Which court should hear a fraudulent transfer case against a third party or a case seeking to protect real performance of a contract? | In Principle

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Which court should hear a fraudulent transfer case against a third party or a case seeking to protect real performance of a contract?

To challenge a transaction by a debtor with a third party injurious to a creditor (fraudulent transfer action) or a contract by the debtor with a third party (action under Civil Code Art. 59), it is essential to file the properly drafted statement of claim with the court with proper venue geographically and for the subject matter. How to determine which court is proper to hear the case?

Under the basic rule of the Polish Civil Procedure Code, the proper court is determined according to the defendant’s domicile (Art. 27), known as general venue. It should be borne in mind that the defendant in a fraudulent transfer case against a third party is the third party (or the fourth, fifth etc) which has conducted a transaction with the awareness that it would injure the creditor.

The defendant’s domicile is determined according to the Civil Code, which defines the domicile of a natural person as the locality where the person is staying with an intention of residing there permanently (Art. 25). Thus, under the law, a natural person’s domicile is a locality, not a specific address.

It is well established that the domicile of a person may be determined only when two conditions both exist:

  • The person is staying in a given locality permanently
  • The person intends to reside there permanently.

Thus to determine the defendant’s domicile within the meaning of the Civil Code, the plaintiff must establish that the person intends to stay in the given locality permanently.

This intention, in turn, is understood as a desire by that person to make that locality the centre of his or her life interests. More and more often, a defendant’s domicile is found to be not the place where the person is registered as living (zameldowany), but where he or she is in fact regularly present (with the intention of staying there permanently, e.g. living there with family members). However, one person can have only one domicile (Civil Code Art. 28), which means that for a given natural person, only one court will be proper.

If the defendant is a legal person (or other entity other than a natural person), it is relatively easy to determine the proper court, because the action is brought according to where its registered address is located (Civil Procedure Code Art. 30).

The proper venue depends not only on the domicile or registered address of the defendant, but also on the amount in dispute. It is mandatory for the plaintiff to specify the amount in dispute in the statement of claim. If it is higher than PLN 75,000, the case should generally be filed with the regional court (sąd okręgowy) (Civil Procedure Code Art. 17(4)) as the court of first instance, and if the amount in dispute is PLN 75,000 or less, the case should be filed with the district court (sąd rejonowy).

In a fraudulent transfer claim against a third party, if there is more than one defendant, a court with geographically proper venue as to any one of the defendants will also be proper as to the other defendants—this decision is left to the plaintiff (Civil Procedure Code Art. 43).

Finally—to cheer up plaintiffs perhaps not advised by professionals, and concerned that they might erroneously determine the court—a Polish court that finds it is not the proper venue will itself transfer the case to the proper court (Civil Procedure Code Art. 200 §14), and actions taken in the improper court will remain valid (Art. 200 §3). Nonetheless, erroneous determination of venue by the plaintiff will no doubt prolong the proceeding. Moreover, this rule applies only in situations where the case should be decided by a Polish court, not a foreign court (in other words, only where there is national jurisdiction in Poland).

The court will take notice of a lack of national jurisdiction on its own initiative, at any stage of the proceeding (Art. 1099 §1). If it is found that there is no national jurisdiction, the Polish court will not determine what is the proper court, but will dismiss the statement of claim. Dismissal of the statement of claim means a refusal to grant legal protection to the plaintiff’s claim set forth in the statement of claim, without addressing the correctness of the claim on the merits under the rules of substantive law. In that case, the statement of claim can be refiled before the proper court with jurisdiction, but the plaintiff must beware of the potential running of the limitations period on the claim.

When there is a cross-border element

Doubts as to which is the proper court (and more generally the applicable law, although that is not the subject of this article) may arise in connection with claims by a creditor pursuing a fraudulent transfer case against a third party if the status of the debtor or the third party, the place where the fraudulent transaction occurred, or the place where it exerts effects, indicates a possible connection to foreign law. In practice, this situation happens more and more often. With the growing number of transactions between Polish and foreign entities, the very practical question arises how to determine the proper court to hear a fraudulent transfer claim against a foreign third party who has made a transaction with the debtor to the detriment of the creditor.

