A fraudulent transfer claim does not always enjoy priority of satisfaction | In Principle

In a recent resolution, the Supreme Court of Poland addressed the legal situation of a creditor bringing a fraudulent transfer claim against a third party, compared to other creditors of the third party.

It should first be noted that the Supreme Court of Poland has yet to publish the reasoning behind its resolution of 2 February 2022 (case no. III CZP 32/22). When the reasoning is published, it should be possible to say more about the currently prevailing view of the Supreme Court on the situation of a creditor bringing a fraudulent transfer claim, compared to other creditors of a person who participated in a fraudulent transfer. But the holding in the resolution suggests the following conclusions of great practical significance for creditors harmed by dishonest debtors.

Which takes precedence: a fraudulent transfer claim or a mortgage?

In the resolution of 2 February 2022, the Supreme Court considered who has priority in enforcement:

• A creditor whose right derives from a mortgage securing a contractual claim has been entered in the land and mortgage register for a specific real property, or
• A creditor who has successfully established a fraudulent transfer claim against the owner of the property?

The meaning of the resolution itself is as follows. If in enforcement proceedings against the right of perpetual usufruct to real estate, there are competing rights of a creditor under a fraudulent transfer claim who has succeeded in having the debtor’s transfer of the property to the third party declared ineffective, and a creditor who obtained a mortgage against the same property on the basis of a transaction with the third party before the fraudulent transfer claim against the third party was disclosed in the land and mortgage register, the creditor holding the fraudulent transfer claim cannot count on the privilege of priority in satisfaction unless it successfully challenged establishment of the mortgage.

It should be mentioned that under Civil Code Art. 532, a creditor as against whom a legal act of the debtor has been declared ineffective may, with priority over third-party creditors, seek satisfaction from assets which, as a result of the challenged transaction, either left the debtor’s assets or did not enter them. Thus it would seem that a creditor bringing a fraudulent transfer claim against the third party has priority over all other creditors of the third party who acquired the property in a fraudulent transfer.

But the resolution of the Supreme Court resolution of 2 February 2022 narrows the priority of the creditor bringing the fraudulent transfer claim against the third party. Thus the priority under Art. 532 does not apply to mortgage creditors unless the creditor bringing a fraudulent transfer claim effectively challenges establishment of the mortgage (through assertion of a claim or defence against the mortgage creditor, Art. 531).

Therefore, creditors bringing a fraudulent transfer claim against a third party must be vigilant and proactive, as there is a risk that even if they obtain a favourable judgment against the third party (rendering ineffective a transaction performed to their detriment by the debtor), they will not be able to satisfy their claims, as they will be outpaced in satisfaction by mortgage creditors of the third party.

It is worth securing claims by enjoining disposal of property

Thus, a creditor affected by a fraudulent transfer should not only bear in mind the possibility of bringing a fraudulent transfer claim against a third party, or claims for damages against parties who have committed tortious acts by participating in implementation of the fraudulent transfer, but should also ensure that their rights in this respect (as an injured creditor) are protected in good time.

Therefore, we advise that a creditor who has lost confidence in a defaulting debtor and has suspicions about the debtor’s honesty should immediately take steps to disclose its claim to a wide range of participants in legal transactions (even before the debtor sells the property to a third party). Due to the non-monetary nature of a fraudulent transfer claim against a third party, this can be done, for example, by obtaining an injunction prohibiting the debtor from disposing of the property (that is, an injunction against selling or encumbering the property).

If, on the other hand, it is too late, as the debtor has already disposed of the property to a third party, then the creditor should safeguard its interests by obtaining an injunction prohibiting the third party (fourth, fifth, etc) from disposing of the property. In the request for injunctive relief, it is important to call for both a ban on sale and a ban on encumbering specific assets, as the court may not grant relief exceeding the scope of the request. The disclosure of such an injunction against disposal of the real estate in the land and mortgage register excludes the good faith of subsequent acquirers of rights to the property, which has an extremely important positive meaning for the creditor (preserving its priority under Civil Code Art. 532).

Mere entry of a warning in the land and mortgage register is not sufficient

We are of the opinion that in the case of establishing an injunction against encumbering or disposing of real estate, there is no need to additionally secure the claim by making an entry pursuant to Art. 755 §1(5) of the Civil Procedure Code, i.e. a warning in the land and mortgage register of the pending fraudulent transfer claim. But we should point out that this is a debated issue, and some experts emphasise that disclosure of such a warning in the land and mortgage register may have evidentiary value when assessing whether a subsequent buyer of the real estate knew about the circumstances justifying setting aside the fraudulent transfer, which will increase the chances of a potential claim under Civil Code Art. 531 §2. However, once again, we emphasise that the mere entry of a warning of the pending fraudulent transfer claim (without obtaining an injunction against encumbering or disposing of the real property) does not sufficiently secure the creditor’s fraudulent transfer claim.

What if the creditor is late?

But what about a creditor with a fraudulent transfer claim against a third party who is late, and discovers that the property has been mortgaged to another creditor? Let us repeat: they will be able to bring a separate action against the mortgage creditor, provided they can prove the heightened grounds for liability under Civil Code Art. 531 (i.e. that the mortgage creditor knew about the circumstances justifying setting aside the debtor’s acts—more on this topic in the article “A chain of transactions designed to harm a creditor: Impossible to unwind?”). This is because establishing a mortgage is regarded by the courts as a further disposition of the benefit referred to in Art. 531 §2. Setting aside a mortgage can prove a very difficult undertaking evidentially. That is why we encourage creditors to closely observe the behaviour of the debtor and its allies, to be active and quick to make information about the debt “public,” e.g. by obtaining interim relief from the court in the form of an injunction against disposition (sale or encumbrance) of the property by the debtor or a third (fourth, fifth, etc) party.

Adam Studziński, adwokat, Aleksandra Cygan, Dispute Resolution & Arbitration practice, Wardyński & Partners