Case Number

CA 1617/04

Date Decided

6-29-2008

Decision Type

Appellate

Document Type

Full Opinion

Abstract

[This abstract is not part of the Court's opinion and is provided for the reader's convenience. It has been translated from a Hebrew version prepared by Nevo Press Ltd. and is used with its kind permission.]

The Petitioner is the holder of leasing rights on a real estate property, which is held in collateral by the Second and Third Respondent. According to the agreement between them, the payment for realizing the collateral will be divided in a portion of 75 per cent to the Second Respondent (HaPoalim Bank) and 25 per cent to the Third Respondent (Le’umi Bank). HaPoalim Bank filed a motion to realize the collateral for its benefit, due to a debt of NIS 5.5 million. A third party’s proposal to purchase the property for $650,000. The Petitioner, the executor and HaPoalim Bank signed an agreement whereby the Petitioner agreed to the sale of the property for $650,000. However he was granted a grace period in which he himself could redeem the property for this amount or he could find another buyer to purchase the property at a higher price. The Petitioner did not redeem the property by the date set in the agreement, and instead filed with the Enforcement Court a motion to redeem the HaPoalim Bank’s collateral on the property for the amount that is HaPoalim Bank’s share of the purchase price proposed by the third party (75 percent of $650,000). The Petitioner pointed out that he reached an agreement with Le’umi Bank whereby Le’umi Bank would redeem for him the creditor’s share of the debt as determined in the Enforcement Court case. The Enforcement Court rejected the Petitioner’s motion and ordered a bidding competition for the purchase of the property. This decision was the subject of the Petitioner’s petition for leave for appeal, and within an agreement between the parties it was agreed, among others, that leave for appeal on the matter of whether a debtor has the right to redeem the mortgage would be granted.

The Court rejected the appeal:

The debtor’s debt to HaPoalim Bank exceeds the amount of the $650,000. The agreement between the parties is which create the Appellant’s right to redeem to property for a price of “only” $650,000, rather than for the entire amount of his debt. The Petitioner did not redeem the property by the set date for the price agreed upon by the parties, and thus the general amount of his debt for purposes of redeeming the property had been restored, according to section 13(a) of the Collateral Act. The Petitioner’s right to redeem the property is subject therefore to the payment of the remainder of his entire debt.

Additionally, the Petitioner has no inherent right to redeem the property only for the amount of the share of HaPoalim Bank. The parties’ agreement explicitly addressed redeeming the property “for the amount of $650,000” by the agreed upon date. HaPaolim Bank never agreed to redeeming its share of the property alone, and certainly not to delaying the redemption date for after the time set by the parties. The Petitioner’s proposal to redeem the property for an amount that is 75 per cent of $650,000 constitutes merely “performing part of the obligation,” and according to section 13(d) of the Collateral Act, a debtor has no right under section 13 to redeem part of the collateral by performing part of the obligation.

Under section 13(a) of the Collateral Act, the debtor’s right to redeem the property was limited, explicitly, to redemption by way of “performing the obligation after the date of performance” alone. This right must be interpreted narrowly, particularly when we are concerned with a sale that was already approved by the Enforcement Court in favor of a winner of a bidding competition that was lawfully conducted. Against the rights of the debtor to redeem the property under collateral stand other rights of the parties to the proceeding, that is the creditors and other rights holders to the property, as well as general considerations as to encouraging potential buyers to make their proposal to purchase properties in procedures for realizing collateral for properties.

The Court additionally noted that the actions of the debtor and Le’umi Bank are inconsistent with the good faith duties required of parties to a bidding competition within enforcement proceedings. There is no doubt that a debtor who seeks to redeem a property under collateral must, in most cases, turn to a financial institution for assistance. However, financial procedures, are also subject of course to a duty of good faith which covers all legal activity. Under the circumstances of the case, it seem that the debtor and Le’umi Bank made an agreement whose purpose was to increase their profit by making a roundabout deal whereby the debtor would purchase the property, clean of all debt or collateral, financed by Le’umi Bank, who would sell the property to a third party for a higher price, while dividing the returns between the debtor and Le’umi Bank. It is doubtful whether this step taken by the debtor and Le’umi Bank can be seen as complying with good faith and the Court must not allow it.

Keywords

Administrative Law -- Competent authority, Securities, Torts -- Exemptions from liability, Torts -- Negligence

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