Rabbinic Authority, Volume 2: The Vision and the Reality, Beit Din Decisions in English, Volume 2

2011

Preface

THE PRESENT VOLUME IS the second in a series of volumes intended as an introduction to a subject perhaps unfamiliar to many – rabbinic authority in our halakhic sources. The subtitle, The Vision and the Reality, points to the themes being addressed in this work.

In addressing the halakhic vision of rabbinic authority,¹ we will focus our attention upon a number of issues that the Torah-observant community has been grappling with during the last fifteen years. How does Halakha envision the professional responsibility of investment brokers vis-à-vis their investors? Is a manager of a feeder fund permitted to place money into the hands of a third party?

Given that there are brothers who are contesting in beit din (Jewish court) the right of their sisters to receive a share in the inheritance bequeathed by their father, how does Halakha view the propriety of a civil testamentary disposition? Will the estate be divided up as per the father’s instructions, or will the brothers as the Torah heirs receive the lion’s share of the yerusha, the inheritance?

With the advent of more incidents of spousal abuse and child abuse being perpetrated by members of our community, we address how the institution of beit din may serve to harness its authority and render monetary awards to the victims of abuse. Furthermore, we address whether there are any halakhic grounds for imputing institutional liability for acts of child abuse that occur under their watch.

The final component of my discussion of the vision of rabbinic authority is to deal with the role of a to’ein, a rabbinical advocate in the beit din process.

The reality of rabbinic authority presented in this volume deals with one type of authority, a beit din, which is an institution whose workings and contributions to the path of Halakha is unknown by most segments of our community. One of the primary reasons for communal unfamiliarity with this institution can be traced back to a Mishnaic ruling:

Upon finishing their deliberations, they would bring the litigants back to the courtroom, and the senior member of the panel would state: Mr. X, you are acquitted and Mr. X, you are liable.²

In short, the rendering of a beit din decision is limited to identifying the party who is innocent and the party who is responsible. Beit din procedure does not mandate the furnishing of a reason for a beit din judgment. A review of various passages in the Talmud, as well the rulings throughout the ages until this very day, will show a consensus that, generally speaking, a dayan (an arbiter) may issue a psak din (a decision) bereft of any reasoning.³ However, prior to a beit din’s rendering of its judgment, should a litigant be concerned that a member of the panel or the entire panel be ignorant of Halakha, and thus concerned that an error may be committed in rendering the psak din, or suspicious that a member of the panel or the entire panel are biased or may have been bribed, in certain instances the panel is obligated to provide a reasoned opinion.⁴ The right to request a reasoned opinion is not limited to a situation whereby one is summoned by a standing beit din to appear in front of them to resolve a contentious matter. According to certain authorities,⁵ such a request ought to be equally acceded to by an ad hoc panel known as a zabla (acronym for "zeh boreir lo achad – one chooses one").⁶ Today, many litigants are questioning a dayan’s credibility, halakhic expertise, and/or business acumen, and therefore, if at all possible, a reasoned opinion should be forthcoming in order to demonstrate that a dayan is not free to decide a case according to his personal whim, but is constrained by sources of halakhic reasoning and canons of interpretation. As Maharah Ohr Zarua and Havot Yair opine, each and every dayan should furnish the grounds for his decision.⁷

Yet, in contemporary times, due to the fact that halakhic court procedure does not mandate the issuance of a reasoned opinion, it is unsurprising to find that dayanim have generally refrained from giving reasoned judgments. Nevertheless, certain dayanim who serve in the beit din networks of the Israeli Chief Rabbinate and Eretz Hemdah-Gazit located in Eretz Yisrael have submitted reasoned judgments.

For over a decade, I served as a dayan on the Beth Din of America, and I continue to appear on various zabla panels, as well as be a single arbitrator for the Hassidic, Modern Orthodox, Sefardic, and Yeshiva communities in the New York-New Jersey metropolitan area. A beit din’s role is to address matters of social interaction, including matters of personal status such as giyur, conversion, and grounds for kefiyat get, Jewish divorce coercion.⁸ In numerous instances, I have rendered reasoned opinions in commercial matters and domestic relations. Labor relations such as employment termination and severance awards, business matters such as partnership dissolution, the validity of minhag hasohrim (commercial practice), civil law, contractual agreements and preliminary agreements, the interpretation of contracts, the principle of indemnity in insurance law, ribbit-related issues such as recovery of economic loss of funds, consequential damages, lease, construction and loan agreements, self-dealing in non-profit organizations, and copyright infringement, have been the subjects under scrutiny in many of these cases. In addressing family matters, I have dealt with the grounds for issuing a divorce judgment, dividing up marital assets upon divorce, spousal support, child support and placement, filial obligations to one’s parents, and yerusha issues such as guidelines for drafting a halakhic will and the validity of a civil will and a trust agreement. The cases and materials found in the cases that have been chosen for this volume cover the range of subjects characteristic of all modern legal systems, namely dinei mamonot (civil matters), public and administrative law, family law, and philosophy of law. Given that Halakha is a religious legal system, the impact of issur ve-heter (ritual law) upon the monetary issues under investigation is equally dealt with in our judgments.

