Civil Claim 52845/05: Bank Mizrahi will return NIS 132,500 transferred from a deposit without authorization

Background and facts in Civil Claim 52845/05 against Bank Mizrahi

The judgment was given in the Tel Aviv-Jaffa Magistrates' Court, by Judge Nurit Raviv. The plaintiffs are a couple whose identity was omitted in the published version. The defendant is United Mizrahi Bank, today Mizrahi Tefahot Bank. The plaintiffs were represented by Adv. Moshe Sivan, and the bank by Adv. Yeshayahu Rizel.

According to the judgment, the couple signed in favor of the bank three limited guarantees for their son's business account. The first guarantee, from January 2000, was limited to NIS 200,000. The second, from May 2000, to NIS 580,000. The third, from May 2001, to NIS 540,000. A similar sum stood to their credit in a shekel deposit. With each guarantee they also signed a "special set-off letter".

In March 2002 the son asked to make early repayment of a loan of NIS 462,000 in the business account. On the same day NIS 530,000 was transferred from the parents' deposit to the business account, to cover the debit balance. The transfer form was not signed by either of the couple. It was signed by a bank clerk, and "transfer in coordination with the set-off letter" was recorded on it.

The parties' arguments

According to the plaintiffs, their money was taken unlawfully. They limited their claim to NIS 330,000, because they were prepared to pay the amount of the first guarantee. According to them, the bank extended large credit to the son and only afterwards had them sign larger guarantees. They further argued that the transfer was made without their consent, and without allowing them to repay the debt in installments as the Guarantee Law directs.

The bank argued that there was no defect in its conduct. In a letter from 2003 it relied mainly on the guarantees and the set-off letters. Later it argued that the transfer was made at the son's request and in coordination with the father. The bank's witness testified that there was no demand to enforce the guarantee and that there was no actual set-off. Alternatively, the bank argued that the set-off letters allowed it to act even without notice and without consent.

What the court held: fiduciary duty and transferring a deposit without authorization

Set-off letters do not replace consent

The court held that the couple are "individual guarantors" under the Guarantee Law. Therefore they have the right that the guarantee be called only when the debtor has not fulfilled his obligation, and that they be able to repay a loan on the original installment terms. These rights cannot be contracted out of except in their favor. When the debtor himself asks for early repayment, the set-off letter does not exempt the bank from obtaining the guarantors' consent in advance.

Consent was not proven

The court noted that the bank's letter from 2003 stated that the transfer was made "in full coordination" with the father, and that he was told about it on a visit to the branch. The father testified that, as he remembered it, they took the money and told him afterwards. The court held that this version is consistent with the bank's first version.

The court examined the documents the bank presented. The transfer form was not signed by the plaintiffs. A form that was supposed to document the repayment of the deposit bore no date, and the signature on it looked like a signature on top of another signature. The branch manager herself called it in her testimony "this shoddy form". It was also found that the early repayment cost the plaintiffs about NIS 20,000 in early repayment fees. The court held that the possibility that they knew of this was extremely slim.

The arguments against the guarantees were rejected

The court also discussed the classification of the first guarantee. In the first deed of guarantee the parents were classified as a "protected guarantor", and the bank argued that this was a clerk's mistake. The court held that the classification in one guarantee does not carry over automatically to later guarantees, in which they were classified as individual guarantors.

On the other hand, the court rejected the argument that the bank breached its duties when it had the parents sign high guarantees. It held that they signed of their own free will and understood the risk, and that the bank met the duty of disclosure about the guarantee being security for an existing debt. The court remarked that it is doubtful whether there was room to present the son, in the notice to the guarantor from May 2000, as someone keeping up with repayments.

The outcome

The court held that the bank was negligent when it relied on the son's request and did not obtain the parents' consent in advance. On the other hand, had it acted properly, the parents would ultimately have had to pay the debt, even if gradually. Therefore restitution of a quarter of the transferred sum was awarded: NIS 132,500, plus interest and linkage differentials from the date the claim was filed. The bank was also ordered to pay the court fee and legal fees of NIS 15,000 plus VAT. The bank's right to collect this sum from the principal debtor was preserved.

Quotes from the decision

The set-off letters do not release the bank from the need to obtain in advance the plaintiffs' consent to the step that was carried out

The judgment, section 4 (translated from Hebrew).

The plaintiffs signed these guarantees of their own free will and they undoubtedly understood that they were putting their money at risk.

The judgment, section 12 (translated from Hebrew).

The plaintiffs' consent to the early settlement of the debt by means of the deposit funds was required

The judgment, section 13 (translated from Hebrew).

What it means for Mizrahi Tefahot customers

The judgment shows that a set-off letter signed by a guarantor does not allow the bank to transfer the guarantor's funds to the debtor's account merely because the debtor asked to repay his debt. According to the judgment, the bank needs the guarantor's explicit consent, and it is required to prove this with documents.

A customer from whose account the bank transferred funds to cover another person's debt can ask for the transfer form and the document the bank relied on. More information on the bank's duties toward its customers in the section The bank's fiduciary duty.

Sources

• Text of the judgment in Civil Claim 52845/05 (website of the law office of Adv. Moshe Sivan)

Frequently asked questions about court rulings against Mizrahi Tefahot Bank

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How to cite

Civil Claim 52845/05 (Tel Aviv Magistrates' Court), Tel Aviv Magistrates' Court, Judge Nurit Raviv. Source: Net HaMishpat (Israeli courts database), case Civil Claim 52845/05 (Tel Aviv Magistrates' Court).