Hamburger Evron & Co.

  • 02.05.2014, The Court cleared First International Bank of Israel (FIBI) of charge of negligence in the Hephzibah case

The Hephzibah case serves as an example of the change in the modus operandi and nature of the banking system, The Marker

One of the challenges facing the Court is to be found in its ability to judge the event in question under the light of the legal and social reality that prevailed at the time of its occurrence. Taking the wisdom of the event, as opposed to the wisdom of hindsight, is no easy challenge given that the Court is obviously not detached from events around it, and is also affected by the voices and reverberations that create a particular event.

A recent judgment, handed down in one of the lawsuits filed following the
collapse of the Hephzibah company, stated that FIBI, which accompanied the project, had not been negligent in its supervision of the buyers’ escrow account and, despite the scale of the fraud, the Bank had acted as expected of it in light of the data in its possession at that time.

The Hephzibah case serves as an illuminating example of the change in the method of operation and the nature of the banking system. The affair shocked the residential construction market and shook up the relationship between the banks and the construction companies. When the dimensions of the fraud started to become apparent, the Supervisor of Banks at the time, Rony Hizkiyahu, understood that the key to the solution for purchasers had to be in the banking system.

After the collapse of Hephzibah, the Supervisor issued guidelines requiring the banks to transfer homebuyers’ money that had not been deposited in escrow accounts into such accounts – in cases where all requirements prescribed in the guidelines had been met. The guidelines were intended to provide a speedy solution to the hundreds of families who were left without their money and without apartments. Naturally enough, the banks were obligated to do so without checking each case individually, and without having examined for each homebuyer basic questions of damages, causal or contributory negligence – and all with a view to bringing about a solution to the predicament in which so many families found themselves.

In parallel to the Supervisor’s action, the courts did not allow banks to enforce liens in their favor until such time as arrangements were in place to resolve the buyers’ problems even though, on the face of it, this was in contradiction to the granting of rights to the secured creditors. The action of the Supervisor and the courts created a foundation allowing the Special Administrator of Hephzibah to reach agreements with the banks, the essence of which meant they had to find a solution for the buyers, with the main economic burden falling on the banks. Later, as we know, the legislator and the Supervisor took steps to make changes - both in the legislation and in the procedures published by the Supervisor, which were intended to prevent a recurrence of fraud of this type. The changes in legislation and the Supervisor’s actions in effect created a new reality with regard to credit for construction.

The Jerusalem District Court recently ruled on another section of the Hephzibah case (T.A. 19886-04-11). The plaintiff, Nessapierre Ltd., which had a business relationship with Hephzibah, purchased apartments from the company and claimed that FIBI (the financing bank for the project) had been negligent in supervising the project financing account. The plaintiff alleged that the Bank allowed Hephzibah to withdraw amounts from the project account without sufficient supervision leading to a deficit on the project and the Bank foreclosing the rights to apartments the plaintiff had purchased.

In the ruling we can see how the court made an effort to discuss the case on the basis of the situation, as it occurred in time, and not through wisdom after the fact. The Court finds the theoretical basis for this in the recently instigated revolution of the Supreme Court (CA 4486/11 concerning John Doe v. John Doe), where it was ruled that in most instances there is no longer a requirement to hold to the traditional model of analyzing the tort of negligence. One must instead first examine whether the materialized risk was expected and unreasonable at the time of the alleged negligence. Namely, the Court determines that one must examine whether it is possible to see behavior as tortious at the time of its occurrence, and not in hindsight.

Equipped with these tools, the District Court headed out on a journey back in time in an effort to ignore the trauma the market experienced following the Hephzibah affair, and examined the actions and omissions of the various entities, given the information they held at the time. This examination brought the Court to the conclusion that the bank should not be held liable, stating that while better supervisory methods were implemented when the dimensions of the fraud became evident, the Bank’s conduct could not be construed as negligent at a time when Hephzibah was known as a large and well-established company.

The ruling is an important milestone both in terms of applying the new model in negligence law and in the matter of the responsibility of a financing bank. It is an example of the effort of the Court, despite the matter’s inherent difficulty, of being wise in the moment rather than calling on the wisdom of hindsight.

The writer, Attorney Assaf Englard, is a Partner at law firm Hamburger Evron & Co
., and Chairman of the Banking Committee of the Tel Aviv District Bar Association.