Grunstein Article

7/29/2019 Grunstein Article

1/21


2/21

The Banking LawJournaL (ISBN 978-0-76987-878-2) (USPS 003-160) is published ten times a year by MatthewBender & Company, Inc. Periodicals Postage Paid at Washington, D.C., and at additional mailing ofces. Copyright2013 Reed Elsevier Properties SA., used under license by Matthew Bender & Company, Inc. No part of this journalmay be reproduced in any form by microlm, xerography, or otherwise or incorporated into any informa-tion retrieval system without the written permission of the copyright owner. For customer support, please contactLexisNexis Matthew Bender, 1275 Broadway, Albany, NY 12204 or e-mail [email protected] any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Mey-erowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, [email protected], 631.331.3908(phone) / 631.331.3664 (fax). Material for publication is welcomed articles, decisions, or other items of interestto bankers, ofcers of nancial institutions, and their attorneys. This publication is designed to be accurate and au-thoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services inthis publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articlesand columns reect only the present considerations and views of the authors and do not necessarily reect those of therms or organizations with which they are afliated, any of the former or present clients of the authors or their rmsor organizations, or the editors or publisher.POSTMASTER: Send address changes to The Banking Law JournaL LexisNexis Matthew Bender, 121Chanlon Road, North Building, New Providence, NJ 07974.

edItor-In-cHIeF

Steven A. MeyerowitzPresident, Meyerowitz Communications Inc.

Board oF edItors

Paul BarronProfessor of LawTulane Univ. School of Law

George BrandonPartner, Squire, Sanders &

Dempsey LLP

Barkley ClarkPartner, Stinson Morrison Hecker

LLP

John F. DolanProfessor of LawWayne State Univ. Law School

Thomas J. HallPartner, Chadbourne & Parke

LLP

Jeremy W. HochbergArnold & Porter LLP

Kirk D. JensenPartner, BuckleySandler LLP

Satish M. Kini

Partner, Debevoise & PlimptonLLP

Douglas LandyPartner, Milbank, Tweed, Hadley

& McCloy LLP

Paul L. LeeOf Counsel, Debevoise &

Plimpton LLP

Jonathan R. MaceyProfessor of LawYale Law School

Martin MayerThe Brookings Institution

Stephen J. NewmanPartner, Stroock & Stroock &Lavan LLP

Sarah L. ReidPartner, Kelley Drye & Warren

LLP

Heath P. TarbertPartner, Weil, Gotshal & Manges

LLP

Stephen B. WeissmanPartner, Rivkin Radler LLP

Elizabeth C. YenPartner, Hudson Cook, LLP

Bankruptcy for Bankers

Howard SeifePartner, Chadbourne & Parke

LLP

Regional Banking OutlookJames F. BauerleKeevican Weiss Bauerle & Hirsch

LLC

RecapitalizationsChristopher J. Zinski

Partner, Schiff Hardin LLPBanking BriefsTerence G. Banich

Member, Shaw Fishman Glantz& Towbin LLC

Intellectual PropertyStephen T. SchreinerPartner, Goodwin Procter LLP


3/21

745

Interest, rIbIt, and rIba:

Must these dIsparate ConCepts be

IntegratedorIsaMore nuanCed

approaCh approprIateforthe global

fInanCIalCoMMunIty? part III

LEonARd GRunSTEIn

This is the nal part of a multi-part article that deals with the apparent conictof laws and ethical traditions between U.S. law, on the one hand, and Halacha

and Shaariah, on the other hand, as it pertains to loans and the charging ofinterest.

u.s. constItutIonal consIderatIons under tHe

estaBlIsHment clause

Legal efforts to accommodate religious practices may sometimes violatethe U.S. Constitution by unlawfully fostering a particular religion or favoringone religious view over another within a particular religion or creed.

The First Amendment to the U.S. Constitution contains the so-calledEstablishment Clause which prohibits the establishment of any particu-lar religion and provides for a separation between church and state. TheFirst Amendment also provides for freedom of exercise of religion. The linebetween permitting the free exercise of religion and the prohibition against

Leonard Grunstein, who was a senior partner at Troutman, Sanders and head of

its Real Estate Equity and Capital Markets Group before retiring, is currently a

managing member of a private equity rm specializing in health care. He can

be reached at [email protected].

Published by Matthew Bender & Company, Inc. in the September 2013 issue of The

Banking Law Journal. Copyright 2013 Reed Elsevier Properties SA.


