Leave to Appeal (Civil) 8674/19 Shefagat: Supreme Court orders Mizrahi Tefahot and Igud to provide data on "small business" classification

Background and facts: "small business" classification at Mizrahi Tefahot Bank and other banks

In 2008, a reform of bank fees was carried out. Under it, a reduced fee schedule was set for customers who are a "small business" under the Banking (Customer Service) (Fees) Rules. Five motions to certify class actions against banks on this matter were filed in the Tel Aviv-Jaffa District Court, and they were heard together. One of them, Class Action 28695-05-16, was filed by Shefagat Ltd. against Mizrahi Tefahot Bank.

According to the motions, the banks deliberately refrain from classifying customers as a "small business", even though they are entitled to it, in order to continue charging them fees under the rate for large businesses. It was alleged that the banks do not inform customers of the possibility of changing the classification. The refund sought was estimated in each of the motions at hundreds of millions of shekels. The banks replied that they comply with the law, and that the responsibility for requesting classification as a "small business" lies with the customer.

The proceeding in the Supreme Court, Leave to Appeal (Civil) 8674/19, did not deal with whether the claims are correct. It dealt with an interim decision of the District Court of November 28, 2019, on motions for disclosure of documents and for answering interrogatories. The applicants were Shefagat Ltd., Speed Building Industry and Commerce Ltd. and Help Line 2009 Ltd. The decision concerns mainly Mizrahi Tefahot Bank, Bank Igud and Discount Bank.

The parties' arguments on disclosure of the data

In the proceeding against Mizrahi Tefahot, at the hearing on April 23, 2017, the bank's counsel agreed to provide the rate of corporations classified at the bank as small businesses in each of the years 2012 to 2016. In a disclosure affidavit the bank filed in September 2017, it stated that it has no information on this rate. In Shefagat's "know your customer" questionnaire, which was attached to the affidavit, a section was blacked out. Shefagat asked to strike out the bank's response to the motion for certification, or to order it to comply with the disclosure decision. The District Court rejected most of the motion, ordered the redaction of one line to be removed, and ordered Shefagat to pay costs of NIS 7,500.

In the Supreme Court, the applicants argued that Mizrahi Tefahot had undertaken in the transcript to provide the figure and had not complied with the undertaking. Regarding Bank Igud and Discount Bank, they argued that the "know your customer" questionnaires should be disclosed, because they contain information on other accounts of the customer. They also argued that a low rate of businesses classified as small may indicate a breach of the disclosure duties.

Mizrahi Tefahot argued that no order was given requiring it to provide the figure, and that the matter was recorded inaccurately in the transcript. Bank Igud and Discount Bank argued that the "know your customer" questionnaire is not relevant, and that it is an internal form for fighting money laundering that is protected by privilege. Discount Bank also argued that "small business" classification is determined according to the total business turnover, and not according to the volume of deposits in the account.

What the Supreme Court decided in Leave to Appeal (Civil) 8674/19

Justice A. Baron granted leave to appeal, heard the motion as an appeal and allowed it. She noted that an appellate court rarely intervenes in interim decisions on disclosure of documents, but held that this is one of the exceptional cases. At the class action certification stage, the gaps in power and information between the parties must be taken into account, while at the same time guarding against a "fishing expedition".

Regarding the "know your customer" questionnaire, it was held that it is prima facie relevant, because it may shed light on the bank's knowledge of the scope of the customer's business activity. Because it may contain sensitive information, the District Court will review the questionnaires and decide how they will be provided. Bank Igud and Discount Bank were ordered to produce the questionnaires within 30 days, subject to this.

The questions directed to Discount Bank were also found relevant: whether it has a means of identifying the volume of deposits, and what the rate of businesses classified there as small businesses was in the years 2012 to 2017. The court accepted that the classification is determined according to business turnover, but noted that the volume of deposits may give a good indication of the customer's activity. It stressed that it takes no position on the questions themselves at this stage.

Regarding Mizrahi Tefahot, it was held that the figure on the rate of businesses classified as small businesses is relevant to the proceedings. The court added that the starting point is that the transcript of the hearing reflects what happened. If the bank disputed the record, it should have applied to correct the transcript. Therefore Mizrahi Tefahot was ordered to provide Shefagat, within 30 days, with the rate of businesses classified there as small businesses in each of the years 2012 to 2016. The data will be provided in an envelope for the court's eyes and to Shefagat's counsel.

The court also held that one bank's consent to disclose a document does not in itself require another bank to disclose a similar document. The costs imposed on the applicants in the District Court were reduced: Shefagat will bear Mizrahi Tefahot's costs of NIS 4,000 instead of NIS 7,500, and the costs in favor of Igud and Discount were also reduced. For the proceeding in the Supreme Court, the banks were ordered to pay the applicants' costs: Mizrahi Tefahot NIS 10,000, Discount Bank NIS 10,000 and Bank Igud NIS 5,000, in view of the narrow dispute in its case.

Quotes from the judgment

"Disclosure of the know your customer questionnaire, which concerns information in the bank's possession that may shed light on its knowledge of the scope of the customer's business activity, is prima facie relevant to the hearing of the motions for certification."

Paragraph 20 of the judgment (translated from Hebrew).

"In the absence of an appropriate motion to correct the transcript of the hearing, the assumption is that the transcript reflects what happened and that the burden of refuting this assumption lies on the party claiming otherwise"

Paragraph 23 of the judgment (translated from Hebrew).

"And it is of course understood that I take no position at this stage."

Paragraph 21 of the judgment (translated from Hebrew).

What it means for Mizrahi Tefahot customers

The decision does not determine that Mizrahi Tefahot classified businesses incorrectly. It deals with a preliminary stage, and determines which data will be provided for the hearing of the motion for certification. The Supreme Court saw the rate of businesses classified as small businesses as a figure that may shed light on how the bank implemented its disclosure duties, and ordered Mizrahi Tefahot to provide it in accordance with the undertaking recorded in the transcript.

On the main proceeding against Mizrahi Tefahot, see the page Class Action 28695-05-16 Shefagat and the page small business fees at Mizrahi Tefahot.

Sources

• The judgment in Leave to Appeal (Civil) 8674/19 Shefagat Ltd. et al. v. Mizrahi Tefahot Bank et al., December 5, 2021 (PDF)

Frequently asked questions about court rulings against Mizrahi Tefahot Bank

How to cite

Leave to Appeal (Civil) 8674/19 (Shefagat Ltd. et al. v. Mizrahi Tefahot Bank, Bank Igud (Union Bank), Discount Bank et al.), Supreme Court, 05.12.2021. Source: Net HaMishpat (Israeli courts database), case Leave to Appeal (Civil) 8674/19 (Shefagat Ltd. et al. v. Mizrahi Tefahot Bank, Bank Igud (Union Bank), Discount Bank et al.).