As members of our covenant-faith community, we are obligated to resolve our differences in a beit din rather than engage in transgression by resorting to litigation in civil court.⁹ Hence, the parties who appear in a beit din sign a shtar borerut (arbitration agreement), which empowers the panel of dayanim to resolve a matter in contention according to the norms of Halakha.¹⁰ Assuming the beit din process and its decision comply with the rules of secular arbitration law, the judgment will be enforceable in a competent civil jurisdiction in the United States.¹¹

In this volume, there are ten presentations that have been inspired by reasoned opinions handed down as a member of a beit din panel. The format of our presentation is to begin by offering a rendition of the facts of the case followed by the claims of the tove’a (plaintiff) and the reply and counterclaims of the nitva (defendant).¹² Subsequently, there is a discussion of the halakhic issues emerging from the parties’ respective claims and counterclaims, followed by a decision rendered by the beit din panel. To preserve the confidentiality of the parties, names have been changed and some facts have been changed and/or deleted.

As we mentioned, accompanying these presentations is an examination of the halakhic identity of an investment broker, the propriety of a civil will, contemporary issues relating to domestic violence, and the role of a rabbinical advocate in the beit din process. Chapters one, three, and four have originally appeared in the pages of Tradition and chapter two has originally appeared in Hakirah. All of these essays appear here in an expanded form.

Hopefully our presentation will educate our community on the parameters and scope of rabbinic authority in general and shatter the silence surrounding the institution of beit din in particular. For those who avail themselves of the services of a beit din, it may be a life-defining moment. As such, it behooves our community to understand the institution, to become attuned to the dynamics of its decision making process, and to perform due diligence in deciding in which beit din to pursue one’s matters.

A. Yehuda (Ronnie) Warburg

27 Tishrei 5765

October 23, 2014

1. As we know, Halakha distinguishes between the theoretical law, which emerges from an abstract study of the sources of Halakha, and the law that is applied in a particular factual context, i.e., Halakha le-ma’aseh. See Talmud Bavli, Bava Batra 130b and Talmud Yerushalmi, Beitza 2:1 (R. Yohanan’s statements).

In our presentation of the vision and the reality of rabbinic authority, we are dealing with the Halakha that was and continues to be applied to actual factual situations, which is memorialized in sifrei psak, restatements of Halakha, and sifrei teshuvot, responsa. However, whereas the the reality portion of our presentation deals with the halakhic-judicial rulings of a beit din, the vision section focuses upon the decisions of halakhic authorities.

2. Mishnah, Sanhedrin 3:7

3. Bava Metzia 84b; Shavuot 30b; Sanhedrin 6b; Shulhan Arukh (hereafter: SA), Hoshen Mishpat (hereafter: HM ) 19:1.

4. Tur, HM 14; SA and Rema, HM 14:1, 4; Sma, ad locum 25; SA, HM 12:2.

5. Teshuvot Sha’ar Yehoshua 1–2. Cf. Teshuvot Hatam Sofer, HM 12.

6. In the absence of a standing beit din or when dealing with a litigant(s) who does not want to appear in front of a standing beit din, each party chooses one judge (known as a "boreir, selected one") and the two arbiters choose a third, and an ad hoc panel is convened to resolve contentious matters between the parties. See SA, HM 13:1–2.

Should the parties fail to agree on a standing beit din to resolve their differences, they are obligated to appear in front of a zabla. See Iggerot Moshe, HM 2:3; File no. 199-61 Beit Din Yerushalayim, in the name of Rabbi Y. Elyashiv and Rabbi N. Karelitz. Whether a divorcing wife must accede to her husband’s request to appear at a particular standing beit din to address end-of-marriage issues is subject to debate. See Pithei Teshuva, HM 14:4; Teshuvot Imrei Yosher 1:38; Iggerot Moshe, HM 1:5. However, the minhag in the NY metropolitan area is that when a couple fails to agree on a standing beit din to resolve their differences, they are obligated to appear in front of a zabla.

Cf. other Poskim (rabbinic authorities) who contend that a defendant isn’t obligated to convene a zabla, however he must be prepared to appear in front of a standing beit din that will determine whether there are merits to the plaintiff’s contention that the complexity of the matter requires the convening of a zabla. Upon review, should the standing beit din concur with the plaintiff’s assessment, the defendant must agree to participate in a zabla. See Teshuvot Avodat ha-Gershuni 47; Teshuvot Ben Porat (Engel) 2:10.

