It is generally said that there are as many opinions as there are people asking questions. Since the Heftsiba (in this article, Heftsiba will refer to all of the members of the Heftsiba group of companies) "story" unfolded, virtually all self-respecting Israeli communication media have, as applicable, conducted live forums, published articles and have given advice, instructions and explanations to those individuals who purchased apartments from Heftsiba. Some of the apartment purchasers, on their own, have taken action based on their gut reactions without having been advised to do so by those who understand the risks and ramifications: They have broken into apartments, including those that have not even been completed, and taken possession. I do not presume that this brief article will give comprehensive advice but, rather, merely attempt to present a clearer picture of what we might see unfold through various proceedings in the upcoming weeks and months and how these events can be expected to influence each of Heftsiba's home buyers who bought their apartments in good faith and who have staked practically their entire life savings on the transactions. It is clear that the situation of those purchasers who obtained guarantees pursuant to the Sale Law (Apartments) (Security of Investments by Apartment Purchases) - 1974 (the "Law"), is very different from that of those purchaser who do not have any such guarantees. Similarly, different stages of construction (e.g. completed apartments vs those that are virtual skeletons vs those that are merely "on paper") will dramatically impact the purchaser's situation. We believe that it is crucial not only to know the physical condition of the apartments subject to purchase transactions with Heftsiba, but also each purchaser should be aware of his status vis-a-vis Heftsiba itself, Heftsiba sub-contractors, banks and other Heftsiba creditors so that purchaser can accurately consider his/her best course of action. Since each purchaser has unique circumstances in these complex scenarios, we recommend that each purchaser obtain his or her own appropriate legal counsel for advice. General Procedure. In ordinary circumstances, in the framework of the relationship between the contractor and the bank that finances the project, the contractor grants to the financial institution that provided the funding a security interest in the land and all property built upon it. When the contractor sells an apartment in the project, the purchaser is required to make a deposit in the appropriate account at the lending bank and the purchaser, in turn, receives a guarantee from that bank according to the Law. Upon completion of the apartment's construction, the bank issues a "Letter of Exception" pursuant to which the bank excludes the purchaser's apartment from the general lien that the contractor initially provided to the bank on the project. In a sense the apartment purchaser is repaying a proportionate share of the contractor's debt to the contractor's bank and receives a proportionate share of the security originally granted - the apartment for which the purchaser has paid. In this way the tri-party relationship between the buyer, the contractor, and the contractor's bank comes to an end. Arguments by Heftsiba's Financing Institutions. Heftsiba's lending banks have claimed in court that the money that Heftsiba received from some of the apartment purchasers was not deposited into the accounts at the applicable lending banks and, therefore, since those lending banks did not receive the funds from the purchasers, those banks did not issue guarantees to those purchasers and will not agree to issue the Letters of Exception regarding those apartments that were mortgaged to them. At the time of drafting this article, a stay of proceedings is in force, a receiver was appointed at the request of the lending banks who provided financing for the various Heftsiba projects and there have been reports that offers to buy the company have been made. What is, then, expected to be the outcome to the buyers in each one of these scenarios? Stay of Proceedings. In the "stay scenario," the company is essentially afforded "breathing space." In this context, initially no party (including the purchasers) is permitted to make any drastic moves (buyers included), and in the interim the company is expected to produce a recovery plan to the court (somewhat analogous to a Chapter 11 Proceeding in the US). This plan might, for example, include a provision that a different contractor assume the continuing operations of Heftsiba, usually subject to the agreement of debtor company's financing banks, the purchasers and the various suppliers to each forfeit part of the debt that is owed to them. Another possibility might include finding another source of financing to enable the continued operations of Heftsiba. The purpose of the "stay of proceedings" is to preserve the assets of the company and to allow the company to continue some of its operations with the goal of at least completing projects for which it is bound. This procedure can even help those purchasers who did not receive bank guarantees provided that funding can be found to complete the project. This scenario does not take into consideration any advantage that might otherwise lie in favor of those who hold guarantees since the purchasers are not able to enforce them. Enforcing guarantee pursuant to the Law is done in one of four ways: imposing a lien on the apartment or the land on which it was built; an order to obtain assets; a winding-up order; or an order to appoint a receiver to the seller or the owner of the land. A stay is not one of the four conditions for enforcing the guarantee. In the context of the decision of the Honorable Deputy Chief Judge of the Jerusalem District Court, the Honorable Judge David Cheshin of August 6, 2007, the Judge indeed issued Orders of Receivership to foreclose on the liens granted in favor of the banks in the projects mortgaged to them, which would seem to suggest that the condition needed to realize the guarantees has been satisfied. Nonetheless, the Judge ruled that, as part of the Order, at this time, bank guarantees could not be realized. Sale of Company/Assets. Regarding a possible sale, there are two alternate scenarios: (a) either the acquiring company will acquire the projects or some of the projects and, therefore, the acquiring company will stand in place of Heftsiba as far as managing the projects are concerned, or (b) the acquiring company will purchase Heftsiba as a entire company of Heftsiba including all of its obligations to creditors, as was the case in the Club