Civil Appeal 4525/09 Shaarei Shamayim: Supreme Court voids a guarantee because Mizrahi Tefahot did not tell the guarantor the borrowers were in arrears

Background and facts in Civil Appeal 4525/09 Shaarei Shamayim v. United Mizrahi Bank

The judgment was given in the Supreme Court on August 28, 2012. The appellants are the company Shaarei Shamayim Har HaZeitim Ltd., one of its controlling shareholders and his mother. The respondent is United Mizrahi Bank, today Mizrahi Tefahot Bank. The appeal was filed against a judgment of the Haifa District Court that rejected their claim.

According to the facts found, two brothers ran a clothing and footwear business and received from the bank in 1996 a loan of NIS 250,000. To secure it, the rights in their mother's apartment were pledged, with her consent. In 1997, after the brothers did not keep up with the repayments, they were given a second loan of NIS 380,000. The mother signed as guarantor for the second loan, and in 2000 a second mortgage was registered on her apartment.

The District Court found that when the mother signed, she was not told that the brothers were not keeping up with the payments on the first loan. Moreover, in the loan documents a box was ticked stating that the debtor was keeping up with repayment. When the brothers did not keep up with the second loan either, the bank opened execution proceedings to realize the apartment.

In addition, the company received from the bank a loan of one million dollars for a cemetery project on the Mount of Olives, and a mortgage was registered on the land. The project collapsed, a receiver was appointed, and the land was not sold.

The parties' arguments

The appellants argued that the bank approved for them a loan of 1.8 million dollars and not one million, and so refused to honor cheques earlier than agreed. They argued that the receiver acted as the bank's agent and was negligent in the sale. As to the apartment, they argued that the mother was misled and that the bank did not update her in real time on the difficulties in repayment.

The bank asked to leave the District Court's judgment in place.

What the District Court held

The District Court held that only a loan of one million dollars was approved for the company, and that the request to increase it was rejected. It also held that the receiver faithfully represented the bank and the company, and that the land is hard to sell. As to the apartment, it held that the absence of the mother's signature on the first loan is a technical defect, which was cured by her signature on the other documents.

The District Court accepted the argument that the mother was misled when she signed for the second loan. However, it held that the damage caused to her by the breach of the duty of disclosure was not proven, because her apartment had already been pledged to the bank since December 1996. Therefore the claim was rejected.

What the Supreme Court held: the duty of disclosure to a guarantor

Justice H. Melcer wrote the main opinion. He rejected the arguments on the amount of the credit and on the receiver's conduct, because an appellate court does not intervene in factual findings except in exceptional cases. As to the credit, it was noted that the appellants did not present a single document on a loan of 1.8 million dollars. The bank, by contrast, presented many internal documents on a loan of one million dollars. As to the receiver, it was held that a person appointed as receiver is deemed an officer of the court, and that the sale of the land was difficult for objective reasons.

As to the guarantee, Justice Melcer accepted the factual finding that the bank breached the duty of disclosure, and changed the legal conclusion. According to the judgment, at the time of signing the brothers had an open debt of about NIS 180,000, and failing to disclose it is misleading on a material matter under section 3 of the Banking (Customer Service) Law. The court recalled that a guarantor is also a "customer" for the purposes of this law.

It was further held that the Banking Law does not require a causal link as in the Contracts Law, and so the misleading should be examined in a way that is lenient toward the guarantor. Under this approach, had the bank disclosed the facts to her, she would have refused to sign. Therefore it was held that her guarantee for the second loan has no validity and the second mortgage on the apartment has no validity.

The outcome: the bank may recover from the apartment only by virtue of the first lien, up to NIS 250,000, without revaluation. If the brothers or the mother provide this sum, the apartment cannot be realized. The stay of execution remained in force for up to six months from the date of the judgment, to allow this, and no costs were awarded.

Deputy President (ret.) E. Rivlin concurred and added that the damage does not concern the first lien but the second lien, to which the guarantor would not have agreed had she known. Justice N. Hendel agreed, and it was decided as stated in Justice Melcer's judgment.

Quotes from the decision

It should be noted that a guarantor is also a "customer" for the purposes of the Banking Law.

From the opinion of Justice H. Melcer (translated from Hebrew).

The bank will be entitled to recover from the apartment, but only up to the sum of NIS 250,000 (the amount of the guarantee in respect of the first loan).

From the opinion of Justice H. Melcer (translated from Hebrew).

The damage caused to [the guarantor] does not concern the first lien of 19.12.1996, but rather the second lien of 20.2.2000.

From the opinion of Deputy President (ret.) E. Rivlin (translated from Hebrew).

What it means for Mizrahi Tefahot customers

The judgment holds that a bank that has a guarantor sign must disclose to him whether the debtor is already in arrears. In this case the failure to disclose the arrears, together with an incorrect box ticked in the loan documents, was enough to cancel a guarantee and a mortgage on a residential apartment, even without the guarantor proving damage in the sense of the Contracts Law.

A guarantor who is required to pay can ask for the guarantee documents and the notice to the guarantor, and check what was written in them about the state of the debt at the time of signing. More judgments on guarantees are collected in the rulings database, among them Civil Appeal 4651-02-17 Perepadia.

Sources

• Text of the judgment in Civil Appeal 4525/09 (ygoldlaw.co.il website)

Frequently asked questions about court rulings against Mizrahi Tefahot Bank

How to cite

Civil Appeal 4525/09 (Shaarei Shamayim Har HaZeitim Ltd. et al. v. Bank Mizrahi (United Mizrahi Bank)), Supreme Court, 28.08.2012. Source: Net HaMishpat (Israeli courts database), case Civil Appeal 4525/09 (Shaarei Shamayim Har HaZeitim Ltd. et al. v. Bank Mizrahi (United Mizrahi Bank)).