## Facts

- Five married couples (including Natan and Shila Tsabach) agreed to buy apartments that were still under construction from Kochav HaShomron Ltd., a developer involved in building the town of Emanuel.
- The purchasers held eligibility certificates for government-subsidized housing loans. The subsidized financing was obtained through Tefahot Mortgage Bank of Israel, Ltd. (Tefahot), using Tefahot’s standard-form mortgage loan agreements.
- The loan documents were signed at the developer’s offices; Tefahot’s forms were available there, and the developer’s staff assisted purchasers with the paperwork connected to obtaining the subsidized loans.
- The developer was also a bank customer of Tefahot. Before the purchasers signed their mortgage agreements, Tefahot had extensive financial dealings with the developer, including financing or securing a major transaction in which the developer paid about US $5.3 million to buy out departing shareholders in exchange for shares and non-competition commitments.
- As a result of its financing, Tefahot became a secured creditor of the developer. As the developer’s condition worsened, Tefahot sought appointment of a receiver, and insolvency proceedings followed.
- A court-approved composition was later reached in the insolvency process, involving creation of a new company and changes to creditor rights; purchasers were offered terms to complete purchases. The respondent purchasers did not participate in the creditor meetings and refused to join the arrangement, viewing it as financially unfavorable.
- The project ultimately failed to deliver the apartments to the respondent purchasers, even though the mortgage loans remained outstanding in form.
- The purchasers sued Tefahot in the Jerusalem District Court seeking cancellation of the mortgage loan agreements and restitution of amounts paid, arguing that Tefahot knew of the developer’s serious financial problems yet proceeded with the mortgage lending without warning them, while also standing to benefit from the transactions.
- The District Court ruled for the purchasers, declaring the mortgage agreements void and ordering Tefahot to refund payments, with a reciprocal transfer of the purchasers’ apartment-related rights to the bank.
- Tefahot appealed to the Supreme Court, arguing primarily that bank confidentiality toward the developer barred disclosure of the developer’s financial problems to other customers.

## Issues

1. Did Tefahot’s relationship with the purchasers and its role in the transaction impose a duty (in contract and/or tort) to disclose material information it possessed about the developer’s severe financial distress?
2. Does the pre-contract good-faith duty under Contracts (General Part) Law, 1973 §12 require a bank to warn borrowers of transaction-specific risks known to the bank and not reasonably known to the borrowers?
3. Can a bank’s duty of confidentiality toward one customer (the developer) excuse nondisclosure to other customers (the purchasers) when the bank is arranging or facilitating the purchasers’ mortgage financing?
4. If the bank breached its duties, was cancellation of the mortgage agreements and restitution an appropriate remedy?

## Decision

- The Supreme Court dismissed Tefahot’s appeal and affirmed the District Court’s judgment in substance.
- The Court treated the bank–customer relationship as a special relationship marked by trust and professional and informational advantage, which can create heightened duties toward customers.
- The Court held that, in these circumstances, Tefahot had obligations of good faith in negotiations and a duty of care, and that proceeding with the mortgages without warning the purchasers about the developer’s serious financial difficulties amounted to a breach.
- The Court rejected confidentiality as a complete defense on these facts; where the bank’s silence foreseeably exposed borrowers to major loss in a transaction the bank helped structure and from which it could benefit, the bank was required to take reasonable protective steps (including warning or declining to proceed).
- The Court left in place the remedy canceling the mortgage contracts and requiring repayment of sums paid by the purchasers, with a corresponding transfer of the purchasers’ apartment rights to Tefahot to prevent unjust enrichment.

## Legal Principles

- A bank’s dealings with customers may be a “special relationship” grounded in public trust, professional standing, and unequal access to information; this can impose duties beyond ordinary arm’s-length contracting.
- Under Contracts (General Part) Law, 1973 §12, good faith in negotiations can require disclosure of material information when one party knows facts that create a serious, transaction-specific risk and the other party is unlikely to discover them through reasonable means.
- A bank may also be liable in negligence where harm to identifiable customers is foreseeable, the bank has superior information and practical ability to prevent harm, and reasonable steps (warning, restructuring the transaction, or refusing to extend the loan) are available.
- Bank confidentiality is not absolute; it must be weighed against duties owed to other customers when the bank’s silence would likely cause them substantial preventable loss in a bank-facilitated transaction.
- Contract cancellation and restitution may be ordered where nondisclosure and conflicted conduct tainted the formation of the lending relationship, provided reciprocal adjustments (such as assignment of the borrower’s related property rights) are made to avoid unjust enrichment.

## Conclusion

The Supreme Court of Israel held that Tefahot, while aware of the developer’s grave financial problems and acting in a dual role connected to the project, could not lawfully proceed with purchasers’ mortgage loans in silence; duties of good faith and care required a warning or refusal to proceed, and confidentiality did not excuse nondisclosure, so cancellation of the mortgages and restitution were upheld with a transfer of the purchasers’ apartment rights to the bank.


Tefahot Mortgage Bank of Israel, Ltd. v. Tsabach, CA 5893/91, 58(2) PD 573 (1994)