Sunday, 20 October 2019
Local Time In Israel Asia - Jerusalem

 

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Using experts in foreign law in Israel.

By. Adv. Daniel Schwartz - ABZ Law Offices, Jerusalem

foreign law in israel daniel schwartz200x200I got a call a few months ago from a colleague in Ramat Gan, seeking some information about American partnership law.  My friend represents a man who got caught up in an all too common scam here in Israel. Fortunately, I’ve been able to help him out of the bind.

A property scam

The scam went like this.  A member of the Ultra-Orthodox community began advertising, in the ultra-Orthodox community, an investment opportunity to buy distressed real estate in the United States, in this case small apartment buildings in Wilmington, Delaware, at steeply discounted prices.  The “investment strategy” was to buy the properties now because the area was due to be redeveloped in the very near future, at which point the investors would reap a huge return on their investment. The investors were assured that the rental income from the properties more than covered the carrying costs of the building.  My friend’s client invested a considerable amount of money in this scheme. A limited liability partnership was formed in the United States to hold the investment funds and later title to the property acquired. Indeed, a property, a run-down uninhabitable five-unit apartment building in one of Wilmington’s worst neighborhoods, was bought; but for far less than the amount of money invested in the scheme.  And in fact, it was a distressed property. But there was no rental income and there were no plans at all to redevelop that neighborhood. Worse yet, the remainder of the money invested was “used” by the scam artist to make “repairs” and “pay bills” related to the property. In fact, that money was stolen. My friend’s client was left owning fifty percent of an Limited Liability Company (LLC) which owned a worthless and empty apartment building that was losing money every month.

When it became clear that he had been swindled the hapless investor sued the thief, and the matter was arbitrated before a rabbinical court, a common occurrence in commercial disputes between ultra-Orthodox Jews.  The rabbinic court ruled that the entire transaction, was a fraud and must be undone, that the plaintiff is entitled to the return of his investment principle, upon which the defendant should receive title to the acquired property.  The problem was, the property was lost in a tax foreclosure due to the LLC’s failure to pay the property taxes. The defendant claimed that if he can’t receive plaintiff’s share of the property, he has no obligation to repay any money.  Based on the wording of the rabbinic court’s decision, he seemed to be correct. After all, “Nemo dat quod non habet” a person cannot give that which he doesn’t have is as true today as it was in Roman days.

It was when the case was in this procedural posture that my friend called me asking if the plaintiff were to transfer his share in the LLC, would that be considered as if he transferred his share of the lost property under the relevant partnership laws?  My response was “no.” But I told him to send me some more information about the case, and I’d try to help resolve this problem.

I reviewed the file.  It seemed to me if the defendant wished to take so formalistic an approach to this case, that the apparent impossibility of the plaintiff performing under the arbitrators’ decision rendered the defendant exempt from meeting his obligations, a similarly formalistic mechanism might be used by the plaintiff.  And at that point a resolution of this problem became readily apparent; the quitclaim deed.

American property law

For those not familiar with American property law, a quitclaim deed is an instrument whereby a party transfers any interest s/he may have in a particular parcel of real property.  The transferor does not convey title to the property, just whatever rights s/he may have in it. For obvious reasons, it’s not a type of deed that’s used very often; certainly not in conventional sales of real estate, where it is crucial to ascertain that the buyer has received title to property in exchange for money paid.  Quitclaim deeds are generally used to transfer property between family members as part of estate planning or in divorce situations. But its usefulness in my friend’s case was obvious. By tendering a quit claim deed, the plaintiff could meet his formal obligations under the rabbinic court’s decision, without making a fraudulent conveyance, and thus obligate the defendant to pay back the investment principle.  I prepared a short expert’s opinion for the court. Last week, the court agreed with me, and ordered the defendant to pay up, whereupon the plaintiff will tender his quitclaim deed.

A word of caution, this mechanism works and is lawful in this instance only because all sides to the “transaction” [sic] know the status of the property; that it’s been foreclosed in a tax foreclosure proceeding.  Hence, there is no fraud involved. The tendering of the deed in this case, is merely to satisfy the requirements of the rabbinic court ruling; not to transfer the property from the plaintiff to the defendant. I strongly recommend caution and that one consult with legal experts when trying to apply this idea to any other case.  

The upshot for Israeli lawyers should be clear.  When faced with a question or problem that might touch on foreign law, don’t hesitate to consult with a local attorney who’s also licensed in the foreign jurisdiction.  We just might save you and your client money and a big headache.

If you have a question or comment for Adv. Schwartz, please post it here and he'll do his best to answer you.