקיאין במשא ובמתן כדי שיהיו לפחות בטוחים על הקרן שלהם, ואמר מאחר דמכל מקום יש בזה קצת אחריות הפסד על המלוה, דשמא יזדמן שאותן שנים האנשים שביררו ידעו בהפסד ויהיה ההפסד על המלוה, והו”ל בצד מה קרוב להפסד ולשכר, שזה הוא דבר שאינו נמנע דאדרבה דבר מצוי הוא דהפסד ברוב פעמים מילתא דעבידא לגלויי… אבל לעשות בזה בטחון על הריבית חלילה חלילה שיעלה על לב הגאון להתירו, דודאי דבר זה נמנע הוא שיהיו עדים מצויים על זה, שאין דרך בני אדם לידע בריוח של חבירו במשאו ובמתנו… ואם היה זה עולה על הדעת שאפשר לעשות בטחון על הריבית היו הם חכמים ח”ו יותר ממשה רבינו ע”ה ותורתו חלילה, דודאי לא היתה התורה אוסרת את הריבית אם היה אפשר לתקן למצוא בו היתר נקל כזה, שהם עושים עצמם לנביאים בתחילת ההלואה שיאמרו ברור לנו שתרויח כך וכך בתוך אלו השנים חדשים הראשונים המוגבלים למלוה, ולכך תכתוב מעכשיו שתשלם לי סך קצוב כזה לזמן כך, דאם לא כן בכלות אותו הזמן שקצב אם יאמר הלוה לא הרווחתי ולא יהיה לו עדות, וכי יוכל המלוה לומר ברי לי שהרוחת כך וכך וסך כך וכך יש לי בידך. דבשלמא תקנת הגאון בעל תרומת הדשן ז”ל שהיא אינה אלא על הקרן שהלוה לו, כשיגיע הזמן אם יאמר הלוה הפסדתי מן הקרן יאמר המלוה ברי לי שסך כך וכך יש לי בידך, ואם תאמר כבר הפסדתי, פסלת עצמך שלא תהא נאמן אפילו בשבועה שהפסדת, וגם פסלת כל העולם מהיות עדים על כך חוץ מפלוני ופלוני, לכן או הביא לי אותם העדים או תן לי מעותי שאני טוען ברי שהם לי בידך… אבל על הריבית איך יעלה על לב שום בר דעת שיטעון המלוה כן, שאף אם הלוה פסל את עצמו משבועה על זה וגם פסל כל העדים שבעולם חוץ מפלוני ופלוני, מכל מקום המלוה לא יוכל לטעון ברי לי שהרווחת כך וכך רק שמא הרווחת, אעפ”י שעשה עצמו בתחלת ההלואה לנביא, נביא שקר הוא, ועתה אם האמת הוא שלא הרויח הלוה הרי הלוה והמלוה שניהם עוברים איסור דאורייתא, הלוה עובר ודאי איסור דאורייתא, והמלוה ספק איסור דאורייתא, שהלוה יודע בודאי שלא הרויח וכשנותן הכל עובר ודאי על לאו דלא תשיך, אלא שהב”ד מכריחין אותו לעבור עליו לשלם, והמלוה נכנס בספק ריבית דאורייתא דשמא לא הרויח הלוה והוא מקבל ריבית קצוצה, ולא עוד אלא שמכשיל גם הדיינים שצריכים לפסוק לו שישלם לו על פי השטר, ועובר הוא והם על לפני עור וגו’. מאי אית לך למימר, יאמר המלוה אף אם לא הרויח כבר מחל לי הלוה והבטיחני לתתו לי במתנה אפילו לא ירויח, זהו עיקר הריבית שאסרה התורה מתנה ומחילה כזו. על כן אני אומר שהשטרות הנזכרים הם המכשילים את הרבים לעבור על כמה לאוין הלוה והמלוה והערב והעדים והדיינים, ראה טעות המכשול הגדול היוצא מזה, כי כן שמעתי מכמה מלוין באלו השטרות שאפילו המלוה בעצמו יודע בבירור לפי אומד דעתו שלא הרויח הלוה כלום הוא נוטל הריבית, וקורא לו ריוח כי הוא חושב כתיבת השטר גורם לו היתר לקחת ריבית גמור המכונה בשטר ריוח. ואני תמה על אלו המשובשים לפי דעתם המשובשת ודברי נביאותם מה להם להאריך בשטרותיהם המשובשים ולשבש אותם באריכות דברים, אם נביאים הם לא היה להם לכתוב רק שטר קצר ויכתבו כך, פלוני קבל מפלוני מאה זהובים לשנה למחצית שכר, והתנה עמו שירויח בשנה זו מאתים זהובים, והמלוה קבל עליו אחריות החצי נ’, וככלות השנה ישלם לו הלוה מאה של הקרן ומאה של הריבית המכונה חצי ריוח, ולא יהיה שום אדם נאמן לומר שלא הרויח כן רק פלוני ופלוני שהם אחד בסוף העולם במזרח והשני בסוף העולם במערב, כאשר הם נוהגים לכתוב שני עדים שידוע הוא שדבר נמנע הוא שידעו הם בהפסד ולא בריוח, רק יסמכו על נביאותם ויאמרו ודאי הרויח, ומתירין לעבור על כמה לאוין כמו שכתבתי. סוף דבר הכל הולך אחר החיתום, ועינינו רואות שכולם נכסיהם מתמוטטים באחריתם. על כן אני אומר שאי אפשר לשום אדם לתקן הלואה לישראל בריוח אם לא יקבל עליו המלוה קצת אחריות אשר עוד יתבארו לפנינו בעזרת השם, ושיאמין המלוה ללוה על הריוח אם הרויח אם לא. ↑