Market affair. In this scenario, the acquiring company can set limits or pose conditions on the purchase, just as "Supersol" conditioned its purchase of "Clubmarket" upon the firing and rehiring of Clubmarket's employees which implicitly meant that the employees were waiving their rights of tenure as part of the transaction. The decision whether to accept a specific offer is in the hands of the court after the approval of a meeting of the creditors. Receivership/Liquidation. In the framework of liquidation, the liquidator collects all of the assets of the debtor, realizes their value and distributes the proceeds of sale among creditors. The distribution is made on the basis of categories of creditors who are assembled into groups with various priorities as determined by law. Parallel to the liquidation, each "secured" creditor that has a lien on Heftsiba's assets (the banks in our case), can foreclose on their collateral in the context of separate receivership proceedings. Purchasers without Guarantees in the Event of Heftsiba's Liquidation. The situation of purchasers who do not hold guarantees according to the Law, is not good to put it mildly. The banks which have registered mortgages and the tax authorities are considered "secured" creditors whose interests take preference over those of the purchaser who does not hold any guarantees. I am not suggesting that these purchasers have no rights - by law they have a legitimate right of claim - however, those claims have very low priority among the groups of creditors. Unsecured creditors, including purchasers who do not hold guarantees, generally only receive a distribution after all of the debts to the "secured" creditors shall have been paid off and what is left of the assets, if any, are to be distributed pro rata among all unsecured creditors. Purchasers who hold Guarantees in the Event of Heftsiba's Liquidation. The condition of those purchasers who hold bank guarantees pursuant to the Law is much better, since they can turn to the issuing bank to realize the guarantee. Nonetheless, it is important to realize that even if one collects on a guarantee, it is likely that the cost of a similar property will be higher than the price that was paid to Heftsiba a year or two ago. This practical reality is the result of the rise in the real estate market and because of the population of projects by other buildings in the area of Heftsiba's projects which would increase demand and, therefore, prices. The result is that even if a purchaser realizes on his bank guarantee, he may have a difficult time in affording a similar apartment in the same neighborhood. We would suggest, therefore, that a purchaser who holds a guarantee should consider the possibility of waiting for his apartment, even if it takes much longer than expected and even if he might need to add money to finance the completion of the project, rather than foregoing the property and trying to realize the guarantee. Further Complications. It is important to remember another factor to be taken into consideration - Heftsiba's sub-contractors. Heftsiba has tremendous debts to the contractors who are actually building the projects. Several of the contractors rushed to seize the vacant properties and to actuate their legal right to enforce a "mechanics lien." As long as there are purchasers who entered into the properties, the contractors are not able to realize their right to a lien. Additionally, the Honorable Judge Cheshin set forth in his decision that, at this stage, the "squatters" may not be evicted from apartments that they entered. Current Situation. As previously noted, this week the District Court in Jerusalem granted the request of some of the banks, and has ordered the realization of the assets mortgaged to the banks - each bank in accordance with the share of the assets mortgaged to it. Representatives of the banks were appointed to the post of receiving officials (each representative of a bank on behalf of the bank she represents), and were requested to present to the court an initial report on the building status in the different projects. Until then, the court limited the realization, and has set the framework for the acts permitted to the receivers: to seize the assets and continue to complete the building projects - each bank with regard to the project for which it provided financing. In parallel, a temporary order was issued to stay proceedings against Heftsiba which will remain in place until the hearing that will take place in the coming days. This is indeed a positive sign for those buyers who have in their possession bank guarantees, since the property they paid for might be built after all and their wishes may come true in the foreseeable future. Another encouraging sign is the ruling of the Honorable Judge Cheshin that the stay does not affect the rights of any of the parties in the dispute, and most importantly, that the purchasers who have entered their apartment cannot be evicted. As we explained, if an order of liquidation is entered against the company, its assets will be distributed among creditors based on the order of priority set by law. In this event, those purchasers who do not hold guarantees will be near the bottom of the distribution list. With respect to purchasers who took possession of apartments even though they did not have a legal basis to do so, from a practical perspective, the receivers will likely be concerned about the potential protracted and costly legal proceeding (and perhaps adverse publicity) that might increase the receivers' willingness to reach a compromise that may benefit those purchasers more than had they not broken into the apartments. Conclusion. In a hearing that took place in the Tel Aviv District Court, the court was asked to legally recognize the intrusion of a couple into an apartment they had bought without having received guarantees and the Honorable Judge Yehuda Zaft held that "there is no room for the court to assist such activity," since they have intruded into the apartment and have done so against the law via self-help. To some degree in contrast, the Honorable Justice Cheshin's ruling, that the stay does not impede the rights and claims of any party and that purchasers who entered apartments may not be evicted while the stay is in force, may be an encouraging sign for purchasers. Only time will tell. This article is not to be considered as a legal opinion. For legal advice, we suggest you contact legal counsel directly firstname.lastname@example.org Chen Livnat, senior partner at the Jerusalem-based law firm of Schuman, Livnat & Mayer, specializes in real estate litigation and bankruptcy.