4/21

THE BAnKInG LAW JouRnAL

746

establishing religion can sometimes be blurred. After all, the free exerciseof religion in its many various forms can sometimes lead to civil disputesamong adherents to a particular religion. Does that mean that the courts areoff-limits to disputes that may involve religious as well as monetary disputes.

Where to draw the line is also a fair question. The U.S. Supreme Court, indealing with these kinds of issues, has developed a body of case law that canhelp analyze the questions posed in this article.

The test for determining whether the enforcement of a particular principle

of religious origin is constitutionally prohibited is commonly referred to as theLemon Test. It is named after the Supreme Court decision in Lemon v. Kurz-man.231

In the Lemon case, the Supreme Court outlined its analysis of whether thegovernment was acting impermissibly to support the enforcement of a particu-lar religious practice or principle. It sets out a three-pronged test. Thus, a lawor governmental activity, dealing with a religious practice or principle, is un-constitutional, unless it satises all three prongs of the Lemon Test summarizedbelow:

it has a secular purpose;

its principal or primary effect neither advances nor prohibits religion; and

it does not foster excessive entanglement with religion.

If a law or governmental activity fails to meet any of the three prongs of theLemon Test then the law or activity violates the Establishment Clause.

To violate the secular purpose test, the law or governmental activity must

be motivated wholly by religious considerations as the Supreme Court found inLynch v. Donnelly.232 If there is also a secular purpose articulated then this rstprong of the Lemon Test is deemed satised.

In the case of Riba and Ribit, it is hard to justify that there is any secularpurpose. It is wholly a matter of religious law and practice. It does not have acomparable purpose under U.S. law, where the matter of charging interest on aloan is not wrong. Indeed, it has become the basis of one of the most successfuleconomic systems in history. The only concern under U.S. law is usury (i.e.,the charging of excessive interest). The prohibition in principle against charg-ing any interest just does not resonate under U.S. law and practice. Given the


5/21

747

InTEREST, RIBIT, And RIBA PART III

lower rates of interest prevailing in our economy (especially when comparedto the alternative of a wholly equity-based transaction), it is fair to say that itis often the debtor who desires (or even insists) on paying interest instead of ashare of the prots. A loan is typically less expensive than the equity equivalent.The risk and credit prole is exceedingly different for a loan (and especially arst mortgage loan against income producing property) as compared to the al-ternative of a partnership or other equity-like investment. There is no genuinereason for anyone to use the Heter Iska or the Shaariah compliant vehicles,

noted above, other than to fulll a religious obligation.There is also no plausible secular purpose for codifying under U.S. law

these religious oriented nancial structures. The only reason to deal with themat all is to respect religious sensibilities. While that is admirable, the Establish-ment Clause was designed to curtail that impulse. This is especially so wherethere are differing views and practices within the religion or as to the particularreligious principle at issue. In effect, the U.S. courts would be forced to en-force one particular view within the religion over another. However, as notedherein, the courts are prohibited constitutionally from choosing one religiousview within a particular religion over another. This is a critical impediment toU.S. court involvement in what is after all a religious question, as more fullydiscussed below.

It is also important to note that the governmental activity may still beunconstitutional if the valid secular objectives can be readily accomplished byother means.233 The secular purpose cannot be a sham or secondary to a re-ligious objective. While opening up additional sources of capital may be anadmirable objective, it is secondary to enforcing a religious requirement.

The second prong of the Lemon Test deals with whether the law or activityhas the primary or principal effect of either advancing or inhibiting the religion.In recent decisions, the Supreme Court has further analyzed this element ofthe Lemon Test as precluding the endorsement or disapproval of religion. Itcannot, in effect, make Islam or Judaism the law of the land. It is one thing toharmonize with religious canons; it is another to foster religion by endorsing anIslamic or Jewish law or practice. Accommodation of religion is different fromfostering religion. It is a continuum and at some point it may devolve into anunlawful fostering of religion.234

The second prong of the Lemon Test is violated where the government


6/21


7/21

749


members or authorities within the applicable religion.The purpose and intent of the Heter Iska under the Halacha is religious

in nature. Similarly, the Ijara, Murabaha and Musharaka are also religious inpurpose and intent. Expert religious authorities are required to interpret thesereligious oriented structures and documents properly, as intended. Indeed,even with the help of religious experts they are still subject to misinterpretation.The results that might be obtained in a wholly religious context can and do dif-fer from what a U.S. court might nd. Indeed, as shown above, a U.S. court

might render a wholly unintended (and even wrongful) result from a religiousprospective. Moreover, religious exerts can and do disagree. As shown above,there are legitimate differences among religious authorities.