Example: The debtor and the creditor are bound by a contract concluded and performed in Poland. But (under a contract concluded in Poland) the debtor sells to a third party (a legal person registered in France) the in rem rights to real estate also located in France, resulting in the debtor’s own insolvency. Thus as a result of a transaction between the debtor and a third party (a legal person), the creditor is injured. There is no bankruptcy proceeding pending against the debtor. Where should the creditor file its claim: with a court in Poland or in France?

For a Polish creditor, it will usually be more advantageous to file suit before a Polish court, generally for financial reasons, but also because of the language, unfamiliarity with foreign procedure, etc. If the real estate, or even movables, against which the creditor seeks to obtain satisfaction is still in Poland, pursuing the case in Poland is favourable, because if the creditor prevails, it can more quickly and effectively seize those assets. But if the real estate or movables are abroad, practical considerations may dictate that the suit be filed with the foreign court proper as to the defendant’s registered office, because that should facilitate satisfaction of the creditor at the execution stage.

In any case with a foreign element, the court must at its own initiative assess first whether it has jurisdiction (and thus the power to decide the case), and if so, in what respect. That is why it is crucial to properly frame the statement of claim, including showing that the court is proper, when there is a cross-border aspect to the case, to avoid the threat of dismissal of the case.

Until recently, the predominant practice was that fraudulent transfer claims against third parties were generally filed (without considering other options) before the courts at the place where the defendant had its domicile or registered office. If the third party was a foreign entity, creditors commenced proceedings before the other country’s courts.

Art. 4(1) of the EU’s Recast Brussels I Regulation (1215/2012) provides: “Subject to this Regulation, persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State.” Under Art. 63 of Regulation 1215/2012, a company or other legal person is regarded as domiciled at the place where, inter alia, it has its “statutory seat.” The jurisdiction established in Art. 4 of Regulation 1215/2012, i.e. jurisdiction of the member state where the defendant is domiciled, is the general rule. Departures from this rule are provided for in instances exhaustively listed in specific regulations, where, depending on the case, the defendant may or must be sued before the court of another member state, and these exceptions should be interpreted narrowly.

Returning to our example involving a third party registered in France, clearly it would be possible to file suit before the French court proper for the registered office of the third party. But is that the only possible court?

In its order of 17 December 2020 (case no. III CSK 160/18), the Supreme Court of Poland held that a fraudulent transfer against a third party, brought by creditor holding a contractual claim, seeking a finding of ineffectiveness against the creditor of a transaction regarded as detrimental to the creditor, consisting of the debtor’s sale of an asset to a third party, is covered by the basis of international jurisdiction established under Art. 7(1)(a) of Regulation 1215/2012. This thus presents a departure from the general rule that the plaintiff should “follow the defendant.”

Art. 7(1)(a) of Regulation 1215/2012 provides, in turn: “A person domiciled in a Member State may be sued in another Member State, in matters relating to a contract, in the courts for the place of performance of the obligation in question.” In practice, this means that a third party domiciled in an EU member state may be sued in Poland if the place of performance of the obligation is Poland. In each case, it must first be examined whether the third party has its domicile or statutory seat in the EU, and where the obligation was to be performed.

The Supreme Court case cited above relied on the judgment of the Court of Justice in C-337/17, Feniks sp. z o.o. v Azteca Products & Services SL, issued as the result of a request for a preliminary ruling sought by the Szczecin Regional Court to determine whether the Polish court had jurisdiction and whether a fraudulent transfer claim was a matter “relating to a contract” for purposes of Art. 7(1)(a) of Regulation 1215/2012. The plaintiff, a Polish company, filed suit against a Spanish company seeking to hold ineffective a contract under which the Spanish company had acquired real estate in Poland from the plaintiff’s debtor, a transfer which allegedly injured the creditor. The defendant alleged lack of national jurisdiction and asserted that the case should be heard before the Spanish courts.

