heftsiba victims 298.88.
(photo credit: Ariel Jerozolimski)
A couple of weeks ago construction company Heftsiba was a leading Israeli business. The group, one of the country's largest home builders, successfully floated a number of recent bond issues, and was considered an attractive buyout target. This week the company declared bankruptcy, seeking protection from creditors to continue functioning as a going concern, but the court-appointed trustee stated that the company's situation is so weak that he doubts they have enough assets to function even without paying off their debts.
Right now, the company owes money to bondholders, banks, suppliers, employees and to thousands of homebuyers who made down payments on apartments that legally are collateral on obligations to more senior creditors.
The company's collapse has a large number of victims and seems to have been accompanied by a large number of ethical lapses. But at this stage, it does not seem that the ethical problems are the source of the collapse. Business ethics studies have shown that most companies don't engage in questionable practices when business is good; it is in times of crisis that they are tempted into illegal and immoral practices.
Of course, causality does sometimes work in the opposite direction. Enron was a successful company until it began an adventurous and audacious assault on decency. Its innumerable deceitful practices, including its "special purpose entities," which hid debt from careless auditors and high-pressured selling for services of questionable value, led to its collapse.
One of the most interesting ethical issues that has arisen in the Heftsiba bankruptcy saga is the "Heftsiba squatters."
In the wake of a previous rash of contractor bankruptcies, the Knesset passed a law stating that when purchasers pay for an apartment that they do not yet possess (usually it has not been built), the contractor is required to give them a bank guarantee on the payment. Usually this is done by putting the money in a special escrow account at the lending bank. Heftsiba succeeded in evading this law, diverting some funds to its own accounts. (No doubt the regulators and perhaps the law enforcement authorities will try to find out how this was accomplished.)
Many purchasers who were stuck without any guarantees have attempted to gain some leverage against the other creditors by squatting in their "own" apartments - flats that they paid for but do not yet own. There is no question that legally this is a crime, namely trespassing. Yet the participants, the media and even the legal establishment itself have taken an ambivalent view of this "self-help." Lawyers have been interviewed on the radio and in the print media saying something like: "Lawyers are not allowed to advise people to break the law, but you should know that occupying your apartment can give you some legal advantages." And, as part of his staying ruling, Judge Cheshin ruled that these squatters should not be evicted immediately.
This question touches at one of the most fundamental questions in the ethics of law, namely, is the law a set of norms or merely a system of incentives? For example, by stating that stealing is a crime, is society saying that it is wrong, or merely that when someone steals this gives parties certain rights and responsibilities - the victim to self-help, the police to arrest and investigate, the court system to convict and punish?
An extreme position is taken by noted law scholar Judge Richard Posner, of the University of Chicago and the US Court of Appeals. Posner has written that law should be viewed as no more than a system of incentives; thus corporations are acting rationally (that is, normatively) when they engage in criminal activities whose benefit is greater than the penalty.
A more common position is to draw the line between civil and criminal penalties. Most people would think it is reasonable to park in an illegal space in case of great need, for example, a loss that is greater than the fine. Virtually everyone speeds at times when they are in a hurry. (Speeding is technically a crime, but there is an "automatic plea bargain" if you pay the ticket so it practically never gets recorded as one.) However, I think that most people would refrain from stealing even in order to avoid a great loss.
For that reason, most ethicists frown on cheating on your taxes, even if the cheater states that he is willing to pay the penalty if caught. Cheating on your taxes is a crime, and not a victimless one.
So why the lenient view in the case of the Heftsiba trespassers? There are three main differences here: transparency, legitimacy and justification.
Cheating on taxes or breaking and entering are furtive activities. The suspicion is that people are not willing to endure the consequences as an "incentive" approach might claim, but rather are merely hoping to evade them. But the Heftsiba purchasers are acting openly.
In addition, cheating on taxes doesn't give you any legal rights; it only subjects you to severe penalties. (As I wrote in a recent column, a minority of tax amnesties are an exception. Most only exempt payers from penalties.) But as the learned lawyers have been explaining to us, trespassers actually obtain some legal rights.
First of all, after 30 days of possession they must be evicted; they cannot merely be ejected as trespassers. Second of all, they do have some claim to the apartment; they are merely low on the totem pole. In the days before bankruptcy, any creditor could keep assets from a delinquent borrower if he could manage to seize them. The disorder this bred was exactly the reason bankruptcy proceedings were invented, but the underlying right seems to have a certain intuitive appeal.
Public support stems from the fact that these people have had their own rights abridged when their legal right to guarantees was circumvented. It's not clear if the banks have any responsibility for this situation but if they do then this only strengthens the feeling that there is an unusual provocation involved.
I am not so much opposed to the view that open violations of the law are a legitimate game of give and take, as I am to the view that the legal establishment should actually make this a worthwhile game to play. As the Talmud tells us, "It's not the mouse that steals, it's the hole."
The Israeli system gives far too much weight to "facts on the ground," legitimating after the fact every kind of willful neglect of the law because it is too much trouble to fight it.
Given that many apartment owners were deceived, and that the commercial creditors seem to have had adequate opportunity to judge the credit-worthiness of Heftsiba, I think there is valid basis to consider giving some kind of legal redress to purchasers who were left without guarantees. But I object to giving any kind of advantage to purchasers who seized possession of their apartments in violation of the law. They may have the right to play the game, but the rules of the game must be written to avoid encouraging lawlessness.
The author is research director at the Business Ethics Center of Jerusalem (www.besr.org), an independent institute in the Jerusalem College of Technology.