7. Teshuvot Maharah Ohr Zarua 13; Teshuvot Havot Yair 165. In fact, given that there is no halakhic duty to provide a reasoned psak din, R. Yehezkel Landau was highly critical of Torah scholars who nullified another beit din’s psak din without having heard the parties’ presentations and without providing reasons for the grounds for their position. See Ohr ha-Yashar 30.

8. A beit din, rather than an individual Jew, is required in order to determine whether there are grounds for coercing the giving of a get. See Tosafot, Sanhedrin 2b, s.v. "le’ba’i"; Sefer ha-Yeraim 164; Teshuvot Maharashdam, Even ha-Ezer (hereafter: EH) 63; Ketzot ha-Hoshen, HM 3; Meshoveiv Netivot 3; Minhat Hinukh 8; Teshuvot Oneg Yom Tov 168; Ohr Sameach, Hilkhot Gerushin 2:20; Hilkhot Mamrim 4:3; Teshuvot Divrei Ta’am (Heft) 128; Teshuvot Kol Eliyahu (Yisrael), EH 22; Teshuvot Tzmach Tzedek (Lubavitch), 262 (9); Teshuvot Avnei Nezer, EH 178:20; Teshuvot Be’er Yitzhak, EH 10:7; Teshuvot Heichal Yitzhak, EH 1; Teshuvot Beit ha-Levi (Soloveitchik), end.

Cf. some Poskim who rule that one Jew is sufficient to determine whether kefiya is proper. See Netivot ha-Mishpat, 3:1; Teshuvot Hatam Sofer, EH 2:64; Teshuvot Ma’aseh Hiya cited by Knesset ha-Gedola, EH 134, Haghot Tur 32; Teshuvot Yehuda (Gordin), EH 51:2; Yad Aharon (Alfandri), EH 134:20–21.

However, even according to the other Poskim who require a panel of three dayanim in order to coerce a get, if the couple agrees that one dayan should decide whether there are grounds for becoming divorced, such an agreement is valid. See File no. 212396-2, Beit Din Petah Tikva, 29 Iyar 5770.

As noted by Rabbi Z. N. Goldberg, all matters of marriage and divorce that relate to issur v’heter, ritual matters such as the validity of a marriage or parenting arrangements, a sole dayan suffices to address the issue. See Lev ha-Mishpat, vol. 1, 149–150.

So, for example, under certain prescribed conditions, a marriage may be voided ("bitul kiddushin") such as a post-marital discovery that the two witnesses who were present at the wedding ceremony were invalid, and therefore, the marriage never occurred. Such a determination may be rendered either by a panel of three dayanim or by a single rabbi.

Obviously, if the divorce matter entails addressing certain monetary claims and/or mandates witness interrogation, it requires the convening of a panel of three dayanim. See SA, HM 3:1; Perush Ovadiya of Bartenura, Avot 4:8; Teshuvot Yehuda, ibid.; Hatam Sofer, ibid.; Lev ha-Mishpat, ibid.

Whether the requirement of having a beit din of three dayanim for the actual seder ha-get (execution of the writ of Jewish divorce) is min ha-din, according to black-letter Halakha, or due to minhag, practice due to the stringency of dealing with the hezkat issur (presumptive prohibition) of eishit ish (a married woman), is subject to debate. See Teshuvot Hatam Sofer, EH 2:66 and Teshuvot Noda be-Yehuda, Mahadura Tinyana, EH 114.

9. Midrash Tanhuma, Mishpatim, piska 6; Gittin 88b; SA, HM 26:1–3

10. See Rema, HM 12:7; Sma, ad locum 18.

11. See Uniform Arbitration Act, sec. 1. A dayan’s decision must be enforceable. See Mo’ed Katan 14b; Sanhedrin 7b; Ohr ha-Hayyim, Devarim 16:18 in the name of Pesikta; Teshuvot Avnei Nezer, HM 1; Hazon Ish, HM 3:2. Moreover, as a dayan, it is one’s responsibility not only to render a judgment in accordance with Halakha, but equally to ensure that the decision will be enforceable. See Hiddushei ha-Ritva, Mo’ed Katan 14b; Teshuvot ha-Rashba 1:18; Perush ha-Gra, Mishlei 31:9; Teshuvot Hatam Sofer, HM 177; File no. 921426/6, Netanya Regional Beit Din, June 25, 2015. In other words, if a party refuses to comply with the beit din’s psak din or attempts to vacate the ruling in civil court, it is the panel’s duty to issue a decision that he is in contempt of beit din, as well as invoke any mechanisms such as an "ikul," an attachment of property of the losing party, which will facilitate the enforcement of the psak din. See Tur, HM 73:17; SA, HM 73:10; Sma, SA, HM 73:30; Shakh, SA, HM 73:34; Bi’ur ha-Gra, SA, HM 73:32.