In Feniks, the Court of Justice held that the creditor could sue in the court for “the place of performance of the obligation in question,” as this construction, “with regard to the contractual origin of the relationship between the creditor and debtor,” met “both the requirement for legal certainty and foreseeability and the aim to facilitate the sound administration of justice.” In that case it meant that the Polish plaintiff could bring suit against the third party from Spain before a Polish court, as the contract between the creditor and the debtor, out of which the claim arose which the creditor could not enforce against the debtor as a result the debtor’s transaction with the Spanish company, was concluded in Poland.

Based on the Court of Justice ruling in Feniks, it appears that the creditor should understand the notion of “the place of performance of the obligation in question” to mean the place where the contract impinged on by the transaction between the debtor and the third party is to be performed. Returning to the example given above, it appears that in this situation, it is also possible to bring suit in Poland.

However, we should stress that the issue of how to understand “the place of performance of the obligation in question” in the context of a fraudulent transfer claim with a cross-border element is extensively debated in the case law and the legal literature, and thus determination of which court has jurisdiction requires thorough analysis by a specialist in each case.

Fraudulent transfer claim against a third party and the location of real estate affected by the fraudulent transfer

It should be borne in mind that Art. 24(1) of Regulation 1215/2012 provides that “in proceedings which have as their object rights in rem in immovable property or tenancies of immovable property, the courts of the Member State in which the property is situated shall have exclusive jurisdiction, regardless of the domicile of the parties.” In the Polish legal system as well, the rule is that a claim over ownership or other in rem rights to real estate shall be brought exclusively before the court for the place where real estate is located (Civil Procedure Code Art. 38).

However, according to the judgment of the Court of Justice in C-115/88, Reichert, “An action whereby a creditor seeks to have a disposition of a right in rem in immovable property rendered ineffective as against him on the ground that it was made in fraud of his rights by his debtor” did not come within the scope of Art. 16(1) of the Brussels Convention of 27 September 1968 (the provision now included in Art. 24(1) of Regulation 1215/2012).

In other words, when a creditor wishes to pursue a fraudulent transfer action to avoid a transaction by a debtor disposing of an in rem right to immovable property, although the case is somewhat related to immovable property, jurisdiction is not determined on the basis of where the property is situated. Returning to our example above: the creditor does not have to be controlled by the location of the real estate (France) when bringing an action to invalidate a transaction to the creditor’s detriment—although, as mentioned, the creditor could go to the French court if it chose, and sometimes practical considerations will counsel filing suit there.

It should be apparent that it can be complicated to determine the specific court that should adjudicate a case with a cross-border element (e.g. when the dispositive effect of the transaction occurs in a country other than where the contract was concluded). The help of professionals is essential to avoid any mistake in determining the court.

Proper court in cases under Civil Code Art. 59

Civil Code Art. 59 and 527 do not overlap, because a fraudulent transfer claim against a third party protects a monetary claim, while Art. 59 applies when non-monetary performance cannot be truly fulfilled. A creditor seeking to set aside a contract under Art. 59 must sue both parties to the contract (necessary joinder of parties). We discuss Civil Code Art. 59 in more detail in the article “When the other party seeks to prevent performance of a contract.”

The proper court for filing a statement of claim seeking to hold a contract between the debtor and a third party invalid under Civil Code Art. 59 should be determined by considering the amount in dispute and the domicile or registered office of one of the defendants. If the plaintiff correctly determines the court that is geographically proper with respect to one defendant, that court will be proper for the whole case (Civil Procedure Code Art. 43).

In these cases as well, if the amount in dispute is greater than PLN 75,000, the claim should be filed with the regional court (Civil Procedure Code Art. 17(4)), or otherwise with the district court.

In our view, the discussion above on determining jurisdiction when there is a cross-border element also applies in all cases unrelated to real estate. However, if the subject of the contract being challenged under Civil Code Art. 59 is real estate, we believe it would be safest for the creditor to bring an action challenging the contract before the courts in the country where the real estate is located (particularly if one of the defendants is domiciled in the same country). But in that case, proper determination of the court’s jurisdiction may depend on numerous other factual elements, which will differ in each case.

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