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Competition of Claims of the Preceding and Subsequent Mortgagee During Restoration of Pledge

30.06.2016

Ivan Stasyuk, lawyer at Ilyashev & Partners
Source: Journal of Economic Justice of Russian Federation

In case No. А55-26194/2013 the panel of judges of the court panel on economic disputes of the Supreme Court of the Russian Federation (hereinafter – the “Panel”) considered the matter of superiority of pledges if the initial pledge was terminated as a result of invalid agreement and later was renewed.

1. The essence of the matter. “Interregional Volgo-Kamskiy Bank of reconstruction and development” (hereinafter the “Volgo-Kamskiy Bank”) just before its bankruptcy entered into the agreement on transfer of indebtedness under four loan agreements of the creditor (“Group of companies “Volzhskie Berega“ LLC) to a third person – VolgaPromServis LLC. Obligations under the loan agreements were secured by a mortgaged land plot and pledged vehicles. Following the transfer of the indebtedness the record about the mortgage was cancelled and after expiration of some time the mentioned land plot was transferred into pledge to another bank – JSC “Toliattihimbank” (hereinafter “Toliattikhimbank”). The bankruptcy commissioner of “Volgo-Kamskiy Bank” appealed the agreements on transfer of the indebtedness and requested to apply the effects of their invalidity in the form of restoration of the right of demand towards “Group of companies “Volzhskie Berega“ LLC and renewal of the pledge holder’s rights under the pledge agreements.

The court qualified the agreement on transfer of the indebtedness as concluded with abuse of the right (article 10, 168 of the Civil Code of the Russian Federation) and with infliction of harm to the creditors of “Volgo-Kamskiy Bank” (Article 61.2(2) of the Federal Law 127-ФЗ as of October 26, 2002 “On financial insolvency (bankruptcy)”). At the same first instance courts, as well as appellate courts, came to conclusion that as soon as at the moment of conclusion of the pledge agreement “Toliattikhimbank” was not aware of the previous pledge (record about it was missing in the Unified State Register of Rights), its demands are subject to be satisfied without consideration of the terms of the preliminary pledge agreement. The cassation court introduced amendments to the court acts deleting a reference from the analytical part that claims of “Toliattikhimbank” are subject to satisfaction without consideration for the previous pledge. In the opinion of the cassation instance the rights of the pledge originate from the moment of execution of the pledge agreement and it is impossible to change the priority of the pledge holders otherwise than by conclusion of an agreement between them. In addition the matter of honesty of the following pledgee and of priority of pledge must be considered at the moment of foreclosing the pledge.

The Supreme Court canceled the decree of the cassation instance upholding constitutionality of the court rulings upheld by first instance and appellate courts. The panel indicated that claims of “Toliattikhimbank” are subject to satisfaction without regard for the terms of the preliminary pledge agreement concluded with “Volgo-Kamskiy Bank” as soon as at the moment of execution of the pledge agreement “Toliattikhimbank” relied onto the record from the Unified State Register of Rights which did not contain the record about the encumbrance of the pledge and, thus, its rightful expectations were based on the fact that the land plot had not been encumbered by mortgage for the benefit of another person. The Supreme Court dismissed the arguments of the district court that the matter of superiority of pledges was to be settled in the process of consideration of the dispute on foreclosing the pledged property. The panel stated that the court rulings on introduction of pledge claims of both banks into the register of claims of the creditors of “Group of companies “Volzhskie Berega“ LLC do not contain conclusions of the sequence of satisfying the claims of the pledge holder. Let’s review these conclusions in detail.

2. Questions about a pledge holder in good faith. Questions about the measure of good faith of participants of the pledge relations had not legislatively regulated for quite a long period of time. The court practice relied upon the fact that the pledge to the property (and, correspondingly the risk of applying a foreclosure to it) was present even in cases when at the moment of acquisition of property the new owner did not know and should not have been aware that such property had been encumbered by pledge. First and foremost such risk was related to acquisition of movable property in relation to which there was no system of public information about available encumbrances.

