Case Study: Form Over Substance

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December 7, 2009
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Benjamin Gluck

Dina de-malkhuta dina, Shmuel’s statement that “the law of the land is the law,” is found in several places in the Talmud.1 Though the source of this rule is obscure, there is a general consensus that it imposes a religious obligation on observant Jews to observe not just Jewish law, but also the secular laws of the country in which they live.

Despite this edict, time and again we seem to read about otherwise extremely observant Jews who are accused of violating all kinds of secular laws, from money laundering, to tax evasion, to (lately) organ selling. Each time one of these stories hits the press, the outraged clamor of “dina de-malkhuta dina!” is heard from critics in the community, albeit usually from those to the left of the offenders on the political-religious spectrum.

These critics point to the rule of dina de-malkhuta dina as proof that the offenders (usually to their right) aren’t really observant, because if they were, the offenders would follow Shmuel’s mandate to observe secular law. Instead, they are, at best, stuck in 17th-century Europe, or, at worst, hypocrites who simply pick and choose which halakhic mandates they want to follow.

I have represented numerous very observant Jews in criminal proceedings across the country. While I would not judge my clients’ observance and certainly do not pretend to know the quality of observance of their communities as a whole, one point about the application of dina de-malkhuta dina should be noted. Rather than obeying most halakhic mandates and disregarding secular law despite dina de-malkhuta dina, at least part of the problem stems from the fact that many of these offenders treat secular law just as they treat halakhah. Often, that is precisely the problem; they treat criminal statues too much like a malleable halakhic mandate, which leads to tragic results.

An Example: To illustrate, consider a client who approached me several years ago to defend him in connection with a federal criminal investigation. This client is a rabbi whose education was entirely in Orthodox Hasidic yeshivot in Brooklyn. He never studied any secular subjects at all. The investigation related to a public stock offering by a mutual savings bank that was converting to a publically owned company. Because a mutual savings bank is owned by its account holders, these account holders are typically given first rights to buy shares, and since the shares often quickly rise in value, the account holders often make a substantial return by later selling them into the market. Because of this lucrative opportunity, federal regulations prohibit the account holders from buying pre-issue shares on behalf of anyone else and, in order to buy them, the account holder must certify that he or she has no agreement with any third party regarding the disposition of the shares.

My client, and many, many others in the Orthodox community, saw these conversions as an opportunity to make a quick return on a low-risk investment. But he faced two problems. First, he didn’t have the cash to buy the shares, so he would have to borrow from an acquaintance with interest — presenting a halakhic problem. And second, he didn’t have a bank account that entitled him to buy shares, so he would have to reach an agreement with someone who did have an account — presenting a secular law problem. How he attempted to address both problems makes my point here.

Form Over Substance — The Heter Iska: Halakhah contains a strict prohibition against lending or borrowing money with interest.2 Not surprisingly, however, halakhah has also come up with a way to achieve all of the effects of a loan with interest while technically avoiding violating the law. This is done by the use of a heter iska. Here is how it works. Assume my client, in order to make the investment in the bank, needed $100,000. His friend is willing to lend him $100,000, but wants ten percent interest.

The heter iska provides that the $100,000 is an “equity investment” in my client’s future business prospects. Technically, the equity investment is a risk and therefore is not a loan. Also, if the enterprise is profitable, the lender/investor is entitled to a share of the profits, again different from a loan. But by way of the heter iska, the parties agree that instead of the lender/investor being actually at risk and being actually entitled to a share of the profits, the parties agree that the only way the lender can lose his money is if the borrower can prove losses by way of an accounting done by two witnesses. Because this accounting is almost impossible to satisfy, the risk of loss is nothing more than a theoretical possibility. Similarly, the parties provide that the lender/investor will receive a “stipulated share of profit” in the amount of $10,000, no matter how the actual enterprise fares.

