THE JERUSALEM INSTITUTE OF JEWISH LAW
Rabbi Emanuel Quint, Dean 

Lesson # 60 — part two of... Collateralized Loans 

We continue with the discussion of the collateral of the borrower held by the lender. 

The lender and borrower may agree that the collateral be held by a third party. In such a situation, the lender still has the same liabilities that he would have had, had he held the collateral, as described in the last lesson. However, when the community appoints trustees to hold collateral given by a taxpayer who is contesting his assessment, and the collateral is lost or stolen, neither the trustee nor the community has the liability of a paid bailee. 

When the borrower pays off the loan he is entitled to receive the return of the collateral. If the lender states that he does not have the collateral to return to the borrower, there are two possibilities. 

In the first case, the lender may allege that he lost the collateral through his negligence or it was lost or stolen, and thus he will be responsible to the borrower. The value of the lost collateral will be deducted from the amount of the loan to be repaid, and it the value of the collateral exceeds the amount of the loan, then the lender will pay the difference to the borrower. However, the lender cannot merely admit liability and deduct the value of he collateral or pay the overage to the borrower. He must take an oath designated the “lender’s oath”, that the colateral is not now in his possession or under his control. In addition thereto, if there is a dispute as to the value of the collateral, the lender also takes an oath as to the value of the collateral. The reason for these oaths is that the lender may have “set his eyes” on the collateral and is willing to deduct the value from the loan or even pay the overage so that he can possess the collateral.
In the second case, the lender alleges that the collateral was lost through force majeure, such as a fire swept through the community, the collateral was thereby lost, therefore he is not responsible and loan must be repaid in full. In such a case the lender must not take only the lender’s oath, but also two other oaths: (1) that he had not used the collateral, and (2) that the loss of the collateral came through force majeure. 

Assume that the lender admits the loss of the collateral but there is a dispute as to the value of the collateral. There are many examples given in the Shulhan Aruch Hoshen haMishpat chapter 72. I will just set forth three of them. 

The loan is for $400. (All of the examples assume that there are no witnesses who can testify as to the facts. If there are witnesses, their testimony, if believed, will be controlling.)

Example #1. The lender alleges that the collateral was worth $200 and the borrower still owes $200. The borrower alleges that the collateral was worth $400 and thus he owes nothing more to the lender. The lender has to take a lender’s oath that the collateral is not in his possession or control. 
The borrower takes a special oath called a hesseth oath that the collateral was worth $400 and the borrower is free of further liability to the lender. (IYH sometime in the future when we discuss chapter 87 of Hoshen haMishpat and the chapters thereafter, we shall discuss the various types of oaths, be they Torah oaths, Mishnaic oaths, Talmudic oath or Geonic oath.)

Example #2. The lender alleges that the collateral was worth $400 and that the debt is therefore discharged and he owes the borrower nothing. The borrower alleges that the collateral was worth $800 and the debt is discharged and the lender still owes him $400. The lender takes the lender’s oath and he combines this oath with an oath that the value of the collateral was only $00 and he is free of further liability to the borrower. 
Example #3. The borrower gives the lender a ring with a precious stone as collateral for the loan, and the ring is lost through the lender’s negligence. Both agree that the value of the ring exceeds the amount of the loan. They go to a dealer and the borrower agrees that the ring in the dealer’s shop is identical to the lost ring. The ring in the dealer’s shop is appraised and the appraised value is assigned to the lost collateral. The lender must then pay to the borrower the overage of the collateral to the amount of the loan. However, if the borrower alleges that the value of the lost ring is more than the ring in the dealer’s shop, while the lender alleges it was not worth more, then the lender must pay to the borrower the overage as admitted to by the lender and the lender takes an oath that it was not worth more and he is free of liability. If the borrower alleges that the ring was worth more than the ring in the dealer’s shop and the lender does not know whether it was worth more, then the lender must pay to the borrower the value alleged by the borrower, deducting therefrom the amount of the loan. The codes state that this last situation must be closely scrutinized by Beth Din so that the borrower will not cheat the lender.

Assume that the collateral deteriorated while in the hands of the lender, and the borrower pleads that he is certain that it deteriorated because of the lender’s negligence. The lender pleads that he took proper care of the collateral and that it deteriorated despite that proper care. The lender takes a hesseth oath that he took proper care of the collateral, and he is absolved of liability for the deterioration. If the lender admits that he did not take proper care of the collateral, the lender must pay the borrower the amount of the depreciation.

Assume that the lender dies and his heirs produce an instrument of indebtedness stating that their father loaned money to the borrower. The instrument disclosed that the loan was secured by collateral. The heirs allege that they cannot find the collateral and suggest that perhaps it was destroyed by force majeure while in the hands of the lender. The heirs thus demand repayment of the loan. The halachah is that the loan is cancelled because it is assumed that the collateral equaled the loan. However, if the heirs plead with certainty that the collateral was lost through force majeure, they may take an oath to that effect and collect the amount of the loan.
What emerges from this lesson and the prior lesson is that there should be a listing of the collateral and that where necessary there should be an appraisal of the collateral. Copies of the appraisal should be given to each side and also with a third party to hold. Better still there should be two “kosher” witnesses to the transaction who can testify in Beth Din as to the loan and the collateral.

The subject matter of this lesson is more fully discussed in Volume 2, Chapter 72 of A Restatement of Rabbinic Civil Law by E. Quint and on sale at local Judaica bookstores. 

Comments & questions to quint@inter.net.il

With the Chagim and other responsibilities I have fallen behind in answering your communications. I apologize and hope to get back on track after the chagim. - EQ