Legal Updates

A creditor who possesses a negative cautionary note is deemed a secured creditor in bankruptcy of the landowner

December 29, 2020

In accordance with a loan agreement, a "negative" cautionary note was recorded on a real estate asset in favor of the lender to ensure repayment, regarding the borrower's obligation to refrain from making a real estate transaction. Shortly thereafter the borrower was declared bankrupt.
The Supreme Court held that the recording of a negative cautionary note creates a secured debt, hence granting the lender a status of a secured creditor with preference on unsecured creditors. Israeli law stipulates that the recording of a cautionary note gives priority over other creditors of a bankrupt landowner. This, without distinguishing between a negative cautionary note and a positive one. Recording of a cautionary note facilitates the execution of real estate transactions and prevents frauds and granting such priority assists creditors to price the credit provided by assessing the level of risk. Here, the loan agreement included an explicit obligation by the borrower towards the lender to record a negative cautionary note on the real estate as security for the repayment of the loan and such was indeed recorded. Thus, the lender should be deemed a secured creditor of the borrower.