V. POSSIBLE ALTERNATIVE SOLUTIONS TO THE BAN ON INTEREST

A formal limited partnership might be used by religious Jews rather than a permissible venture format. This alternative offers the Financier limited liability, safeguarding him from many of the more serious risks associated with treatment as a partnership.¹⁴⁰ There are, however, a few drawbacks. First, some institutional lenders may be precluded from entering limited partnerships. Second, formalization of a limited partnership structure might militate against treating the Recipient's payments as "interest" for tax purposes. Third, the need to comply with statutory requirements of a limited partnership may be costly and inconvenient, consuming precious time before a closing. Fourth, even where there is a limited partnership, it is possible for the limited partner to unwittingly become liable as a general partner by participating in the partnership business.¹⁴¹

If a third party sues a Financier, alleging that the Financier is a general partner, the Financier may ignore some of the above problems and attempt to escape liability through applicable ULPA or RULPA provisions.¹⁴² The Financier must assert that, in good faith, he erroneously believed that through the permissible venture agreement he had become a limited partner and would be required either to renounce its interest in the partnership or to cause a certificate of limited partnership to be filed. A practical problem might arise because of the statutory requirement that the general partner, the Recipient, execute the certificate.¹⁴³ The Recipient might refuse to execute a certificate, preferring to have the Financier share in the liability.¹⁴⁴ If the Financier can establish that the permissible venture is in fact a limited partnership, it may be able to obtain a court order requiring the Recipient to execute and file the certificate.¹⁴⁵ If the Financier is either sophisticated or represented by counsel, it may be difficult to establish that he believed in good faith that it was a limited partner because he was presumably aware that no certificate of limited partnership was filed.

Some rabbis have informally suggested that, as an alternative, an institutional lender earmark a certain portion of its deposits originating from "non-Jewish" sources for use in making loans to Jews. In this manner, they contend the loan is made from "directly" from the non-Jews depositors to the Jewish borrowers and no prohibition on exacting interest is involved. This argument, however, misstates the nature of the depository relationship. A deposit in a bank is a loan to the bank. When the institution lends money to others, it is lending its own money and, if the institution and the borrower are both Jewish, the prohibition against lending with interest applies.¹⁴⁶

These rabbis have alternatively proposed that a corporate lender segregate the equitable rights of its non-Jewish and Jewish shareholders so that there would be created a fund of non-Jewish "owned" money which would be used exclusively for loans to Jews. A similar amount of money wholly owned, equitably, by Jewish shareholders would be used for loans to other borrowers. In this way a partnership would not be established between the lender corporation and Jewish borrowers. Instead, the parties would participate in a straight loan of money, from the non-Jewish shareholders to Jewish borrowers. The interests of Jewish and non-Jewish shareholders would be linked, at least to a certain extent, to the performance of different groups of loans. As a result, the rights of those shareholders in dissolution, and even as to the declaration and issuance of dividends, would theoretically differ. To avoid any practical actual difference, there would be a presumption that the two groups of loans performed equally well. This presumption would be rebuttable only if a shareholder, prior to issuance of a dividend or liquidation right, would conclusively prove, by a specified and almost impossibly demanding standard of proof, that the respective groups of loans performed differently.

The primary problem with this proposal is that given the theoretical difference in the rights of Jewish and non-Jewish shareholders, it requires the establishment of two classes of common stock: one class being defined as the stock owned by Jewish shareholders and the other as that owned by non-Jews.¹⁴⁷ Assuming the initial creation of such classes, if the non-Jewish stockholders sold their shares to Jews, the Jewish law prohibition on interest could be violated by ongoing and future loans. Yet it is inconceivable that a corporation could legally restrict ownership of its stock on religious grounds. Even if such restrictions could be imposed, the attendant practical problems, including enforcement of the restriction itself, would be significant. Moreover, this process would involve possibly undesired publicity; the corporation might not choose to be perceived as making religiously based distinctions.

As a final alternative, the lender could avoid permissible ventures altogether and attempt to accommodate its religious Jewish customers in other ways. There is, for example, a rabbinic view that allows lending with interest if the borrower is not personally liable for the debt.¹⁴⁸ Therefore, a religiously observant Jew might deposit money into an account with a Jewish bank without a permissible venture agreement, because the shareholders of the corporation are not personally liable to the depositor.¹⁴⁹ Similarly, a lender might elect to make traditional nonrecourse loans to religiously observant Jews.¹⁵⁰ Any additional risk incident to nonrecourse debt might motivate the lender to increase marginally the cost charged for the financing or to require additional collateral.