When a debtor starts litigation to avoid paying a debt—continued | In Principle

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When a debtor starts litigation to avoid paying a debt—continued

It is worthwhile for creditors to take part in litigation even if the outcome could go against them. This way, they can help prevent the court from issuing rulings sought by colluding debtors and their allies.

Recently, we brought to our readers’ attention how dishonest debtors are increasingly daring to use court proceedings to evade their obligations. Now, as promised, we will try to suggest to creditors how they can keep from being injured by court proceedings in Poland instigated or conducted with the aim of harming them.

Creditor appearing as an interested party or secondary intervenor in proceedings involving the debtor

Creditors should take all available measures to learn as much as possible about court proceedings to which their debtors are parties or other participants. If a creditor suspects that court proceedings may cause or aggravate the debtor’s insolvency, the creditor should always consider participating directly in the proceedings:

  • As an “interested person” in non-contentious proceedings (Polish Civil Procedure Code Art. 510)
  • As a “secondary intervenor” in contentious proceedings (Art. 76–80).

It is no secret that it is easier to prevent harm than to repair it later. And only active participation in a court case, exercising rights similar to those of other litigants, gives creditors a real chance to defeat the efforts of dishonest debtors. In particular, it is useful to be able to inspect the case files and to apply to the court to admit and consider evidence.

How to find out about proceedings to which the debtor is a party?

Here, the creditor has quite a few options, of which we will mention a few basic ones.

First, in the contract with the debtor (or co-debtor, guarantor, surety, etc), the creditor may stipulate that the debtor will inform the creditor of any court proceedings in which the debtor becomes involved. These types of contractual clauses are quite typical as covenants in debt financing agreements (and loan agreements or other contracts). But there is no legal obstacle to including clauses of this kind in any other agreement, and it is highly advisable to do so when the resulting claim is significant.

It there any guarantee that the obligor will comply with such a covenant? No, but this should not discourage creditors from seeking to include such clauses in their agreements, as it will be easier for the creditor to demonstrate to the court that it has standing to be admitted to the court proceedings as an interested person or secondary intervenor.

Second, especially when the creditor’s claim is substantial and the creditor begins to have doubts regarding the debtor’s solvency, the creditor should diligently track and analyse all publicly available information regarding potential court cases in which this debtor is engaged. Among other things, the creditor can look for such information in:

  • Current and periodic reports filed by issuers of securities
  • Management reports on the business of the company filed with the National Court Register along with the annual financial statements
  • Land and mortgage registers relating to properties owned by the debtor (it is useful to know the numbers of the land and mortgage registers for the debtor’s properties)
  • The customer service office of the courts that may have geographical or subject-matter jurisdiction over proceedings in which the debtor may appear (this may be looking for a needle in a haystack, but creditors should not give up on such a search prematurely).

Additionally, the creditor should always consider hiring a licensed investigator. A skilled investigator can quickly and legally obtain knowledge of the debtor’s court cases from sources that are difficult for the creditor to access on its own.

When to demand admission to non-contentious proceedings involving the debtor?

Examples of non-contentious proceedings whose outcome may significantly affect the possibility of satisfaction from the debtor’s assets include:

  • Proceedings for declaration of title through prescription (adverse possession) (Civil Procedure Code Art. 609–610)
  • Proceedings involving administration of joint ownership (Art. 611–616)
  • Proceedings for cancellation of joint ownership (Art. 617–625)
  • Proceedings for granting an easement (Art. 626)
  • Land and mortgage registration proceedings (Art. 6261–62613)
  • Inheritance proceedings, including judicial declaration of succession, determination of the assets and value of the estate, and partition of the estate (Art. 627–691).

A creditor may request to be admitted as an “interested person” in any such case. This request can be made until the end of the second-instance proceedings. An order refusing to allow an interested person to join the case may be appealed (Art. 510).

When requesting participation in non-contentious proceedings, a creditor does not have to demonstrate that its legal interest in participating in the proceedings is compatible or at least concurrent with the interest of any of other applicants or participants in such proceedings. The creditor’s legal interest may even be completely contrary to the claims and requests of other persons participating in the non-contentious proceedings (see Supreme Court of Poland resolution of 20 April 2010, case no. III CZP 112/09). Thus, a creditor may effectively request to participate in non-contentious proceedings involving the debtor even if the creditor does not favour the procedural position (applications etc) of any of the existing applicants or participants in such proceedings, and may even request termination of the proceeding without a ruling on the merits.