By using these legal fictions, the parties are able to call themselves “investors” and “equity partners” even though the money is not at risk and it bears a fixed return, the classic hallmarks of a loan. It looks, walks, and quacks like a duck, but in the eyes of halakhah, it’s a goat.

Form Over Substance — Investing in Shares of a Mutual Savings Bank: As noted earlier, federal regulations prohibit the account holders of a mutual savings bank from reaching any “agreements” with any outside investors. To get around this problem, my client “lent” the account holder the $100,000 that he had borrowed, and “agreed” with the account holder that if the account holder “desired,” he could repay the loan with stock rather than with cash. Because the account holder “technically” could have satisfied the loan with something other than the stock, my client argued that there was no technical “agreement” for the sale of the shares. By way of these two legal fictions, my client was able to claim that the loan from his friend was really an “investment,” and the investment with the account holder was really a “loan.”

The Government Prosecutor Was Not Initially Impressed: The U.S. Attorney’s Office took a dim view of the arrangement regarding the bank shares, arguing that for all intents and purposes, this was an agreement to purchase shares. My client provided the money; the account holder bought the shares and turned them over to my client. Therefore, according to the U.S. Attorney’s Office, my client had caused a false statement to the bank when the account holder attested under penalty of perjury that he had “no agreements” with any third parties regarding the distribution of the shares.

Fortunately, I was able to convince the U.S. Attorney’s Office not to press charges against my client. Specifically, I argued that my client’s use of the heter iska, which obviously was done solely for personal reasons, showed that my client has an unusual understanding of the importance of form over substance. Specifically, I argued that my client would never carry outside on Shabbat, would never eat chametz on Pesach, and would never borrow money with interest. However, he would carry outside if there were an eruv, he would sell his chametz to a non-Jew on Pesach, and he would rely on a heter iska. Each of these shows that my client truly believes that obedience to a regulation is a matter of form rather than substance. Luckily, the U.S. Attorney’s Office agreed that my client’s unusual take on regulatory compliance applied to his entire life, which supported an argument that he acted in good faith and no charges were brought.

This example demonstrates how some Orthodox Jews’ violations of secular law may be founded in part on the manner in which they apply the dina de-malkhuta dina. Raised in an atmosphere that respects legal fiction and form-over-substance, they apply these types of fiction to secular matters as well — even, perhaps, when the substance clearly violates the law.3

Thus, instead of respecting halakhah and ignoring secular law, the problem stems from treating the two systems too similarly.  Respecting secular law is entirely different from respecting halakhah.

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Benjamin Gluck attended and taught at Chabad yeshivot for fifteen years before proceeding directly to Stanford University Law School. He is a partner at the Bird Marella law firm in Los Angeles, where he defends clients accused of white-collar crimes.

2 Comments

  1. I have read with great interest Mr. Gluck’s view on the “dinah d’malchutah dinah” passage of yore. And I could not agree more with his take on it.

    Mr. Gluck seems to have a firm grasp and knowledge on Talmudic discourse, and Talmudic interpretation. This seems to come no doubt from his years in the Yeshivah system.
    I look forward to reading more of Benjamin Gluck’s Halachic, Talmudic or possibly even social commentary, or otherwise in the future.

    Posted by
    Isaac Gross
  2. This is a very ingenuous argument. Your client presumably knows about other halachot such as geneivas daas. He also knows about choti umachti. He knew fully well that the US govt had a different understanding of that signature. So basically he violated important rules about not deceiving (even if there is no literal falsehood). In effect you did a snow job on a prosecutor and you created a perception that the charge of low integrity is normative and rationalized routinely when in fact he was violating Jewish law as well as violating US law.

    The sources of much chareidi lawlessness are not ignorance but deviousness which they would not consider appropriate when dealing with other Jews.

    Why would you write in Shmah, a journal with a largely Jewish readership in ways that obscures the high ethical standards expected of erliche yidn.

    http://FrumFollies.wordpress.com

    Posted by
    Yerachmiel Lopin
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