II. THE BAN ON INTEREST UNDER JEWISH LAW AND THE USE OF THE PERMISSIBLE VENTURE

A. SCOPE OF THE JEWISH LAW BAN ON INTEREST

The prohibition on the payment and collection of interest in transactions between Jews applies equally to all loans, whether for consumer or commercial purposes.⁸ Similarly, it applies not only to third party loans, but also to purchase money mortgage financing provided by sellers of businesses or properties. Moreover, it does not matter if the parties are related or strangers.⁹ Although there are differing views in instances involving partnerships or corporations, the predominant position is that if a majority of the partnership ownership interests or of the corporate stock is held by Jews, the proscription applies.¹⁰

B. THE INDIVIDUALIZED PERMISSIBLE VENTURE

Although there is no single form of a permissible venture,¹¹ the most common works in the following manner. The party seeking funding (the "Recipient") receives fifty percent (50%) of the money as a non-interest bearing loan; the other fifty percent (50%) is "invested" by the party furnishing the funds (the "Financier"). The Recipient obligates himself to use all of the monies in conjunction with a business venture¹² and to share profits and losses with the Financier on specified bases.¹³ The permissible venture may provide that, irrespective of the partnership's actual losses, the Financier's potential loss is limited to the amount of his investment (i.e., one-half of the total money advanced).¹⁴ The Financier pays some nominal sum, usually $1.00, to the Recipient in consideration of the Recipient's agreement to dedicate himself to the commercial venture.

The permissible venture ordinarily contains a clause requiring the Recipient to repay the amount loaned to him (i.e., fifty percent of the total funds advanced) on or before a specific date.

The obligation to repay the loan is unconditional.

In order to assure the Financier of a virtually risk-free fixed percentage return on all of the money he has advanced, additional provisions are commonly included in the permissible venture. First, the permissible venture establishes a presumption¹⁵ that the business is sufficiently profitable to provide the required return and places on the Recipient the burden of proving otherwise. To meet his burden, the Recipient must take a solemn oath in accordance with Jewish law.¹⁶ Another provision recites that the Financier agrees to relieve the Recipient from the obligation to take an oath and to give up his share of profits in exchange for periodic payments equal to the amount of interest the Financier would have received had he loaned all of the monies to a non-Jewish borrower. Thus, in light of the historically strong aversion of religiously observant Jews to oath-taking, the Recipient ordinarily would make the periodic, interest-like payments.¹⁷

Even if the Recipient is willing to take an oath, he can only thereby establish that the business earned no profit. To prove that there were net losses and thus relieve himself from principal repayment, the Recipient must adduce the testimony of two reliable and trustworthy witnesses, as determined under Jewish law. Because Jewish law requirements regarding witnesses are quite exacting, this standard is exceedingly difficult to satisfy.¹⁸ Moreover, the permissible venture may even demand that any such testimony come from particular persons, even though it is highly improbable that the named individuals will be in a position to offer testimony.¹⁹

A permissible venture agreement may also establish an irrebuttable presumption that the money invested by the Financier was utilized in those business activities of the Recipient which were in fact most profitable during the term of the agreement.

The permissible venture may also be limited as to scope. The Recipient may have an ongoing business in which he has invested a great deal of money. The permissible venture may be used for the purpose of raising additional funds for specific equipment or projects in connection with that business. The permissible venture may not be intended to create an investment in the Recipient's entire business, but only as to the particular use of the funds advanced by the Financier.²⁰

C. THE GENERAL PERMISSIBLE VENTURE

A number of institutional lenders have adopted a "general permissible venture" document, either as a substitute for or supplement to²¹ an individualized document for each particular deal. This document is executed only by representatives of the lender and declares that all of the lender's transactions shall be permissible ventures under Jewish law. It further states that its terms govern even if the other party or parties to such transactions are unaware of Jewish law. Although the general permissible venture is a unilateral document, its enforceability from a Jewish law standpoint is based on the assumption that persons dealing with a lending institution will accept its standard terms, even if they are not familiar with its details.²²

The general permissible venture is of little independent significance to the themes in this article. To the extent the borrower/depositor is aware of and agrees to the general permissible venture terms, the implications are the same as if an individualized permissible venture agreement had been executed. By contrast, if the borrower/depositor is unaware of the general permissible venture or if its terms contradict the specific documentation for the transaction in question, the general permissible venture should be null and void.²³

D. DIFFERENCES BETWEEN THE JEWISH "SHUTFUS" AND THE SECULAR PARTNERSHIP

The permissible venture is recognized by Jewish law as a form of "shutfus." The term "shutfus" is often translated into English as "partnership." Yet the Jewish law regarding a "shutfus" differs significantly from secular partnership law. Under Jewish law, for instance, a person can invest in and share the profits of a "shutfus" without being personally liable for any loss. Moreover, one member of a "shutfus" is not necessarily authorized to bind another personally. Nor need one member of a "shutfus" be vicariously liable for the acts of another.

The parties entering into a permissible venture agreement customarily intend that their agreement contain these types of restrictions. Although such terms, as I explain in Part III, infra, might prevent the permissible venture from being characterized by a secular court as a partnership, they in no way interfere with the parties' religious objectives. Jewish law does not care how secular law labels the permissive venture relationship. It is sufficient that the terms of the permissible venture agreement be enforceable.²⁴