In some beit din arbitration agreements, one finds that the parties agree to waive a civil law that prohibits an arbitrator to have a familial tie to one of the parties. Without addressing the legal validity of such an arrangement, how does Halakha view such an agreement? Generally speaking, in the context of financial matters, the operative rule is an individual may contrary to what is written in the Torah. See Kiddushin 19b. Therefore, if the beit din errs regarding a monetary matter, the litigant’s waiver of his right to appeal is valid. Every individual has a right to waive his right to money that he may have been entitled to receive from another person. As such, seemingly such an arrangement ought to be recognized.

However, regarding matters of ritual law (issura), parties are proscribed from negotiating such an arrangement. Given that a violation of secular law is an infraction of dina de-malkhuta dina (the law of the kingship is the law), we are dealing with a matter of issura, and therefore parties cannot agree to engage in an issur, and surely a beit din cannot render a decision that is tainted by issur and proceed to convene a hearing in which a litigant has a family relationship to an arbitrator. See Beit ha-Behira, Nedarim 28a; Bava Kama 113a; Teshuvot Rashbash 212; Beit Shmuel, SA, EH 28:3; Teshuvot Maharshach 2:27, 219; Avnei Miluim 28:2; Teshuvot Hatam Sofer, Yoreh De’ah (hereafter: YD) 314, EH 139; Teshuvot Teshurat Shai, 50.

Obviously, even if civil law would not disqualify the arbitrator from serving on the case, clearly a dayan is disqualified due to his familial ties to one of the litigants. See SA, HM 7:12. Nonetheless, if the dayan, the arbitrator, discloses the disqualification to the parties prior to the proceeding and both parties mutually agree to proceed with the din torah, then there are no grounds for appealing the decision due to the relationship. Regarding the validity of a litigant accepting the opposing party’s undue influence relating to the proceeding, see Teshuvot Maharitz 218; Teshuvot ve-Hanhagot 3:332. Recognizing a party accepting a familial tie between the dayan and the opposing party, see Shakh, SA, HM 7:15.

12. Recently, in various places in the US there have been a few battei din in the format of ad hoc panels that have handed down decisions in monetary matters without hearing the defendant’s reply. Such a decision is null and void. See Teshuvot Lehem Rav 87; Teshuvot Ba’ei Hayyei, HM 1:18.

In fact, if one inquires from a rabbi how to deal with a contentious issue dealing with two fellow Jews, it is incumbent upon the rabbi to either hear both sides of the issue from both parties or to render a decision with the caveat if the facts are as you presented them to me, the decision is … See Pithei Teshuva, SA, HM 17:5 in the name of Meil Tzedaka. In other words, a rabbi ought to function like a beit din with respect to hearing the other side prior to giving a reply to a question posed to him.

In particular, such a procedural requirement is important when a beit din must determine whether there are grounds to obligate a get. See Kovetz Teshuvot 1:181.

I

Rabbinic Authority

The Vision

Chapter 1

The Multifaceted Halakhic Identity of a Jewish Investment Broker

NEARLY ALL INVESTORS IN the securities markets must avail themselves of the services of brokerage firms. Even sophisticated investors who choose their own investment portfolio usually rely on brokerage services to execute their transactions. Other investors rely on brokers for their professional and (hopefully) informed and competent advice. Given the irrational exuberance that affected many investors in the trading markets in the years prior to the 2008 market meltdown, it behooves us to address, from a halakhic perspective, some of the issues that emerge in a broker-client relationship.¹

The purpose of this essay is to address whether a Jewish investment broker or a manager who owns partnership interests in a fund, is liable for failing to comply with his Jewish client’s instructions to execute a buy or sell of an investment product.² For example, if the broker fails to sell a security and the investment declines in value, is the broker liable for the loss? If the broker fails to buy a product he’s been instructed to buy, and the security increases in value, is the broker liable for the loss of anticipated profits? A reply to these questions and others requires us to examine the multifaceted identity of a broker or an investment manager of a fund as a shaliah, i.e., an agent, and as a shomer, i.e., a bailee.³

A broker may service his clientele with two types of accounts. One type of a brokerage account is non-discretionary, which requires a customer’s authorization prior to the execution of any investment transactions. The duties of a broker handling such an account are more than simply being an order taker who competently executes a securities transaction for a client who manages his own investment portfolio. In the absence of any written agreement between the broker and the client, the duties required in handling a non-discretionary account include due diligence in evaluating an investment, the duty to execute an order promptly in accordance with the client’s instructions and best interests, the obligation to refrain from any self-dealing, and the obligation not to misrepresent any fact relating to the trade.⁴ As such, brokers are not mere order clerks mechanically executing buy and sell orders. Nevertheless, the broker’s services are transaction-specific and are limited to a faithful execution of the client’s instructions, rather than offering risk assessments, such as the dangers of the lack of diversification or over-concentration in volatile securities.⁵ In many instances, account agreements make it explicitly clear that the customer is responsible for his own investments.⁶

I.

What happens, however, if the broker abstains from following his client’s instructions to purchase an investment and the product subsequently declines in market value? Is the broker liable to reimburse his client for the ensuing loss of anticipated profits?