In other words, a creditor may demonstrate to the court that the outcome of the non-contentious proceeding may adversely affect the possibility of successfully satisfying the creditor’s claim against the debtor. The creditor may request that the dispositive ruling rendered in the proceedings adequately protect or take into account the creditor’s legitimate rights. The creditor can even demand that the court refuse to take up the case, if the creditor can demonstrate that the proceedings are being initiated or pursued with the intention of fraudulently evading an obligation. Based on Civil Procedure Code Art. 3 and 41, if the creditor demonstrates this with admissible evidence, the court should recognise that the procedural acts are being taken in the non-contentious proceedings for a dishonest purpose, different from that foreseen by the law.

Then, the court should find the debtor’s exercise of its procedural rights to be an abuse of those rights, which cannot be upheld or tolerated by the court (e.g. Kraków Court of Appeal judgment of 22 January 2020, case no. I ACa 338/19, and Katowice Court of Appeal judgment of 6 October 2021, case no. I ACa 729/20). If the mere application for initiation of a non-contentious proceeding suffers from these defects, it should be rejected by the court without considering the merits (Supreme Court judgment of 12 March 2020, case no. IV CSK 582/18).

The cost of participating in proceedings as an interested person

The creditor’s mere request to be admitted to non-contentious proceedings as an interested person does not involve any court fees. In non-contentious proceedings, each participant bears the costs of the proceedings related to its own involvement in the case (Civil Procedure Code Art. 520 §1).

However, if the participants are interested in the outcome of the proceedings to a different extent or their respective interests conflict, the court may proportionately split the costs or charge one participant with all of the costs (the same applies to the reimbursement of the costs of proceedings incurred by the participants, Art. 520 §2).

If the interests of the participants are contradictory, the court may also order the participant whose applications have been dismissed or rejected to reimburse the costs incurred by another participant. This provision applies as relevant if the participant has acted in the case negligently or improperly (Art. 520 §3).

This means that a creditor applying for admission to non-contentious proceedings involving the debtor must be prepared to incur court fees arising from the actions taken by the creditor in the proceedings (e.g. the creditor’s requests to admit evidence). However, if the creditor can demonstrate that the applicant and other participants have acted negligently, e.g. concealing from the court the wrongful, fraudulent purpose of the court proceedings, the creditor can obtain a ruling from the court ordering these persons to cover the court fees for the proceedings in full, including reimbursement of fees incurred by the creditor.

Creditor as a secondary intervenor

A creditor may have standing to participate as a secondary intervenor in contentious proceedings to which the debtor is a party, at any stage before the case is closed at the second instance (Civil Procedure Code Art. 76–80).

As Art. 76 states: “Anyone who has a legal interest in a case being decided in favour of the parties may join the case alongside the party at any stage before the hearing is closed at the second instance (secondary intervention).” Thus, the purpose of secondary intervention is to protect the secondary intervenor whose interests could be violated as a result of a judgment unfavourable to a party to the proceedings with which the secondary intervenor has a specific legal relationship. If the intervenor successfully joins the case, its participation can shape the course of the proceedings and even control to some extent the steps taken by the party the intervenor is joining (e.g. in terms of claims raised and evidence submitted).

If a creditor decides to participate in litigation as a secondary intervenor, the creditor must “join” one of the parties to the trial. Most often, in practice, that party will be the debtor, sued by a third party over financial or other property rights, and the creditor will then probably request dismissal of the case. But it is also possible to imagine a situation where the debtor sues a third party over property rights, but does so in a manner seeking to lose the case—then the creditor should take steps to ensure that the court upholds the claim.

Each of the parties to the pending proceedings has the right to file opposition (under Civil Procedure Code Art. 78) to the creditor’s submission. The parties have two weeks from the date of service on them of the pleading on joining the case to file their opposition, but they must do so no later than commencement of the next hearing involving the party filing the opposition. The court will dismiss the opposition if the secondary intervenor substantiates (makes a prima facie showing, not necessarily proving) that it has a legal interest in joining the case. Here, it should be emphasised that despite filing of opposition, the secondary intervenor will continue to participate in the case until the decision upholding the opposition becomes final. Only if the opposition is finally upheld will the steps taken by the secondary intervenor be considered null and void.

