STORME, The effect of avoidance in bankruptcy as against a third party acquirer in good faith

annotations to Hof van cassatie van België / Cour de cassation de Belgique, January 31, 2002 , by:

Matthias E. STORME
Brigitta LURGER
Isabel GONZALEZ PACANOWSKA
Arthur SALOMONS

from: European Review of private law, 2004 nr. 6, p. 789-792

Summary

The case decided by the Belgian Hof van cassatie / Cour de cassation on January 31, 2002 concerns the effects of an avoidance in bankruptcy of an impeachable transaction by the bankrupt debtor disposing of assets, and especially the conflict with a subsequent acquirer of these assets. The bankrupt debtor (Transport de Koning) had transferred shortly before bankruptcy a trailer in lieu of payment to its creditor Diemotrans. Diemotrans had sold and delivered the trailer shortly after bankruptcy to a subsequent buyer in good faith, the LLC André. The insolvency administrator (Driessen) asked the court for a declaration of ineffectiveness of the transaction vis-à-vis the creditors and a condemnation of LLC Andre to restitute the trailer to the bankrupt estate. The Court decided that the claim of the insolvency administrator fails insofar as the conditions for bona fide acquisition by LLC Andre are met (actual possession and good faith).

Belgian introductory note
Matthias E. STORME

1. For the sake of clarity, let me give some general information on the structure of Belgian law in this respect, i.e. the specific remedies of creditors against acts by their debtor. Apart from other types of sanctions not specifically protecting the interest of a creditor as creditor (e.g. sanctions for the protection of family members, for the protection of veri domini or other persons entitled to older property rights, for the protection of hereditary rights of so-called legitimate heirs, etc.), the specific interest of a creditor as creditors, i.e. the recoverability of debt, is protected under Belgian law by 1° the actio Pauliana as a general remedy (regulated in the Civil Code, art. 1167) and 2° some more specific remedies applicable only in case of bankruptcy of the debtor (found in the Bankruptcy Act). The pauliana is a remedy for fraud of creditors, requiring apart from the fraudulent intention of the debtor itself, either conspiracy in fraud of the other party or a gratuitous acquisition by the other party. The more specific forms in bankruptcy are basically two: a) on the one hand a "light" version of the Pauliana, requiring no fraudulent intention in the strict sense but merely knowledge of the prejudicial nature of the transaction (art. 18 Bankruptcy Act of 1997), and b) avoidance of listed acts considered to be prejudiciable to the creditors and committed after the debtor has ceased to pay its debts (art. 17 Bankruptcy Act). Differing from many other jurisdictions, the moment of cease of payment is fixed by the Court in the judgment declaring bankruptcy, and cannot be fixed at an earlier date than 6 months before that judgment, in order not to upset the security of transactions too much (this 6 months period - the so-called "period of suspicion" - does not apply to the general as well as the specific actio pauliana). The list of acts which can be avoided without any subjective requirement (proof of fraud) provided they have taken place in the period of suspicion, contains i.a. all gratuitous (wholly or partly) dispositions (art. 17, 1°), all payments of debts yet undue (17, 2°) and all transfers in lieu of payment, except payment by cheque, money transfer and similar instruments of payment (art. 17, 3°).

2. The nature and effects of such avoidance is disputed in Belgian scholarship. According to some authors, the remedy consists of an action in personam, more specifically a claim for restitution (subsidiarily for damages when restitution in kind is impossible) not fundamentally different in nature from a tort claim or an unjust enrichment claim. According to other authors, including myself, the remedy if primarily of a different nature and the claim for restitution or damages is only a sequel of its primary nature. In this view, it is in first instance a Gestaltungsrecht, a power of the creditors to interfere with the authority of their debtor over its own assets. This power to interfere is more specifically a right to render ineffective the prejudiciable act of their debtor. The action is in that sense revocatory. It is because the juridical act of the debtor (such as the contract, donation, payment, etc.) is made ineffective in relation to the acting creditor(s), that the assets are still part of the estate of the debtor (in case of bankruptcy of the debtor: the bankrupt estate) and can thus be realised by its creditors. The remedy is thus a "primary" or "direct" one, as compared with the "indirect" nature of a personal claim for damages or restitution by the other party to the transaction. Further, the Belgian system of transfer of property is a so-called causal system, differing from the so-called abstract system of i.a. German law. The ineffectiveness of the underlying transaction entails ipso iure the ineffectiveness of the transfer based upon it. The other party is therefore considered to have never acquired ownership of the asset. And because nemo dat quod non habet, a subsequent buyer, such as LLC Andre in the annotated case, has not acquired ownership either, unless the rules of bona fide acquisition from a non-owner apply.

Several decisions of the Belgian Hof van cassatie /Cour de cassation seem to confirm this second doctrine on the nature and effects of the creditors remedies, the annotated one being one of them.

3. Indeed, the decision confirms that the avoidance of the transaction has in principle an effect in rem, returning the asset in the bankrupt estate whether or not the other party is its owner or in possession of it (in rem may be a misleading expression: the creditors have no property right in the assets, but in a causal system of transfer of property the avoidance of the underlying contract entails the ineffectiveness of the transfer of property, and that is what is meant). Further, the decision expressly invokes the rules on bona fide acquisition by third party acquirers, which again implies that the third party has acquired from a second party who did not have the authority to dispose of the asset because he did not become owner itself (at least not vis-à-vis the creditors). A parallel decision can be drawn with a decision of the same Court of October 25th, 2001 concerning an immovable asset (interest in land), equally applying the normal rules of bona fide acquisition in a case concerning the general actio pauliana (and not the more specific avoidance in bankruptcy) .

4. A further indication can be found in the rule applying to the conflict between the creditors of the insolvent seller and the equally insolvent buyer; as in French law, it is accepted that the creditors of the seller entitled to render the fraudulent act ineffective, have priority over the creditors of the other party who acquired the asset. If recovery of the asset is impossible, and the other party is liable in tort, such (subsidiary) tort action on the contrary does not have such a priority in the insolvency of the other party .

5. As to the protection of bona fide acquirers of movable things in Belgian law, it is sufficient for our purpose to mention that this protection is very wide, and applies to all acquirers in actual possession who were in good faith at the time of acquiring possession, except for stolen and lost goods, where a stricter system applies (where the dispossessed owner can basically revindicate the lost or stolen thing within 3 years).