In many economic and financial disputes that are brought before the courts for resolution, the gap between the positions of the opposing parties may be extremely significant in monetary terms. In these cases, the parties sometimes tend to attempt to undermine the claims of the opposing party on all fronts and issues, some relevant and some not so relevant to the dispute. This approach is common among lawyers, and does apparently have some legal logic when an attorney does not have a substantial, dominant argument that may tip the scales for his client, he tries his luck with a number of arguments in the hope that the court will accept one of them. Even if there is some legal logic to this method, if there is no synergy between the various arguments, a lack of focus may emerge and may even cause the arguments that are heard to lose their validity – a type of devaluation.

Some financial disputes in which the monetary gap between the parties is substantial are based on one or two fundamental points that constitute the bone of contention between the parties. Sometimes these points are obscured from inexpert eyes by one of the parties to the dispute in the belief that this ambiguity will benefit him. Identifying these points and exposing them before the court may cause a reversal or turning point in the court's perception of the case that will be reflected in the verdict.

Following is a case in point:

In a lawsuit heard before the court, a mortgage bank filed suit against a business owner for a debt accumulated on a mortgage the business owner took.

Following are the case details:

The defendant took out a mortgage for a sum of 200,000 NIS in 1990, for a period of 15 years, to be repaid in equal annual installments that include the capital and interest. After eight years, a debt of 40,000 NIS was accumulated in the loan account due to monthly payments that were not paid and exceptional interest accumulated for the arrears sum. The bank contacted the defendant and demanded that he cover his debt, otherwise the bank would put the property up for sale. In order to ensure his continued operation and honor his commitments, the bank's customer sold another private asset he owned and deposited 100,000 NIS in the bank, to cover the 40,000 NIS he owed and to partially repay the remaining mortgage – 60,000 NIS. The balance of the loan, after this repayment, totaled 120,000 NIS.

The defendant continued to partially repay the loan, while sometimes deviating from the monthly due date.

In 2005, the plaintiff filed a claim for 250,000 NIS against the defendant for the debt he accumulated, that included interest on the arrears. The defendant claimed that he had paid most of the his debt to the bank, including the arrears in his account, and claimed that the bank had charged him astronomical interest contrary to the terms of the loan agreement.

In order to understand and clarify the issue in dispute, following are the central facts:

  • The sum of the loan taken out in 1990, for a period of 15 years, based on equal monthly payments, was 200,000 NIS.
  • From 1900 to 1998 before partial repayment of the loan and coverage of the arrears+ interest accumulated on the arrears, the total installments amount paid To cover the loan was 20,000 NIS.
  • The total amount paid on behalf of the accumulated arrears and partial loan repayment on 1998 was 100,000 NIS.
  • In 1998, after partial repayment of the loan and coverage of the arrears + interest accumulated on the arrears, the remaining balance of the loan was 120,000 NIS.
  • From 1998 to 2005, the defendant paid the bank an additional sum of 180,000 NIS.
  • In 2005 the bank sued the customer for a debit of 220,000 NIS.

This means that, if the bank's claim is correct, than for a loan of 250,000 NIS, the defendant was required to repay 520,000 NIS. It is therefore clear why the defendant felt that the bank has charged him astronomical interest. Is this truly the case, and why?

In 2005, after partial repayment of the loan, the bank had two options (according to the guidelines of the Bank of Israel). One was to adjust the monthly debit (monthly repayment) to the scope of the diminished loan – this means retaining the original loan terms, i.e.: leaving the total number of years and interest rate unchanged, or alternatively to leave the repayment sum unchanged, meaning a change to the terms of the loan – by shortening the time period. In this case, this "minor" difference is the difference between a loan commitment of 220,000 NIS to a loan commitment of 25,000 NIS, after proper revaluation on the date of the expert opinion.

(Assuming the original loan terms remain as is) How is this possible?

Leaving the monthly debit sum unchanged, i.e. changing the loan terms and required monthly repayment sums, caused the defendant a cash shortage that was more severe than the shortage prior to the repayment after selling an asset and depositing the money in the bank. It is reasonable to assume that if the defendant has known that the bank would decide to change the terms, he would not have partially repaid the loan, since he was suffering from a severe shortage of cash. Under the new conditions, the defendant was incapable for repaying the monthly sum, causing arrears in the loan account and debiting of exceptional interest, which quickly accrued and mounted up to the debit sum for which he was sued.

This critical turning point was explicated to the court, with reference to the two legal alternatives that the bank faced. My expert opinion recommended the adoption of the following guideline: "If the bank faces two legal alternatives, with one of them being more to advantageous to the customer in his current situation than the other – the bank should choose the alternative that is most advantageous to the customer". The court adopted this guideline, and ruled that the defendant's revaluated debt was 25,000 NIS.

In the above case, exposing and revealing the "turning point" resulted in a 195,000 NIS (88%) reduction in the scope of the customer's debt to the bank.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.