In 2011 the Supreme Administrative Court formulated two positions related to the measure of measure of good faith of participants of pledge relations. Firstly, this is the position regarding a good faith purchaser who has the right not to be liable with its property for obligations of another party if at the moment of acquisition of this property he was not aware and could not have been aware that this property had been pledged. This conclusion was formulated in paragraph 25 of the Decree of the Plenum of the Supreme Administrative Court of the Russian Federation No. 10 as of February 17, 2011. In its Decree the Supreme Administrative Court referred only to the buyer of an item of movable property. Secondly, also formed was the position about a good faith pledge holder according to which it may rely on preservation of the pledge if the property was transferred into pledge not by the owner about which the pledge holder was not aware and could not have been aware (the Decree of the presidium of the Supreme Administrative Court No. 2763/11 as of July 26, 2011 in the case No. А56-24071/2010 (hereinafter – the case “Lobanova vs. Medtekhnika”)).

As the legal literature state the Supreme Administrative Court of the Russian Federation was not confused that the law does not contain norms on protection of a good faith pledge holder; the court presidium based its opinion on the principles of equality of participants of the civil circulation and public nature of the register.

At the end of 2013 the legislators introduced amendments to the Civil Code of Ukraine providing protection to good faith pledge holder (Article 335 of the Civil Code of Ukraine) and bona fide purchaser of the pledged property (Article 352(1)(2) of the Civil Code of Ukraine). These norms entered into force from July 01, 2014.

The questions on good faith nature of the following pledge holder, who was not aware of the preliminary pledge, is a logical continuation of the concept of protection of bona fide owner of the pledged property and good faith pledge holder. Indeed, the condition of the pledge holder here is, to a great extent, similar to the condition of the purchaser of the property. As the purchaser has a substantial interest (subject to legal protection) to acquire the property (not encumbered by pledge), so as the pledge holder wishes that its pledge is not successive to a previously established pledge. Otherwise it will be able to satisfy its demands (at the expense of the pledged property) if the coast of the pledge is higher than the amount of demands of the previous pledge holder. The standing of the pledge holder here is similar to the standing of the pledge holder interests of which, as the Supreme Administrative Court of the Russian Federation believes, are subject to protection in the case “Lobanova vs. Medtekhnika”. In that dispute the Supreme Administrative Court of the Russian Federation came to conclusion than if the pledge holder had not been able to be aware about the possible invalidity of the legal act related to acquisition of the pledged property.

In the case in question “Toliattikhimbank” could not also have supposed that the agreement on transfer of the debt and termination of the mortgage may be deemed invalid under the grounds stipulated by the bankruptcy legislation. However, it must be mentioned that the mortgage agreement had been concluded after commencement of bankruptcy proceedings regarding “Volgo-Kamskiy Bank”, i.e. there were formal grounds for appealing the validity of agreements. It hardly possible to put an obligation on verification of the mentioned circumstances onto “Toliattikhimbank” as soon as research of all the previous agreements concluded by the borrower cannot be acknowledged to be an obligatory element of the good practice.

This formal argument, in our opinion, cannot be an obstacle to protection of interests of a good faith pledge holder. Firstly, the position on protection of good faith pledge holder and bona fide purchaser of the pledged item was formulated by the Supreme Adminsitrative Court as early as in 2011 and the parties could have relied on such an approach. In addition in this case “Volgo-Kamskiy Bank” cannot refer to the fact that on the final stage of conclusion of the agreement it relied onto the legislation valid at that moment. Otherwise it would be necessary to claim that “Volgo-Kamskiy Bank” (in the process of execution of the operation) had allegedly considered for and even expected that the agreement would be appealed and it would have preference compared with the following pledge holder. However, it would be absurd to consider that, while carrying put an operation, the party has in view possible advantages related to its appeal.