Consider another example of this constitutional issue in practice. The gov-ernment has attempted to deal with matters of Kashrus and Halal. It has cre-ated organs of government that were designed to enforce standards of what isKosher and what is Halal. However, there is no universally accepted standardof just what is Kosher and what is Halal within the respective religions. Thegovernments attempts to legislate a denition in accordance with a particularstandard have been rejected by a number of courts as unconstitutional underthe Establishment Clause. For example the N.J. Supreme Court239 recentlythrew out the New Jersey Kashrus Law because of the constitutional principleof separation of church and state. This is because the denition of the termKosher240 can only be decided under religious law. There are divergent viewsas to the meaning of the term. If the U.S. courts require religious scholars totestify as to the meaning of the term religiously, then it violates the Establish-ment Clause of the Constitution. Moreover, not everyone within the religionagrees as to the meaning of the term Kosher. There are different standardsenunciated by various authorities within the religion. Dening kosher as inaccordance with a particular standard was held to be excessive entanglement ofthe sort prohibited by the Constitution.241

The term Halal242 is similarly the subject of divergent views. Thus, for ex-ample, whether a particular prayer is recited at the moment of slaughtering ornot can make something that is Halal according to many, Haram243 accordingto some.

Championing one view over another within a particular religion is just

the sort of excessive entanglement the Establishment Clause (and the case law


8/21


750

thereunder) was intended to curtail.Consider too that both the terms Kosher and Halal, on the one hand, and

Ribit and Riba, on the other hand, are dened and encompassed within thebody of law within their respective religions dealing with sins.244 This as op-posed to matters of commerce between parties. In Halacha, the body of lawencompassing the laws of what is and isnt Kosher are known as Yoreh Deah. 245The laws of business and other interactions between one individual and an-other are known as Choshen Mishpat.246 Interestingly, the law of Ribit is not a

part of the section known as Choshen Mishpat. Rather, it is a part of the bodyof law known as Yoreh Deah (just like the laws of what is and is not Kosher).Similarly, the term Halal and the fact that if something is not Halal it is Haram(i.e., it is a sin to violate this requirement).

Violating these religious laws is not a matter of civil liability. Instead, it is amatter of sin. How more religious can the terms be? Indeed, but for the Bibli-cal prohibition (that is the religious source of these rules), they would not havebeen prohibited in the natural order of things.

Consider how Western civilization developed the concepts of trade andcommerce and how vital the banking/lender function is to the proper function-ing of the economy and society. Thus as a matter of rational development oflaws, there is no intuitive bar to charging interest. Indeed, the contrary is likelytrue. Hence the U.S. laws that permit and, indeed, encourage the loan/inter-est structure, as a foundational element in our economy. The rst mortgageloan nancing structure (and the capital markets that encompass this nancingproduct) developed naturally over time. As it turns out, it yielded an enormousbenet to society, in the form of substantially lower cost of funds than wasprevalent at the time when the religious rules against charging interest were rstpromulgated.247 As many Halachic and Shaariah religious scholars agree,248 thecapital markets have benetted and not burdened our society. In line with theforegoing, usury (excessive interest) is prohibited under U.S. law. Ordinaryand reasonable rates of interest are encouraged. These substantive issues areat the heart of the problem, since choosing one view over another within thereligion constitutes excessive entanglement. In this regard, I cant help but notethe trend in Shaariah compliant banks to have a religious board that supervisesvarious aspects of lending. This goes beyond just dealing with the permissible

versus impermissible loan structures (that would constitute prohibited Riba);


9/21

751


it goes to whether the intended purpose of the loan is Haram. Thus, a loan toa developer for the purpose of creating a drinking establishment (or other suchprohibited uses under the Shaariah) might be rejected because it is Haram.The government, in enabling this kind of banking establishment and insuringbank accounts, as well as, creating a secondary market (Freddie Mac or FannieMae) to purchase Shaariah compliant (wholly religiously motivated nancing)products, may be violating the third prong of the Lemon Test.

The kind of governmental actions noted above may even violate the sec-

ond and even the rst prong of the Lemon Test. In essence, the government isenabling a religious view and delegating to a religious board its role as an organof government. It is empowering the religiously-oriented bank to act for purelyreligious purposes. In doing so it is also endorsing it. This goes well beyondexcessive entanglement.