Halakha provides that a broker, similar to an agent, should execute an agreement with his client either through oral communication or in writing. As Shulhan Arukh rules, "If one instructs his agent ‘proceed and sell land or chattel for me,’ or ‘acquire for me,’ the agent sells and buys and executes his mission … and one who appoints an agent does not require a kinyan or witnesses."⁷

Or as R. Shmuel de Medina observes, Authorizing an agency via writing is more effective than orally creating one.⁸ An agency agreement in writing provides the terms of the agent’s mandate (and by extension, a broker’s performance), as well as the consequences of his failure to perform. In short, the broker has actual authority to engage in trading on behalf of his customer. This agreement serves as the broker’s mandate to serve the best interests of his client and defines the parameters of his mandate.⁹

Nevertheless, should a broker abstain from executing a transaction, is he liable for any ensuing loss of anticipated profits? The halakhic stance regarding this matter has been recently summarized by Dr. Michael Wygoda, Senior Director of Jewish Law at the Ministry of Justice in Yerushalayim, Israel:¹⁰

The principal … has no legal claim, but merely a grievance, against an agent who fails to carry out his mandate … however, if the principal sustains a loss because of the agent’s action, he is, in some cases, entitled to claim damages from the agent, and need not make do with expressing a grievance …

Some early authorities hold that, in principle, the preclusion of profits is indeed not grounds for indemnification … Other early authorities, however, maintain that … in principle, prevention of profit does provide grounds for a claim, provided the anticipated profit was certain …

Numerous authorities ascribed to the latter approach and argue that in cases in which the profit is speculative or dependent upon the actions of a third party, there is no recovery for lost profits.¹¹ Consequently, given our situation, the value of securities is subject to market fluctuation; hence, a broker who fails to execute his mandate to buy or sell a product is exempt from liability for any lost profits.

The above conclusion is corroborated by the dominant interpretation of the following Talmudic passage:¹²

If someone gives money to his friend to go and purchase wine for him during the season while the price was low, but he was negligent and failed to buy it, the law is that he has to pay him with wine according to the low price.

Here, a promise was made, the promisee relied upon the promisor to purchase wine, and the promisee suffered monetary loss. Talmud concludes that the promisor is liable to compensate for the harm incurred. Many opine that the compensation resulting from the promisee’s reliance is due to the fact that the promisor explicitly agreed at the time the agreement was made to reimburse the promisee for the loss resulting from failure to finalize the wine purchase.¹³ Analogously, a written agreement between a broker and his client mandating liability for failure to execute a transaction would be valid. On the other hand, in the absence of such an agreement, any harm suffered from relying upon the promise would be unrecoverable.¹⁴ To state it differently, even though the broker may not have been able to foresee the ensuing loss due to his failure to comply with his client’s instructions, nevertheless by virtue of the fact that a broker is viewed as a shomer, he is responsible for unforeseeable damages.¹⁵ What happens, however, in a situation in which the broker receives instructions to sell an investment product such as a stock or bond, the broker fails to carry out his client’s instructions, and the customer sustains losses due to the broker’s inaction? At first glance, absent any agreement that states otherwise, given that the damage was only indirect (grama), and the ruling that one who causes indirect damage is exempt from liability ("grama be-nezikin patur"),¹⁶ the broker cannot be considered legally liable for his client’s losses.¹⁷ This conclusion flows from those Poskim who view a broker through the lens of "adam ha-mazik."¹⁸ As we will demonstrate, however, the broker, as an agent, may nevertheless be deemed halakhically-legally liable by virtue of his status as a shomer sakhar, i.e., bailee who is paid a commission, who is liable for negligence including grama, loss, and theft, and is entrusted with managing the purchase/sale of stocks, bonds, annuities, or mutual funds, which are objects of shemira, i.e., bailment, and therefore subject to hilkhot shemira.¹⁹ Given that the client instructed the broker to execute certain transactions, in exchange for which the broker would receive compensation, the broker is considered a shomer sakhar.²⁰

Implicit in our presentation is that Halakha recognizes commercial relationships that primarily entail the accumulation of wealth and are governed by the halakhot of entrustment of assets, i.e., bailment, to the broker. For example, the Talmud discusses a partnership arrangement called an "iska. This arrangement is defined as palga milveh u-palga pikadon," half loan and half bailment. The investing partner invests the funds that are required for the business enterprise and plays no role in managing the business, while the managing partner uses the investor’s capital to operate the business. Unless stipulated otherwise, all profits and losses are to be divided equally between the two partners. The investing partner receives the profits from the half designated as a loan and the managing partner receives his profits from the half labeled as a bailment. In effect, the managing partner receives remuneration for his time and effort in managing the bailment.²¹ The iska arrangement is an example in which an individual is managing somebody else’s money while being entrusted as a bailee to protect those assets.

