Unilateral Iska Agreements Do Not Bind Lenders and Arbitration Rights May Be Waived Through Inaction

Introduction

This commentary examines the Appellate Division, Second Department’s decision in Arnav Indus. Inc. Profit Sharing Plan & Trust v. 3449-3461 Hamilton Ft, LLC (2025 NYSlipOp 02052), decided April 9, 2025. The dispute arose when Arnav Industries Inc. Profit Sharing Plan & Trust (“Plaintiff”) sought to foreclose a mortgage and enforce a guaranty against 3449-3461 Hamilton Ft, LLC and individual guarantors Dov Zabrowsky, Yaakov Glatzer, and Moshe Glatzer (collectively, “Defendants”). Key issues included:

  • The enforceability of a heter iska agreement signed only by Defendants;
  • Whether New York law or Jewish law governed the note;
  • The requirements for obtaining a default judgment under CPLR 3215;
  • The enforceability of an arbitration clause in the iska agreement and potential waiver.

Plaintiff moved for leave to enter a default judgment after Defendants failed to answer. Defendants cross-moved to dismiss, compel arbitration, or obtain leave to serve a late answer. The trial court granted Plaintiff’s motion and denied Defendants’, and Defendants’ subsequent motion for reargument was also denied. On appeal, the Appellate Division affirmed.

Summary of the Judgment

The Appellate Division’s decision can be distilled into three main holdings:

  1. Default Judgment Properly Granted: Plaintiff satisfied CPLR 3215’s requirements by proving service, default, and the underlying debt obligation. Defendants offered neither a reasonable excuse for their default nor a meritorious defense.
  2. Iska Agreement Not Binding on Plaintiff: Because the heter iska was executed only by Defendants—and not by Plaintiff—it did not obligate Plaintiff to its terms. The note expressly provided for New York law, precluding any notion that Jewish law or the iska agreement altered the transaction’s character.
  3. Arbitration Right Waived: Although the iska contained an arbitration clause, Defendants never invoked it for over a year of litigation. Their delay and participation in litigation constituted a waiver of any right to compel arbitration.

Analysis

1. Precedents Cited

  • Arnav Indus., Inc. Empl. Retirement Trust v. Westside Realty Assoc. (180 AD2d 463): Establishes that a heter iska, by itself, does not create a partnership but serves as a form‐compliant vehicle under Hebraic law. The Second Department applied this to confirm that an iska signed by one side cannot bind the non-signatory.
  • Pemberton v. Montoya (216 AD3d 988): Outlines the requirements for a CPLR 3215 default-judgment motion—proof of service, the facts constituting the claim, and default itself—and the defendant’s burden to show excuse or a meritorious defense.
  • Hersko v. Hersko (224 AD3d 810): Affirms that the trial court’s discretion governs the reasonableness of a default-excuse and that absence of a reasonable excuse obviates consideration of a meritorious defense.
  • Performance Constr. Corp. v. Huntington Bldg., LLC (68 AD3d 737) and Armstrong Trading, Ltd. v. MBM Enters. (29 AD3d 835): Recognize that ongoing settlement negotiations can, in some circumstances, justify a default, but require concrete proof of continuous, substantive negotiations.
  • LZG Realty, LLC v. H.D.W. 2005 Forest, LLC (71 AD3d 642): Holds that a litigant may waive arbitration by engaging in the litigation process without timely demanding arbitration.
  • Sherrill v. Grayco Bldrs. (64 NY2d 261): Establishes that participation in litigation or failure to assert arbitration rights within a reasonable time amounts to waiver.

2. Legal Reasoning

The court’s reasoning unfolded in two strands—default judgment and contractual enforceability:

  • Default Judgment Under CPLR 3215: Plaintiff’s moving papers included the note, mortgage, guaranty, affidavits of service, and trustee affirmation of non-payment. Defendants simply asserted that they had been engaged in settlement talks but did not document any timely, substantive negotiations. Under Pemberton and Hersko, this failure furnished no reasonable excuse, and thus default judgment was properly entered.
  • Iska Agreement and Choice of Law: Defendants argued that Jewish law, via the iska, governed the transaction and converted the loan to an investment. The appellate panel rejected this: only Defendants signed the iska, and the note itself specified that New York law applied. As in Westside Realty Assoc., the iska was a formality under Hebraic law but did not alter the substantive contractual relationship.
  • Arbitration Waiver: Although the iska contained an arbitration clause, Defendants never invoked it until more than a year into the foreclosure action. Under LZG Realty and Sherrill, their protracted silence and participation in the litigation process signaled waiver of any right to arbitration.

3. Impact

This decision sends several clear messages to commercial lenders, borrowers, and guarantors:

  • Mutual Assent Required for Alternate Law Agreements: A heter iska or similar religious-law device must be executed by all parties to bind non-defaulting lenders.
  • Choice-of-Law Clauses Prevail: Explicit governing-law provisions in promissory notes will control, notwithstanding ancillary agreements invoking alternative legal regimes.
  • Vigilance on Default Proceedings: Borrowers or guarantors facing default must promptly respond with timely excuses or defenses, particularly if settlement efforts are ongoing.
  • Timely Assertion of Arbitration Rights: Arbitration clauses must be invoked early in the proceeding or risk forfeiture through inaction.

Complex Concepts Simplified

  • Heter Iska: A contract used in Orthodox Jewish finance to structure a loan as a partnership, avoiding the religious prohibition on interest. It does not, by itself, create a binding partnership unless all parties agree.
  • Default Judgment (CPLR 3215): A mechanism for a plaintiff to obtain judgment when a defendant fails to answer or appear. Plaintiff must show proper service and default; defendant must then show a reasonable excuse or a meritorious defense.
  • Arbitration Waiver: If a party entitled to arbitration participates in litigation for a prolonged period without demanding arbitration, it may lose the right to compel it.

Conclusion

In Arnav Indus. Inc. Profit Sharing Plan & Trust v. 3449-3461 Hamilton Ft, LLC, the Second Department reaffirmed fundamental contract principles: non-signatories to an ancillary agreement (like a heter iska) cannot enforce or benefit from it; clear choice-of-law clauses prevail over informal rituals; and litigation conduct carries real risks, including waiver of arbitration rights and default judgments. This decision underscores the importance of formal, mutual assent when parties seek to invoke alternative legal regimes and the imperative of prompt, well-documented responses in foreclosure and guaranty actions.