Beyond the Lemon Test, there is also the test enunciated in Larson v.Valente.249 In the Larson case, the Supreme Court held that, even where theLemon Test is not violated per se, there can still be an issue of choosing onereligious denomination over another. One religious denomination cannot beofcially preferred over another. Taking sides in a religious matter, effectivelydiscriminating in favor of one sect requires the state to take an ofcial positionon religious doctrine and creates an impermissible fusion of governmental andreligious functions by delegating civic authority to individuals or bodies chosenaccording to religious criteria (see Commack Self-service Kosher Meats, Inc. v.Weiss).250 Deferring to the interpretation of religious authorities in reaching anofcial position constitutes excessive entanglement under these circumstances.It is impermissible for the state including a court to weigh the signicance andthe meaning of disputed religious doctrine (seePresbyterian Church in the U.S.v. Mary Blue Hull251). Similarly, one cant employ a religious organization asan arm of the civil [government] to perform the function of interpreting andapplying state standards.252

We are a land of toleration and of diversity of views. Our country hasthrived on the principles enunciated in the First Amendment EstablishmentClause that prohibits just this kind of governmental activity. People should notbe required to accept religious practices contrary to their own religious beliefs.Efforts by the courts or government to interfere with the religious beliefs and

the free exercise of religion by individuals are just wrong.


10/21


752

Rather than seeking protection by the government of a particular religiousview or practice, recourse should be had to religious authorities as to religiousmatters. The Establishment Clause was enacted for this very purpose. As theSupreme Court stated inMcCollum v. Board of Education,253 by allowing gov-ernment to interpret an inherently religious term and impose its interpretationon members of that religion is constitutionally defective. The government, in-cluding the courts, should not be interpreting religious doctrine and its properapplication. A U.S. court should not be deciding who is a good Christian,

Jew or Muslim and whether their actions are right or wrong from a religiouspoint of view. This not only violates the Establishment Clause it could pos-sibly lead to interference with free exercise as well. As noted below, the betterview constitutionally is to allow each to function within its own sphere and notmix religious practices with nancing structures, but more on this below. Bothreligion and government can best work to achieve their lofty aims if each is leftfree from the other within their respective sphere.

Denominational preference violates the Establishment Cause (seeBargh-out v. Bureau of Kosher Meats and Food Control,254 a Fourth Circuit Court of

Appeals opinion, citingLarson v. Valente, Hernandez v. Commissioner255 andof course the Lemon case. It is impermissible for the court to sponsor oneview and create a symbolic union between church and state (seeLarkin v. Gren-dels Den, Inc.,256 and see alsoRan-Davs County Kosher, Inc v. New Jersey.257 TheLarson258 denominational preference test takes precedence over Lemon. Theconcept predates Lemon.259 In the Thorton case, the court struck down a Con-necticut blue law. The court held that government cant impose an absoluteduty on businesses to conform their business practices to the particular religiouspractices of the employee. An individual in pursuit of his own religious viewscant use the courts to impose those views on others and force them to conformtheir conduct to his own religious beliefs.260 Government action that has theprimary, not incidental or remote, effect of impermissibly advancing a particu-lar religious practice, is constitutionally prohibited. It conveys a message ofendorsement of a particular religious belief to the detriment of those who dontshare that belief, alaLynch.261

The English courts have taken a similar position. Thus in Islamic Invest-ment Company of the Gulf v. Symphony Gems NV262 and in Beximco Pharmaceu-

tical v. Shamil Bank of Bahrain,263

there were assertions made that the markup


11/21

753


charged was prohibited Riba and that Islamic Shaariah Law governed. In bothcases, the English courts reasoned that the Shaariah was not the recognized lawof the state. Moreover, different Islamic legal scholars might differ in practice asto whether a particular structure was or was not prohibited Riba. The Englishcourts determined that they could apply English law only.

tHe dIsconnect Between rIBa In tHeory under tHe

sHaarIaH and In practIce

As Dr. Mahmoud A. El-Gamal264 pointed out in his most insightful May2007 article Incoherence of Contract-Based Islamic Financial Jurisprudence inthe Age of Financial Engineering,265 there is a disconnect between the goals ofIslam and the methodology chosen to avoid the strictures against Riba.

I would suggest, as noted above, there is also a disconnect between thearticial contract forms and structures used and how they might be interpretedunder U.S. law as compared to what they were intended to accomplish.