In viewing an agent as a bailee who is entrusted with assets within a commercial setting, it is unsurprising to find the following responsum penned by R. Yosef Trani, which addresses our issue of liability for damages incurred by indirect causation. R. Trani deals with an agent who was remunerated and authorized to sell merchandise given to him by the principal, but failed to finalize the sale. Is he liable for its depreciated value? Though in terms of hilkhot nezikin, we are dealing with a case of grama, and we would expect the agent to be exempt from liability. Nevertheless, R. Trani concludes that the agent is liable for damages caused indirectly.²² In effect, the halakhot of shelihut and shomerim trump hilkhot nezikin. R. Trani’s position is endorsed by others.²³

Seemingly, we may analogize to our case of the broker who fails to fulfill his customer’s mandate. Just as in R. Trani’s case, in which the businessman is liable for failure to sell the merchandise, a broker who fails to act should be liable for any subsequent damages. Implicit in both instances is that an agent who serves equally as a bailee is responsible for the depreciation of the value of the bailment entrusted to him.

Does a shomer’s duty of care (and by extension, a shaliah’s duty) extend to protecting the market value of an asset in his safekeeping, or is it limited to ensuring the physical state of the bailment? The resolution of this issue emerges from a question regarding the prohibition of benefiting from hametz that was in the possession of a Jew over Pesach (hametz she-avar alav ha-Pesach). If a Jew deposits hametz with a fellow Jew on the eve of Pesach and the Jewish bailee neglects to sell the hametz to a gentile before the onset of Pesach, will the owner of the hametz be forbidden to derive benefit from it after Pesach?²⁴ Is a shomer obligated to prevent the loss of the value of the hametz? Most decisors argue that a shomer’s responsibility is limited to ensuring the preservation of the physical state of the bailment, namely the actual hametz, no different than the Talmudic conclusion regarding the shomer’s duty to prevent the spoilage of fruit.²⁵

Nevertheless, in situations of potential devaluation of currency or depreciation of documentation such as a lottery ticket, most authorities argue that a shomer is obligated to redeem this currency, lest the owner of the assets incur financial loss.²⁶ For example, in case of an agent’s neglect to extend the expiration date of a lottery ticket, R. Ya’akov Emden rules that he should indemnify the principal for the market value of the ticket prior to its expiration date.²⁷ Without having to render an independent authoritative opinion of our own regarding this issue, pursuant to majority rule we may conclude that in cases of imminent document or currency depreciation, a shomer must engage in safekeeping and save the value of his client’s assets.²⁸

Similarly, one may argue that a shomer who is aware of a potential loss in the market value of an investment and fails to sell the investment is liable for the loss.²⁹ On the other hand, given that a nondiscretionary account is transaction-specific, once the transaction is executed, absent any agreement to the contrary, the broker has discharged his mandate and therefore hilkhot shelihut and shemira no longer govern his relationship with the client. Should the investment depreciate, the broker is no longer under any halakhically enforceable obligation to avert any of the client’s losses. In other words, such a claim for losses incurred generates no monetary redress and therefore will not be addressed by a beit din.

However, should the broker become aware at some juncture that his former client’s investments are depreciating; he is obligated to sell his former client’s assets. There is a duty based upon the biblical exhortation relating to the restoration of lost property, And you shall return it to your brother,³⁰ which directs one to save a fellow Jew’s assets in a situation that there is an clear impending loss.³¹ After the transaction is executed and the broker has discharged his duties as memorialized in the agreement, should the broker become aware that his former client’s investment has declined in value, he may sell it with the former client’s consent, and it is understood that he can charge the client for professional services rendered.³² Though generally one should restore property free of charge,³³ nevertheless the finder should not incur a financial loss, or even a loss of profit, and therefore he should justifiably be reimbursed for his services rendered.³⁴ As noted by Rema, Ketzot ha-Hoshen, and Netivot ha-Mishpat, recovery of a lost object is grounded in the concept of zekhiya, which tells us that a benefit may be conferred upon a person in his absence, but a burden may not be imposed on anyone unless he is present. In other words, should the conduct be construed in the eyes of the owner as a hov, i.e., a detriment, an individual must abstain from saving the asset.³⁵ Consequently, in the absence of an agreement to the contrary, the client may feel that his former broker’s involvement would be detrimental to his interests, and therefore the broker should abstain from saving his client’s assets.