- See, e.g., Shulchan Arukh Orach Chaim 156:1: ויזהר מלישבע, אפי’ באמת, שאלף עיירות היו לינאי המלך וכולם נחרבו בשביל שהיו נשבעים שבועות אף על פי שהיו מקיימים אותם. See Pitchei Teshuva Choshen Mishpat 87:22: עיין בתשובת חתם סופר חלק חו”מ סי’ צ’ שנשאל מנא הא מילתא דרגיל על לשוננו דאפילו שבועת אמת עבירה הוא ועי”ז נמנעים מלישבע שבועת אמת ומתפשרים בכל מה דאפשר. Sefer Ha-Chinuch no. 435: הרמב”ן ז”ל [בהשגותיו לספר המצוות] כתב, שאין השבועה בשמו גם בעת הצורך מצות עשה כלל כי אם רשות גמורה… וגם כי יש במניעה מהשבועה מצוה. See also Sefer Chasidim no. 418, and Sefer Rokeach Hilkhot Teshuvah no. 25. ↑
- Brit Yehudah 37:9: מותר להתנות עם המתעסק… שלא יהא נאמן לומר שלא הרויח כי אם בשבועה חמורה. See also Brit Yehudah 35:15, and Nachalat Shiva, Shetarot no. 40: וכן אין אנו נאמנים לומר שלא הרוחנו כלל במעותיו של בעל השטר. או לומר שלא עלה ריוח כנ”ל. ושעסקנו בעיסקא באמונה. אם לא בשבועה חמורה כנ”ל. ↑
- See R. Yisroel Reisman, The Laws of Ribbis (1995), p. 390:Since an investing partner anticipates earning profits from his investment, the Iska agreement may make provisions for a specific amount of anticipated profits. It may stipulate that if the managing partner claims that these profits were not realized, he would be required to attest to this claim under oath… Since Orthodox Jews traditionally avoid making this type of oath… the investing partner would be reasonably confident that he will receive his anticipated profit. ↑
- See Binat Adam, Sha’ar Mishpatei Tzedek no. 11: נראה לי דמותר לומר ללווה אני קונה ממך או מוכר לך הספק שתתן לי בכל שבוע ריווח כך וכך ועל זה תתן לי שטר חוב מהיום רק בתנאי מפורש שאם תשבע בכל שבוע ושבוע שלא הרוחת אזי אפטור אותך ובתנאי שזמן החזרת העיסקא הוא בכל ערב שבת וכאשר לא תשבע הרי הוא כהודאה שהרוחת ולא תועיל לך עוד שבועתך. See Brit Yehudah, Chapter 35 note 54: משום שאפשר לפרש הסכום קצוב כענין מכירת הריוח… ועי’ צמח צדק (יורה דעה) סימן פו שכתב בטעם ההיתר משום שקונה חלק חבירו. ↑
- See Brit Yehudah, Chapter 35 note 54: הרבה אחרונים הזכירו בהיתר עיסקא דידן על דרך ההתפשרות שההיתר הוא משום שנותן כדי לפטור עצמו משבועה. For the general idea of converting an oath obligations into a financial settlement, see Shulchan Arukh Choshen Mishpat 12:2: רשאי הבית דין לעשות פשרה ביניהם כדי ליפטר מעונש שבועה. See also Pitchei Teshuva Choshen Mishpat 87:22, Pitchei Teshuva Choshen Mishpat 12:3, and Responsa Tzitz Eliezer 8:8. ↑
- See Rashi Shevuot 38b s.v. be-Sefer: ובדורותינו בטלו הראשונים שבועה דאורייתא לפי שענשה גדול ותקנו לגזור עליו ארור בעשרה והא אמרן ארור בו שבועה. See also Shulchan Arukh Choshen Mishpat 87:19:יש אומרים שבדורות אחרונים ביטלו שבועה בשם, לפי שענשה גדול, ונהגו להשביע בארור. ↑
- Ra’avad, Hasagot, Hilchot Shevuot 11:13: א”א שמעתי שתקנו הגאונים שאין משביעין עכשיו לא בשם ולא בכנוי כדי שלא יהא העולם חרב על ידי החוטאים שרבו. ↑
- See Responsa Ateret Shlomo 1:57:8: קשה בזמננו לחייב שבועה לאנשים שאינם מוכרים בתור יראי שמים, ואין היום חומר שבועה על בני אדם שייזהרו מלפרוש מחשש שבועת שקר. ↑
- For an overview of contemporary practice, see R. Natan Chai, “Ha-Shevua Be-Beit Ha-Din Ha-Rabbani: Bein Chazon Le-Metziut” in Mishpetei Eretz Vol. II (5765), pp. 459-477, available at: https://asif.co.il/wp-content/uploads/2021/04/mishpatey-2-459-478.pdf. ↑
- See https://bethdin.sfo3.digitaloceanspaces.com/2026/01/BDA127-RulesProcedures-2025-Bro_02.pdf. ↑
- See, generally, Rambam To’en ve-Nit’an Chapter 2, Rambam Sanhedrin 24:1. ↑