Furthermore, Dr. El-Gamal notes that even when the capital markets havedealt with Shaariah compliant nancial products (embodying equity like legalstructures, so different from the loan products they are intended to mimic),they cost more than the equivalent loan product. It is submitted that if thesereligious oriented nancial products were actually fully tested in the U.S. courtsand the courts properly interpreted the text of these legal documents, it is likelythat there would even be a greater pricing disparity. Indeed, for good reason;because the legal structures are based on re-characterizing a loan as equity, withall of the attendant risks, including, intervening creditors, claims of lack of

priority and difculty of enforcement associated with such products. Thesedeciencies usually result in pricing disparities. Moreover, it is unclear whetherthere even is a summary enforcement remedy of foreclosure, which is also fun-damental to the pricing of a loan product. Frankly, it is likely that the verynature of the documents is open to question. After all, it is not supposed to bea loan; or is it?

The response of the English courts is cogent. They found that its not theirbusiness. They chose instead to deal with the note itself and not the overlay ofShaariah compliant legal structures and the documents; and, as noted herein,

well they should. This is because the enforcement of these structures is fraught


12/21


754

with all manner of legal difculty for all the reasons noted herein and likelyothers as well.

This kind of analysis echoes the views of Rabbi Epstein in his work theTosefot Bracha266 noted above. He noted the success of the banking function inpromoting commerce and prosperity and yet it appeared to be prohibited Bibli-cally. There was a disconnect. How could something so good, be so wrong?His answer was cogent. He found that the new world of commerce and nance

was to be embraced and that this was indeed what the Talmud was suggesting,

thousands of years before. Whether it is the original Iska (part loan and partinvestment trust) structure or its further development in the Heter Iska, theHalacha is not xed; it is vibrant. It developed mechanisms to meet the needsof the real world and market place. Similarly the Shaariah and the mechanismsdescribed above that are Shaariah compliant.

Nevertheless, to be fair, it requires some further practical changes, becausenefarious debtors have sought to misuse the U.S. courts to defeat their obliga-tions. However, if properly employed in the religious setting, only, as intended,then it serves a vital function.

In the case of a Heter Iska, ordinary loan documents can be signed and,as noted below, a separate instrument (whether on the wall and unsigned orsigned only by witnesses and not the parties), resolves any religious concernsabout Ribit. This while not upsetting the requirements of the capital marketsand U.S. law. Hence, religious matters are dealt with in a way amenable toreligious authorities and the wonderful benets offered by the capital marketsare embraced. As noted below, this kind of approach, in practice, may providea useful solution as to how to deal with similar Shaariah law concerns.

Dr. El-Gamal also notes that the higher cost of the Shaariah compliantversion of a nancing, as compared to an ordinary loan, is also of concern.267Ideally, this should be a focus of Islamic jurists and mitigate against a whole-sale rejection of the benets of the capital markets approach under U.S. law.

Why not nd a way to accept these lower cost formats on some expedient ba-sis? Thus, Dr. El-Gamal points out the focus on contract forms as a meansof purporting to provide nancial products and services in accordance withIslamic law or Shaariah may in fact be misguided. In essence, instead ofextending a mortgage loan on most favorable terms and rates, the Shaariah

banks are purporting to buy the property rst and then re-sell it to the cus-


13/21


14/21


15/21

757


uments favored by one structure within another only seems to cause moreproblems; not solve them. It is suggested that the key is to apply a more nu-anced approach.

Underlying this approach is a recognition that when documents are en-tered into under one system of law and ethics and enforcement is soughtunder another contradictory system of laws and ethics, problems can and doarise. Each system is better able to deal with its own laws and traditions andto overcome the problems it faces.

Melding the competing systems creates a situation where anomalous andunpredictable results can occur. As demonstrated with respect to the HeterIska, precisely the wrong result was obtained in a New York lower court case,as noted above, from that which was intended under the Halacha. There alsoappears to be genuine resistance in the U.S. to enabling religious orientatedforms and usages that conict with established business norms. This kind ofpush back is to be expected even in the healthiest of diverse societies, whenthe implicit message is, in effect, my system is morally superior to yours. As Ihope is demonstrated above, these concerns are borne more of ignorance andmisperception than as a result of genuine differences. I do believe that resolu-tion of these issues does not lie in integrating these discordant systems of lawand practice. Rather, it is suggested the solution lies in a healthy respect ofeach system for the other and self-respect, as well.

