A chain of transactions designed to harm a creditor: Impossible to unwind?
Often, both debtors and creditors believe that if a debtor has initiated a whole chain of transactions to evade paying debts, the case cannot be “unwound” and the creditor is defenceless. But in reality, in such situations dishonest debtors (and their allies) cannot rest easy. Both the legal provisions and the court practice give the creditor a chance to successfully challenge even a whole chain of fraudulent transactions.
In the current social and economic reality (in which, in principle, nothing stands in the way of subsequent transactions occurring very quickly), a creditor is protected by fraudulent transfer claims, governed by Art. 531 of the Polish Civil Code and other regulations. Art. 531 §2 establishes the possibility of filing a fraudulent transfer claim directly against a “fourth party.” (“If the third party disposed of the benefit gained, the creditor may proceed directly against the person to whom the disposition was made, if that person knew about the circumstances justifying declaring the debtor’s act ineffective or if the disposition was made without consideration.”) A third party is one who has transacted directly with the debtor and by virtue of that transaction has obtained a benefit from the debtor. A “fourth party” is the person to whom the third party disposed of the benefit gained by the fraudulent transfer. Art. 531 §2 plays a significant role in protecting the creditor against dishonest debtors.
Unfortunately, some creditors have refrained from taking legal steps against persons assisting the debtor in avoiding performance, based on an erroneous assumption that the Polish justice system is not able to deal with this type of case. We emphasise that this is a misleading view, as the creditor is not defenceless in the case of a chain of transactions aimed at fraudulent evasion of an obligation.
A creditor may successfully file a fraudulent transfer claim against a third party, but must be very well prepared and careful when formulating a claim under Civil Code Art. 531 §2 not to risk dismissal.
It should be remembered that a mere partial transfer by a third party of a benefit gained from the debtor to a further acquirer (a fourth party) does not imply the existence of the state of impoverishment of the creditor within the meaning of Civil Code Art. 405, if grounds exist for assuming that the portion of the property remaining in the hands of the third party may lead to satisfaction of the creditor’s protected claim (e.g. Supreme Court of Poland judgment of 10 October 2014, case no. III CSK 266/13). In other words, if a third party still retains a portion of the benefit against which the creditor can obtain satisfaction, it cannot be automatically assumed, just because the third party has transferred a portion of the benefit gained from the debtor to a fourth party, that the creditor will be entitled to a claim under Civil Code Art. 531 §2.
Who to sue
The question arises against whom a creditor should pursue a claim based on Art. 531 §2, and exactly which transaction should be set aside. Should the creditor seek to invalidate a transaction between the debtor and a third party, or perhaps between the third party and a fourth party? What if the chain of transactions detrimental to the creditor was longer, and a fifth, sixth, etc party has also appeared? The enforcement effect of a fraudulent transfer claim is a cause for doubt, as it contributes to the necessity of choosing a legal path allowing the creditor to reach a benefit no longer included in the debtor’s assets or even in the assets of a third party (who received the benefit directly as a result of a transaction by the debtor).
Before answering this question, it is necessary to clarify the requirements of Art. 531 §2, i.e. that the fourth party must know about the circumstances justifying setting aside the debtor’s transaction, or the disposition must be made without consideration. If a fourth party is sued, the creditor must be able to prove both the grounds under Civil Code Art. 527, demonstrating the liability of the third party, as well as the additional grounds under Art. 531 §2.
In practice, what does this mean for the creditor? It cannot bring an action against a fourth party who acquired the benefit for consideration and in good faith (such a claim will be dismissed). Nor can a creditor bring an action against a third party who is in bad faith—acting with the purpose of preventing the creditor from obtaining satisfaction from the property, whether or not it entered the debtor’s assets—if that person transfers the benefit to a further good-faith acquirer for consideration. But then, if the grounds for the third party’s tort liability are proven, the creditor may demand that the third party compensate for the injury under Civil Code Art. 415 (alternatively, in connection with Art. 422).
As regards the requirement that the fourth party must be aware of the circumstances justifying setting aside the debtor’s act, it is indicated in the case law that this concerns knowledge of all the circumstances, and only such person may be the subject of an effective claim under Art. 531 §2. Thus, the person performing the act may know of the existence and the amount of the creditor’s claim against the debtor, but not know that the debtor’s act was undertaken with the intention of harming the creditor (Supreme Court judgment of 14 May 2010, case no. II CSK 545/09). Also, the creditor may proceed directly against a fourth party to whom the disposition was made, “if the disposition was made without consideration.” In that case, the protection is available to the creditor regardless of whether the fourth party knew of the circumstances justifying setting aside the debtor’s act. It is sufficient that the disposition was without consideration. However, the third party will not be liable to the creditor if the third party has transferred the property acquired from the debtor to another person without consideration (Art. 407 in connection with Art. 531 §2).