- Regarding testimony for losses, see Chelkat Binyanim, Kuntrus Heter Iska, Section 3: יכול להתנות שלא יהיו נאמנים עדים בעלמא אלא דוקא עדים מיוחדים כגון הרב והש”ץ שבעיר דאע”פ שאפשר שאנשים כאלו לא ידעו מה אירע בסחורתו של זה מ”מ אפשר שאמנם ידעו ובהכי סגי שלא יהא קרוב לשכר ורחוק להפסד. Brit Yehudah 40:3:מותר לעשות כן, מכיון שישנה אפשרות, אע”פ שהיא רחוקה, שאמנם יוכיח המתעסק שהפסיד. Regarding the possibility of the oath, see Brit Yehudah 40:4: יסוד ההיתר הוא מכיון שקיימת אפשרות שאמנם ישבע המתעסק שלא הרויח, ואז לא יתן לבעל המעות יותר מהמגיע לו. ↑
- See Reisman, The Laws of Ribbis, pp. 409-410, who discusses writing a promissory note alongside the Iska “to expedite legal redress in the event that the terms of the Heter Iska are violated” and the requirement of a supremacy clause giving authority to the Iska over the note. ↑
- Elsewhere I pointed out that certain halakhic constructs are coherent only under the jurisdiction of batei din. To the extent that litigants have recourse to civil courts which treat the Iska as a religious device permitting the charging of interest without altering the economic terms of the note, the Iska is most likely ineffective, and the parties would be in violation of the prohibition against charging interest. See Itamar Rosensweig, “The Beit Din as a Basic Institution of Jewish Life”, Journal of the Beth Din of America 3 (2023), p. 12, note 13 therein:Some halakhic constructs are coherent only under the jurisdiction of batei din. Take the heter iska which structures an equity investment, between an investor and a manager, to imitate features of a loan. The iska imposes an artificially difficult burden of proof on the manager to establish losses, and it incentivizes the manager not to rebut a presumption of fixed annual profits. Thus the parties create an equity relationship that carries the benefits of debt… The heter iska is valid only if it succeeds in creating a genuine relationship of equity. If the iska is a sham, the heter fails. Now, the heter iska preserves the integrity of the equity relationship because it remains possible, even if difficult, for the manager to prove losses. It is also possible, though costly, for the manager to rebut the presumption of fixed annual returns. But civil courts generally do not recognize the heter iska as a genuine equity relationship. They dismiss the document as a religious ritual required to conform with Jewish law. One New York court recently held “A Heter Iska constitutes merely a compliance in form with Hebraic law, and does not create a partnership, joint venture, or profit sharing agreement.” See Kirzner v. Plasticware, LLC, 16 N.Y.S.3d 792 (N.Y. Sup. Ct. 2015). If Jews rely on civil courts, the heter iska is of dubious worth. It’s questionable whether the heter iska succeeds in structuring the relationship as equity if both parties are relying on the civil court to enforce what it characterizes as an interest-bearing loan. However, when Jews submit their commercial disputes to batei din, the integrity of the heter iska is upheld as an equity relationship under its true halakhic description, and the beit din will have to determine whether the manager has met his evidentiary burden to demonstrate losses and whether he can provide an accounting of profits to rebut the presumption of fixed annual returns. It follows that the validity of a heter iska–whether it succeeds in avoiding the prohibition of charging interest–depends on parties enforcing it through batei din. ↑