Why not therefore allow each system to exist and develop on its own.As discussed above the concept of embedding hybrid loan documents in aShaariah complaint structure does not cure the problem. Indeed it wouldappear to cause more problems than it solves.

It is suggested that one way of accomplishing this result is to enter intoHalachic or Shaariah compliant documents in a manner that is enforceableunder the respective religious laws that created them; but, which do not re-quire enforcement under U.S. law, as more fully discussed below. Similarly, aseparate capital markets compliant structure and set of documents would beentered into that are enforceable under U.S. law.

In the case of Heter Iska, I have accomplished this by having the docu-ment executed in a manner, which makes it enforceable under the Halacha,but, which absolutely makes it unenforceable under U.S. law. As noted

above, the Heter Iska need not be enforceable under U.S. law to make it


16/21


758

effective, Halachically. The fact that the Heter Iska is or is not enforceableunder U.S. law is wholly irrelevant. It only has to be enforceable in a BetDin under the Halacha. This is accomplished through the simple device ofthe parties themselves not signing the document. It is also recommend thatanother clause be added as well. The clause would provide that the Heter Iskacould only be enforced in a Bet Din and not in any other forum; and thenonly in accordance with the Halacha.

In the case of the Shaariah, I am relying on the Hanifa Fatwa and its

progeny that permit loans on interest in a non-Islamic state, as more fullydiscussed above. I am also relying on the Tantawi Fatwa and to a lesser extentthe Quaradawi Fatwa. As also noted below, the loan structure is non-recourse.Thus, not only is there no individual borrower or lender (both are entities),the borrower generally has no personal liability. The only qualication is thatthe borrower not interfere with the enforcement of the loan or violate certaincovenants intended to preserve bankruptcy remoteness and the integrity ofthe collateral. This is often referred to as a good guy guarantee.

In this regard I cant help but note that it is the lender that is taking realrisks in furnishing the credit to the borrower. Indeed as between the lender andborrower, it is the lender who is taking most of the risk. If anything, the price,in terms of interest rate charged to the borrower, is most benecial to the bor-rower. After all the lender is putting up most of the money to accomplish thetransaction. When you look through the transaction, it is in substance the pre-xing of return by the lender. Most borrowers dont want the lender to be theirpartner in the upside. Hence they prefer to borrow as much money as possibleat a xed rate of return. Under this structure, the borrower is not personally li-able on the downside. It is the assets forming the collateral package that standsfor the loan. The key to this structure, which benets the borrower, is to satisfythe requirements of the capital markets without qualication.

Thus, it is proposed that there be a wholly capital complaint structurethat fully and unequivocally satises the requirements of the capital market.In addition, there would be a wholly Shaariah compliant structure created

which is separate and apart from the capital compliant structure and whichdoes not interfere with it. The Shaariah compliant structure would also notrequire enforcement under U.S. law. This could be accomplished by iso-

lating the religious oriented nancing transaction from the loan transaction


17/21

759


format. The loan transaction format would be formulated to best take ad-vantage of the opportunities for placement through the capital markets. TheShaariah compliant format would similarly be structured separately to fullycomply with the requirements of the Shaariah. This separation could be ac-complished as follows:

1. A U.S. lending company could be formed. It could be an actual bank orpublic or private lending platform. If not a bank then a public or private

lending REIT might be a useful lending entity. This is because it is arecognized form in the marketplace and it offers tax advantages, like passthough of taxable income (i.e., no double taxation). This is particularlyuseful for a foreign investor that is otherwise not taxable in the U.S. orreceives other tax concessions under certain treaties (depending on thecountry of origin of the ultimate lender).

2. The U.S. lending company would be staffed with expert personnel whoare able to originate, underwrite and process loan transactions through

the capital markets.3. The U.S. lending company would be capitalized in a Shaariah compliant

manner using nancing mechanisms along the lines suggested above.

4. This kind of structure could be used for each nancing transaction or asan ongoing business format.

5. The Shaariah compliant capitalization of the U.S. lending companycould be made subject to binding arbitration under the Shaariah. Thedocumentation for this kind of remedy is readily available. It has been

used successfully in the analogous circumstances of a Bet Din under theHalacha and has been found to be enforceable under N.Y. law,276 if prop-erly drafted, executed and effectuated in practice.