Steps taken by a non-subordinate side intervener must not contradict the deeds and statements of the party it joined (Art. 79). A non-subordinate secondary intervenor (e.g. a spouse joining on the side of the other spouse requesting that a third person surrender an item that is the joint property of the spouses) has incomparably greater procedural freedom and independence from the party the intervenor has joined. But in an attempt to block the consequences of sham, collusive court proceedings, in practice a creditor will rarely be able to invoke the non-subordinate nature of the intervention. Thus, as a rule, the role of a non-subordinate secondary intervenor is reduced to being an “ally” of the party joined.

In light of Civil Procedure Code Art. 77 §2, a secondary intervenor may also take other procedural measures along with its request for admission to the case. Such other measures would undoubtedly including filing a broader pleading in which, in addition to declaring its participation in the case, the intervenor also indicates to the court the relevant circumstances of the case which the court may have been unaware of. The secondary intervenor is entitled to take all procedural measures permissible according to the state of the case (in particular, to review the court case file, which at a given stage of the case has already been collected by the court).

Other procedural measures referred to in Art. 77 §2 may include:

  • Filing a response to the statement of claim (if a third person claims participation on the defendant’s side after being served with a copy of the statement of claim)
  • Filing an appeal or a request for interim relief
  • Filing an application to present particular evidence.

We must point out that under current law, the procedural measures performed by the creditor as a non-subordinate secondary intervenor contrary to the measures or statements of the party the creditor has joined may not directly exert any procedural effect. Thus a dishonest debtor on whose side the creditor intervenes can quite easily block measures by the creditor (e.g. the debtor can effectively withdraw all evidentiary requests submitted by the creditor).

However, as mentioned, a non-subordinate secondary intervenor may raise in its initial pleading all factual assertions and evidence demonstrating that the litigation is a sham, and its real purpose is to harm the creditor. A court learning of facts relating to the litigation from the pleading of a secondary intervenor cannot remain passive and rely only on the position of the litigants opposing the creditor. Then, according to a well-established line of case law, under the second sentence of Civil Procedure Code Art. 232 the court shall admit certain evidence at its own initiative (i.e. evidence that the creditor could not successfully submit as it conflicted with the conduct of the party joined by the intervenor). As the Supreme Court pointed out in the judgment of 25 June 2022 (case no. IV CK 417/02), “The court is obliged to take the evidentiary initiative in special cases where the parties aim to circumvent the law, in the case of completely fictitious trials….” In Polish civil litigation, the abuse of procedural rights by litigants, including collusive suits and sham trials, should be taken into account by the court at its own initiative (e.g. Katowice Court of Appeal judgment of 6 October 2021, case no. I ACa 729/20).

Possible influence on the course of the trial by the creditor as a secondary intervenor

This way, in contentious proceedings, as a non-subordinate secondary intervenor the creditor can also persuade the court that the legal route being pursued in the case is inadmissible. And if contentious proceedings are initiated for a dishonest purpose, different from that provided for by the law, initiation of the proceedings should be considered an abuse of procedural rights that cannot be tolerated by the court (see Kraków Court of Appeal judgment of 22 February 2020, case no. I ACa 338/19). In such a situation, the statement of claim should be rejected without considering the merits (Supreme Court judgment of 12 March 2020, case no. IV CSK 582/18). And in such a case, because of the wording of Civil Procedure Code Art. 3 and 41, the court should also not allow for a court settlement to be concluded causing injury to the intervening creditor.

The costs of secondary intervention

The court fee for secondary intervention is one-fifth of the fee payable on the principal case. Thus, such a fee can be as high as PLN 40,000. Nevertheless, in our view, it is sometimes worth bearing. Intervening in contentious proceedings aimed at harming a creditor may be the most effective way to thwart the plans of a dishonest debtor and the debtor’s allies.

Certainly, we advise incurring such a cost if it can be demonstrated to the court with a high degree of probability that the trial is a sham and illegitimate, with the sole purpose of evading performance of an obligation by the debtor. In our opinion, a creditor who demonstrates the existence of grounds for dismissal of the statement of claim and discontinuance of the contentious proceedings due to their dishonest purpose may successfully seek an order against the parties to reimburse the costs incurred by the creditor as a secondary intervenor.

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