Court: Attorneys Not Liable for Inbal Or Project’s Business Failure, Except in One Point

The Tel Aviv District Court this week largely rejected a lawsuit filed by buyers of 38 apartments in a project on Jabotinsky Street in Ramat Gan, one of Inbal Or’s failed projects, against the lawyers who accompanied the purchase group. The court ruled that the risks that materialized in the project were explicitly stated in the documents signed by the buyers, and that “not every business failure” amounts to professional negligence. One of the two attorneys sued was found liable for failing to draw the buyers’ attention to important information, but most of the claims by 38 of the project’s 57 apartment buyers were dismissed. ● About a decade after buying the Princess Hotel in Eilat: Nezba will pay tax of more than NIS 17 million ● Dozens bought land in Pi Glilot and were surprised to discover: part of it was expropriated

The lawsuit was filed against the attorneys who accompanied the group, after the plaintiffs claimed they breached a series of duties and made misrepresentations to Or’s clients. The court ruled against one of the attorneys, Adv. Guy Nof, awarding compensation of NIS 600,000, a negligible amount relative to the astronomical claim, which stood at NIS 12.7 million. However, the significance of the ruling does not lie in its outcome, but in the rules the court sets regarding attorneys’ duties, and the price an attorney may pay if he fails to meet them.

When a deal or project collapses, the injured parties look for a party from whom they can recover to reduce their losses. When it is not possible to recover from the central figure, the injured parties try to find “additional culprits.” The ruling goes to the heart of professional negligence and sets clear rules for attorneys: compliance with them will protect them from liability, while deviating from them may lead to financial harm.

The ruling in brief ● The court rejected most of the lawsuit against the attorneys in the Inbal Or case and held that business failure does not necessarily amount to professional negligence ● The ruling defines clear boundaries for attorneys’ liability in complex transactions ● The court emphasizes heightened requirements of transparency, proactivity and loyalty toward members of purchase groups

“The ruling may become a reference point,” explains Adv. Ariel Dubinsky. “It sends a clear message that in complex transactions, the court expects attorneys to be much more than ‘document lawyers,’ and they must critically examine their conduct when clients are harmed.” On the other hand, Adv. Yosef Weitzman of the Israel Bar Association says the court made clear that one cannot use “hindsight wisdom” to establish professional negligence, and that “not every business failure rises to the level of negligence.”

First rule, not every business risk will lead to liability for the attorney

First, the court states that, as a rule, an attorney will not be held liable for the economic viability of a transaction. Attorneys are not responsible for shaping the business plan at the basis of a construction project, and therefore are not liable for its risks. “The transaction at issue may be more risky or less risky,” the ruling states, but attorneys do not determine that and do not “serve as an insurance policy that cures realized risks.” Regarding purchase groups, the court clarified that those who join them “set out on a long journey at the end of which lies risk,” and warned: “We must caution ourselves not to stretch attorneys’ legal liability into realms that are not appropriate.”

So what are attorneys responsible for? Drafting the agreements, ongoing legal support, contracting with construction parties, registering rights, handling taxes and assisting the committee. This raises the question, at which points will they be held liable?

Second rule, duty of disclosure and clear drafting of agreements

At the stage of forming the purchase group, even if the attorneys represent the organizer and not the group members themselves, the court holds that they owe a duty of disclosure to the participants. This duty arises from their status as attorneys toward the opposing side, and also by virtue of the duty of good faith and disclosure that applies to them as a party to the negotiations. Because a transaction within a purchase group is “high-risk,” the attorney must ensure that its nature is clearly described and that all risks are expressly reflected in the documents.

Inbal Or during a Tel Aviv Magistrate’s Court hearing, photo: Yossi Cohen

The court adds an interesting practical requirement, the attorney must ensure that the agreements are not overly complex, so that they can be read and understood without effort. At the same time, the court also imposed responsibility on the potential buyers, they are obliged to ask questions, insist and act suspiciously, especially when offered “a three-room apartment in central Ramat Gan at a relatively low price,” because “there is no free lunch” in our world. According to the court’s reasoning in this case, a close reading of the agreements would have revealed that this was a risky transaction. The bottom line is that anyone seeking to join a purchase group bears responsibility for reviewing the documents they sign.

Third rule, an attorney cannot stand by when contractual undertakings are breached

In the second stage, as the project advanced, the court held that the attorneys owed duties of trust to the group members and served as their fiduciaries. According to the court, because of the power imbalance and the buyers’ dependence, this is “heavy responsibility.” Another interesting point on which the court dwells is that the attorney was in a potential conflict of interest, he represented the organizer, while at the same time owing similar duties to the group members. The court emphasized that an attorney may not absolve himself of responsibility toward the buyers by prioritizing the organizer’s interests in the event of a conflict.

In this case, most of the claims against the attorneys were dismissed, except for Or’s demand to advance payments contrary to the agreements. The court held that “given that the defendants were fiduciaries of the group members, they had to act” and not merely refer the buyers to review the agreements independently. The lead attorney in the case was found liable for failing to try to prevent the collection of the prohibited payments, although he should have taken active steps to protect the group members.

In 2012, Or organized a purchase group for a residential project in Ramat Gan, at a time when she was considered a promising developer. The plaintiffs sought to buy apartments at an attractive price, but the project did not go ahead after a change in planning policy in the city and implementation difficulties. Or later became entangled in criminal proceedings and the project collapsed. According to the ruling, some of the investors’ money was returned to them in receivership proceedings, and some was lost. The lawsuit was filed against the attorneys who accompanied the group, on the grounds of breach of duties and misrepresentations that caused the investment losses.

It should be noted that Or was convicted, among other offenses, of tax evasion involving millions, forgery and fraud under aggravated circumstances. Or herself is currently serving a 7.5-year prison sentence. At the end of December, she filed, through the Public Defender’s Office, an appeal against the sentence imposed on her. The appeal is based on several grounds, the main one being lack of legal representation.

Adv. Sini Elias, representing the defendants: “Most of the lawsuit was dismissed. The court also ordered the plaintiffs to pay costs of about half a million shekels, which indicates the clear outcome. Regarding the issue of early payment demands in the land purchase, it was determined that Adv. Nof acted in good faith.”

Adv. Shlomi Hes and Adv. Yitzhak Aharonov, who represented the buyers, said: “We are studying the ruling and believe there are serious errors in it. We are considering filing an appeal.”

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