6. The loan transaction would take the form of a typical capital marketsloan transaction. It would include a note, rst mortgage, assignment ofthe rents and all of the special purpose entities and bankruptcy remote-ness demanded by the capital markets, as the threshold requirement ofaccessing the favorable rates and terms achievable in this context. As istypical, U.S. law would govern and the documents would be enforceablein the U.S. courts, exclusively.


18/21


19/21

761


undo what was intended. The borrower receives the benet of more favor-able rates and terms than would otherwise be the case. Concomitantly, allof the terms and conditions of the capital markets, that were designed so asto afford so favorable an execution will continue to take precedence underU.S. law, without religious complication or entanglement. The result is thekind of predictability that each system of law intended, before they becameentangled. I cant help but note the wisdom of our founding fathers in seek-ing to prevent this very kind of entanglement.

conclusIon

The object of this article was to analyze the problem and nd expedientsolutions, a purely utilitarian exercise. Where diverse systems of law andethics are in conict and they intersect, there may or may not be a meansof satisfactorily melding them; but, so what? Why be concerned whether alegal structure designed to be compatible with one system of law is enforce-able under another conicting system of law, which has different traditionsand ethical practices. Indeed, the best resolution may be to develop lendingstructures and methodologies that allow each system to exist simultaneously,side by side. I leave it to the reader to decide. Hopefully, I have providedadequate materials to make an informed decision. Finding a solution that isreadily acceptable, both from a capital markets prospective on the one hand,and the particular legal system, on the other hand, is a worthy goal. The realtest will be in the market place. Let it not be said that in our time the door

was shut to borrowers or lenders, anywhere in the world, no matter their

culture, religion or legal traditions. Rather, let it be said that we did oursmall part to enable the free ow of capital, on competitive market terms andconditions and helped continue to build this world as G-d intended.

notes

231 403 U.S. 602 (1971).232 465 U.S. 668, 680 (1984).233SeeLarkin v. Grendels Den, Inc., 459 U.S. 116, 123-124 (1982).234SeeCorporation of the Presiding Bishopric of the Church v. Amos, 483 U.S. 327, 334(1987).


20/21


762

235Id. at 337.236 322 U.S. 78 (1944).237 393 U.S. 440 (1969).238Infrafootnote 286.239Seediscussion below.240 A term that denotes the fact that only certain types of meat, sh and fowl may beeaten and then only after satisfying the requirements for ritual slaughtering, saltingand watering, as applicable, as well as other detailed rules and regulations (includingno mixing of meat and milk products), collectively referred to as the laws of Kashrut.241I.e., under the Establishment Clause of the First Amendment.242 An equivalent concept to Kosher; but under the Shaariah, with its own detailedrules and regulations.243 Forbidden under the Shaariah (the equivalent of a sin).244Yoreh Deah vs. Choshen Mishpat.245 A codication of the Halacha (set out topically) by Rav Yosef Karo. It is viewed asone of the most denitive works of the Halacha.246 The volume dealing with commercial law by Rav Yosef Karo.247SeeSection 88 of the Code of Hammurabi and the 20 percent interest rate noted

therein. In the Middle Ages, even higher rates were prevalent.248Seethe discussion relating to the Shaariah below.249 456 U.S. 228 (1982).250 204 F3rd 415 (2001).251Suprafootnote 158.252Id. at 451. Furthermore, in the case of the religious advisory board for a Shaariahcompliant bank, there is in effect state reliance or sponsorship of a religious authorityon matters of religious doctrine. It provides a symbolic, and more so an actual benet,in sponsoring the activities of one view and in effect disparaging other views withinthe same religion.

253 33 U.S. 203, 212 (1948).254 66 F3rd 1337 (4th Cir.-1995).255 490 U.S. 680, 695 (1989).256 459 U.S. 116, 125-126 (1982).257 608 A.2nd 1365 (N.J.-1992); cert. denied 113 S.Ct. 1366 (1993).258 608 A2nd 1353 (N.J.-1992).259See Hernandez; see alsoEstate of Thorton, et al v. Caldor, 472 U.S. 703 (1985).260 Justice Learned Hand cited in the Burger decision at page 709.261Seediscussion ofLynch above.262 2002 WL 346969 (QBDComm Ct-2002).263 1 W.L.R. 1784 (Court of Appeals England and Wales-2004).


21/21

Date post:	14-Apr-2018
Category:	Documents
Upload:	deanna-cameron
View:	218 times
Download:	0 times

Grunstein Article

Documents