To bring a case against the first act, the last, or all of them?
Returning to the main question—against whom, and how, a demand under Civil Code Art. 531 §2 should be pursued—doubts are justified as to which of the successive legal acts should be declared by the court to be ineffective against the creditor, so that the creditor could achieve its objective of enabling enforcement against the transferred property. Further, specific questions must arise: Is it a transaction with the participation of the debtor (the “first” act, Art. 531 §1) or a transaction with the participation of the last recipient of the property (the “last” act)? Also, there are doubts as to whether the demand should cover all transactions in the chain if one is dealing with a transfer to a fourth or fifth (and possibly further) party.
The case law has developed two main positions regarding these concerns.
According to the first concept, the fourth party (or further parties—the fifth, sixth, etc) is sued, challenging the action performed by the debtor (i.e. the first act) upon proof of additional grounds justifying the liability of this further entity, i.e. knowledge of the grounds for setting aside the debtor’s act as against the creditor (e.g. Supreme Court judgments of 12 April 2012, case no. II CSK 448/11, and 5 February 2015, case no. V CSK 246/14).
According to the second line of case law, the creditor acts directly against the last acquirer of the property and it is the “last” act that is set aside (e.g. Supreme Court judgments of 24 September 2015, case no. V CSK 667/14, and 11 December 2013, case no. IV CSK 222/13, and the relatively recent judgment of the Katowice Court of Appeal of 4 November 2019, case no. I ACa 229/19). This argument is based on the assertion of the identity of the benefit by which the debtor’s assets have been depleted or not increased, from which it is deduced that even a multiple and multi-entity transfer of this benefit is irrelevant for ensuring the real possibility of creditor protection.
It seems that an intermediate solution may be adopted, one that is the most beneficial to the creditor, i.e. that all acts in the chain (the first and the last, and possibly intermediate acts) may be attacked. This approach is supported by the above-cited Supreme Court judgment of in case no. II CSK 448/11, in which the necessity to challenge only the first act was indicated, but the possibility of including the last act within the scope of attack was not excluded.
In case no. II CSK 448/11, the Supreme Court indicated that the wording of Art. 531 §2 does not imply the necessity to set aside transactions other than those by the debtor in order to achieve an effect enabling enforcement. Nonetheless, the court added that it would be permissible to include in the statement of claim all acts sequentially leading to the fifth party, since these acts must be examined anyway in terms of the prerequisites under Art. 531 §2 in order to assess the validity of the claim to set aside the debtor’s acts, directed against a subsequent acquirer of the property.
With the proviso that much depends on the specific facts, it is our position that the claimant may choose to bring an action under Art. 531 §2 only against the last party to obtain a benefit in the chain of fraudulent transfers. However, the claimant should indicate in the prayer for relief that they are seeking to set aside both the first act and all subsequent “chain” acts.
It should also be noted that in case no. II CSK 448/11, the Supreme Court interpreted “the party to whom the disposition was made” (the phrase used in Art. 531 §2) to mean not only the entity that directly obtained the benefit from a third party, but also subsequent entities to whom the benefit passed by way of subsequent dispositions, provided that the acquirer was aware of the existence of grounds for setting aside the debtor’s act, or the act was made without consideration. It was emphasised that the position of the “fourth” party and its successors in relation to the debtor is identical: none of them was a party to the act performed by the debtor harming the creditor, but each of them behaves in a manner that cannot be condoned, consciously participating in acts depriving the creditor of the possibility of obtaining satisfaction from the debtor’s assets, or receiving without consideration (and thus, in a manner less protected by law) a benefit from which the creditor could obtain the consideration it was due.
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In summary, the interpretation of Civil Code Art. 531 §2 is to some extent debatable, and the Supreme Court of Poland judgment of 12 April 2012 in case no. II CSK 448/11 is not the only approach that should at least be considered in a specific case involving a chain of fraudulent transactions. Therefore, when pursuing a claim under Art. 531 §2, heightened caution is advised. Especially if it disregards facts that the creditor can reliably prove, an improperly worded claim can mean a costly defeat.
Nevertheless, creditors affected by fraudulent activity in the form of a chain of transactions should not give up without a fight. We recommend at least considering the use of Art. 531 §2, preferably with the help of professionals specialising in fraudulent transfer claims.
Adam Studziński, adwokat, Aleksandra Cygan, Dispute Resolution & Arbitration practice, Wardyński & Partners