In addition, even if it has been stipulated, such expectations may hardly be related to the lawful expectations subject to protection. Secondly, protection of a good faith economic agent may be excluded from the list of general principles of the civil law (Article 1 of the Civil Law of the Russian Federation). Thirdly, the Supreme Court of the Russian Federation registered in this case applied the principle of public credibility of the register which had existed till summer 2014 and “Toliattikhimbank” counted on credibility of the Unified State Register of Rights in the process of conclusion of land plot mortgage agreement.

3. Termination of the pledge at the wish of “Volgo-Kamskiy Bank”. Unfortunately, the courts failed to zero in on their attention on whether the mortgage of the land plot was terminated upon the initiative of “Volgo-Kamskiy Bank” (although violating the creditors’ rights). Would the result of consideration of the case had been different if the mortgage had been terminated outside the bank’s wish (for example, as a result of falsifying the agreement on mortgage termination)? This question should be answered positively if the doctrine of protection of good faith participants of pledge relations was a continuation of the institute of protection of bona fide purchaser of the property against the vindicatory action.

Of course, this aspect was taken into consideration by the Supreme Administrative Court of the Russian Federation in the process of consideration of the case related to good faith mortgagee. In the mentioned case the pledge holder had not been also aware that the property was transferred into mortgage not by its owner, but the person record about title of whom was introduced to the Unified State Register of Rights as result of unlawful actions. The Supreme Administrative Court of the Russian Federation noted that the true owner was not aware and could not have been aware about introduction of such record to the Unified State Register of Rights as a result of which the pledge terminates. In other words the owner ceased to own his property beyond his own will which served as a reason for protection of interests of the property owner and not of the pledge holder.

4. Determination of the sequence of sustaining claims advanced by the pledge holders in the case on invalidation of agreements.

The question of the sequence of sustaining claims advanced by the pledge holders was reviewed by the Panel only briefly. From the formal point of view the district court was right when it stated that application of the said sequence must be allowed in the process of consideration of disputes related to imposing foreclosure to the subject matter of pledge. In ordinary circumstances the question of priority is not disputable as soon as it is defined in relation to the date of introduction of entry about the encubrance into the Unified State Register of Rights and, correspondingly, any interested person may easily do this. Knowledge about the priority of pledges is required, firstly, in case of introduction of amendments to the pledge agreement and, secondly, if one of the pledge holders initiates application of foreclosure onto the pledge. The case in question contained legal uncertainty as for the status of the pledge holders (preliminary or the next). This is why it should be agreed that the courts eliminated such uncertainty in the process of consideration of the dispute on restoration of the right of pledge.

However, from the procedural point of view it would be advisable to establish the sequence of sustaining claims not in the declaration, but in the resolutive part of the court act. Pursuant to Article 170(5) of the Administrative Procedure Code of Ukraine it contains the conclusion on sustaining or dismissing each of the stated claims. In this case the claim on establishment of the priority of the pledged rights was not advanced. However, in certain cases the court may exceed the limits of the stated claims and allow a new claim which closely related to the stated one.

With consideration for the fact that the matter of sequence of sustaining claims did not constitute a subject matter of the stated claims the first instance court was obliged to put it forward for discussion and offer the parties to clarify their positions and provide evidence to the court. This obligation of the court may be take out from the list of provisions related to preparing a case to a court hearing (Article 133 of the Administrative Procedure Code of Ukraine). Unfortunately, based on the acts upheld by the court follows that such a question was raised before the parties; however, the courts acknowledged that materials of the case do not contain information about unfair practices of “Toliattikhimbank”. At the same time absence of information about pledge in the excerpt from the Unified State Register of Rights is the major, but not the only criteria of good faith provision of proof to the contrary is also possible.

In general we believe that the ruling upheld by the Collegium may be reviwed as a step towards development of the institute of protection of a good faith pledge holder and its conclusions deserve support.

 
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