To avoid any potential problems, such as the client’s reluctance to have his broker execute another transaction or the possibility that another broker will be hired to manage the customer’s account, which would construed as a "hov" to the customer, the provisions of the first broker’s agreement ought to address both the parameters of their business relationship prior to the broker’s finalization of the transaction, as well as his responsibilities after its consummation³⁶ (including his professional fees for services rendered).³⁷ In the absence of a written agreement, the broker should notify his former client regarding the depreciation and ask him whether he should sell the financial product.³⁸

Our conclusion regarding a broker’s ongoing responsibility after a customer’s order has been executed stands in bold contrast to the position of American law, which limits a broker’s duty to the narrow task of warning his client of the risks of certain investments and then consummating the transaction requested, rather than obligating the broker to continue monitoring the account and informing his client should his assets begin to depreciate.³⁹

However, we need to point out that the broker’s duty to inform his client of asset depreciation is a halakhic-moral obligation and therefore cannot be enforced in a beit din. Absent a written agreement to the contrary and given the pragmatic considerations of the broker’s unawareness of the client’s wishes and present management of the portfolio, should the broker refrain from saving the value of his client’s assets, he is not liable for any ensuing loss.⁴⁰ In the words of R. Ephraim Navon, we have not found that he is obligated to pay for recovery of a lost object.⁴¹

In short, on the one hand, pursuant to Halakha, similar to American judicial opinion, a broker must warn an owner of a nondiscretionary account about the dangers of risky investment choices. On the other hand, unlike American law, with its tradition of rugged individualism, which inexorably serves as the ideological backdrop for a broker’s circumscribed duties vis-à-vis his client,⁴² Halakha instructs us that it is incumbent upon a broker to intervene on behalf of his former client by warning him of an impending loss from a recent trade.

In sum, if a broker is servicing a nondiscretionary account in a case of anticipated profits, there are no grounds for indemnification. On the other hand, should he fail to execute a client’s instructions to sell an investment, and the client suffers losses, he is liable. However, once a broker’s duties have been discharged and the mandated transaction has been executed, unless the agreement provides otherwise, any subsequent losses due to market fluctuations are beyond the broker’s halakhic responsibility.

What happens, however, if a client directs a broker to execute a transaction, but a few minutes prior to finalizing the buy or sell, circumstances have changed and the broker realizes that executing such a transaction would result in losses to the client? Unable to contact his client regarding the impending loss, does the broker comply with his mandate and finalize the transaction, causing losses to his customer, or does he refrain from fulfilling his mandate in order to protect his client’s interests?

Not only are the parties bound by the express terms of the agreement, an agreement that memorializes the broker’s actual express authority, but certain duties as a shaliach are also implied. Actual implied authority emerges within two contexts. Firstly, the broker must perform the client’s mandate. Nevertheless, the broker must also do what is necessary to achieve the principal’s objectives, even if it is not memorialized in their agreement. Additionally, the agent may not have been explicitly mandated to take a particular action, but if he can infer that he is authorized to do so based upon the principal’s goals, then he is authorized to execute such conduct.

The Talmud argues that an agency relationship is premised upon the fact that an agent shall act for the benefit of the principal rather than his detriment.⁴³ As such, Shulhan Arukh concludes, Every principal who appoints an agent implicitly articulates that any detriment resulting from the agent’s performance negates his agency.⁴⁴ Consequently, if the principal can demonstrate that the agent’s actions undermine his mandate, the agency relationship is null and void.

The above halakhot of implied agency will apply equally to a broker’s discretionary account and non-discretionary account. Should circumstances arise that were not contemplated when the agreement was negotiated, would the agent be responsible? R. Shmuel Kalai addresses a question regarding a principal who authorized an agent to deliver goods to a particular individual. Upon investigation, the agent discovered that the third party was impoverished and would therefore be unable to pay for the goods. Despite this clear warning signal, the agent delivered the goods to the third party. As anticipated, payment was not forthcoming. R. Kalai rules that the agent had deviated from his mandate by undermining his implied authority to serve the principal’s best interests, and he was therefore liable.⁴⁵

Addressing a similar scenario, R. Shmuel de Medina argues that by dint of the agent being a shomer, the significance of this warning sign should have propelled the agent to refrain from executing the transaction.⁴⁶ As a shomer, he is obligated to safeguard these goods rather than cause damage to his principal.⁴⁷

In our scenario, if the parties did not contemplate changed circumstances when the agreement was negotiated, and the execution of a transaction would incur losses for the client, it is incumbent upon the broker to refrain from finalizing the transaction.⁴⁸ For example, if Moody downgrades a firm’s debt to junk bond status and this rating is announced prior to the opening of the futures market, it would be incumbent upon a broker to contact his customer to decide how to proceed.

II.

In the absence of any written agreement between the broker and the client, how does Halakha address discretionary accounts for which the broker fails to execute a transaction he was instructed to make and the value of the product subsequently declines? Is the broker liable to reimburse his client for the ensuing loss of anticipated profits?