- Brit Yehudah 40:3: בעל המעות מתנה עם המתעסק שלא יהא נאמן לומר שהפסיד מדמי הקרן כי אם על פי עדים כשרים ונאמנים, וכל זמן שלא יברר זאת עליו לשלם כל דמי הקרן. ↑
- See Rambam Sanhedrin 24:1: אם כן למה הצריכה תורה שני עדים שבזמן שיבואו לפני הדיין שני עדים ידון על פי עדותן אף על פי שאינו יודע אם באמת העידו או בשקר. ↑
- Ibid., and Rambam Edut Chapter 3. ↑
- See, e.g, Rambam Nizkei Mamon 8:13-14. ↑
- See Brit Yehudah Chapter 37 note 19, citing several authorities observing that the provision could only be realistically satisfied if the manager keeps witnesses with him at all times that the investment is being managed: ובחקרי לב (יו”ד סי’ כו) האריך בענין היתר זה ותמה עליו מכמה צדדים… גם בתנאי שלא יהא נאמן כי אם על פי עדים כשרים ומיוחדים, וכי בכיפי תלי להו שיהיו עמו כל היום וכל הלילה? And Brit Yehudah Chapter 37 note 22: ובספר ערך ש”י תמה בתקנה זו שהרי אי אפשר שידעו עדים שהפסיד בממון זה ואין בידו להעמיד עדים שלא יזוז ידם מידו. These poskim clearly interpret the Iska’s clause to require the witnesses to evidence losses first-hand. If the clause could be satisfied by having the witnesses review books and records, there would be no reason to believe that the clause requires witnesses to be present at all times that the account is managed.See also Brit Yehudah 40:2-3, where he writes that with the witness requirement, the investor effectively secures his principal and that there is only a remote possibility of witnesses testifying: בשטרי עיסקא הנהוגים כיום נוספו… תנאים שונים שעל ידם בעל המעות כמעט בטוח בדמי הקרן…. מכל מקום מותר לעשות כן, מכיון שישנה אפשרות, אע”פ שהיא רחוקה, שאמנם יוכיח המתעסק שהפסיד. This would be false if the manager could meet his burden by simply procuring witnesses to review books and records. ↑
- See Chelkat Binyanim, Kuntrus Heter Iska paragraph. 3 who interprets the clause this way: ועל כל פנים נראה דאם אפשר להעדים לברר הפסד של העס’ ע”י בדיקה ברשומות של העסק סגי, דודאי אין כוונת המלוה שהעדים לא יזוזו ידם מתוך יד הלוה לכל משך העסק ואילו היתה כוונו כן הוי קרוב לשכר ורחוק להפסד שלא ימצא עדים שיעשו כן, והרי זה כמעמיד עדים הדרים במקום רחוק דאסור. ↑
- I don’t mean to imply that all contemporary transactions are of this character. If I borrow money to flip a building in Brooklyn, and dispersed the funds to purchase building materials and to pay contractors and construction workers, the record keeping of the Iska funds would be quite different from funds invested in a brokerage account. But there is a large class of cases in contemporary finance where the borrowed funds are tracked in such a way such that there is meticulous record keeping of their growth or depreciation at every moment. This was the case in Spiro v. Fink before the Beth Din of America where the borrowed funds were held in a brokerage account from beginning to end. ↑
- See Chelkat Binyanim, Kuntrus Heter Iska, paragraph 3: יכול להתנות שלא יהיו נאמנים עדים בעלמא אלא דוקא עדים מיוחדים כגון הרב והש”ץ שבעיר… אמנם בנוסחאות היתר עיסקא המצויים כהיום לא ראיתי תנאי של בירור עדים מיוחדים רק עדים סתמא. ↑
- R. Natan Chai, “Ha-Shevua Be-Beit Ha-Din Ha-Rabbani: Bein Chazon Le-Metziut” in Mishpetei Eretz Vol. II (5765), pp. 459-477, available at: https://asif.co.il/wp-content/uploads/2021/04/mishpatey-2-459-478.pdf ↑