In contrast to the management of a nondiscretionary account, a broker handling a discretionary account determines whether to buy or sell without any instructions from the client. To execute transactions wisely, the broker must be duly informed of market fluctuations that affect his client’s interests, protect his client’s objectives, and provide ongoing advice regarding the risks entailed in purchasing or selling an investment. In effect, the broker manages the account and is granted power of attorney to engage in securities transactions for the client without his prior approval. Whereas in a nondiscretionary account a broker’s duties are circumscribed on a transaction-by-transaction basis, in a discretionary account, there is an ongoing relationship between the broker and his client wherein the broker is authorized to execute numerous transactions without prior approval. Ongoing due diligence requires that the broker be cognizant of whether a precipitous decline in a security is due to the financial integrity of the company, or, in Prof. Aaron Levine’s words, the halo effect of the financial markets. The broker’s understanding of the situation will determine whether he sells or refrains from selling the product. Furthermore, the broker must keep in mind the investor’s goals, i.e., whether his needs are long term or short term.⁴⁹ For example, if his client is relatively young and everything else is equal, a broker may decide that his client’s retirement portfolio should consist of volatile securities. On the other hand, once this client reaches old age, the broker’s responsibility may be to transfer his portfolio to more conservative securities.

In short, similar to our conclusions regarding a nondiscretionary account, in a case of anticipated profits relating to an investment executed by a broker managing a discretionary account, there are no grounds for indemnification. However, should the broker fail to execute a client’s instructions to sell an investment and the client suffers losses, he would be liable. Finally, in a discretionary account, the execution of a transaction is not a sign of the discharge of the broker’s mandate. After the execution of a transaction, the broker has an ongoing duty to provide clients with investment advice and provide risk assessment of their securities. Consequently, should there be red flags that indicate a potential depreciation of an investment, the broker is obligated to prevent any potential losses.

III.

Absent any agreement that provides otherwise, what happens if the investment manager (hereafter: manager) of a nondiscretionary account or discretionary account chooses to appoint another manager to manage the account? Does Halakha recognize the institution of an agent appointing a sub-agent and what are the manager’s responsibilities in this case?

In the absence of a written authorization from the principal, can an agent appoint a sub-agent? Articulating the position of normative Halakha regarding this matter, a contemporary writer states,⁵⁰

The agent may appoint a second agent [a sub-agent] to do the assigned task for the principal and the second agent may appoint another sub-agent, and so forth … All this may be done without authority of the principal unless he expressly forbids such further appointments, or unless the acts to be done by the agent are so sophisticated or entail a high degree of trust.

In short, the sub-agent’s authority flows from the authority of the agent, rather than that of the principal. In effect, the agent is appointing an agent for the principal.

Rivash rules that, throughout the entire Torah, an agent may appoint another agent in cases where there is no insistence on personally appointing one.⁵¹ Should the agent unilaterally appoint a sub-agent, according to some authorities such an appointment would be valid ex post facto. As Rambam opines,⁵²

If a husband gave a bill of divorce to his agent and said to him, only you should deliver it to her, he should not send it with another, but if he gave it to another agent … then she is divorced.

Clearly, our broker-client relationship provides another illustrative example of a principal’s potential insistence on being selective regarding his agent of choice. Professionals, such as investment managers and brokers, regardless of whether they are managing discretionary accounts or nondiscretionary accounts, have a special relationship of confidence and trust with their clients by virtue of their training and expertise. Elsewhere we discussed how various indicia, such as a broker’s expertise, words of persuasion, and receipt of a professional fee, serve to engender a relationship of trust and reliance between the parties which gives rise to a broker’s duty of care.⁵³ As such, given the vulnerability, dependency, and substantial disparity in knowledge that may exist between the broker and client, we may assume that the client will insist on personal service and would be reluctant to have his account managed by another broker. Consequently, should an unauthorized transfer be made to another broker or manager, the client may justifiably exclaim, I do not want my bailment to be in the possession of another!⁵⁴

Nonetheless, Talmud instructs us:⁵⁵

What does [the Mishnah] mean when it states, He gave it over to a shepherd? It means he transferred it to an apprentice because it is customary for a shepherd to give over his charges to his apprentice to watch.

In other words, the animal owner knew that the shepherd would not guard his animal personally and would entrust it to the safekeeping of another; therefore, the first shomer is exempt from any liability resulting from negligent conduct of the second bailee.⁵⁶ In other words, everything depends upon the customary practice of the shepherd and the animal owner’s awareness of that practice.

The authorities extend this Talmudic rule to encompass situations in which it is customary for a salesman who holds merchandise to entrust it to another for safekeeping, or for a craftsman who is authorized to repair an item to give it to his worker to perform the work. There is a presumption that the customer is well aware that his asset will be in the hands of another, and therefore we may assume that the client consents to the appointment of the new shomer.⁵⁷ Analogously, in our case, though the client developed a sense of trust and confidence with his manager, and one would expect that the client would insist in benefiting from the broker’s personal service, nevertheless, if the client is aware that the manager usually delegates his responsibilities to others, we assume that the client implicitly agreed to the appointment of the second broker, absent any explicit protest from the customer.

Given that we can infer from the circumstances that the client consents to the appointment of a sub-manager, what are the respective responsibilities of the first manager and the sub-manager? As we