Source: http://conflictoflaws.net/2018/forcing-a-square-peg-into-a-round-hole-the-actio-pauliana-and-the-brussels-ia-regulation/
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Forcing a Square Peg into a Round Hole – The Actio Pauliana and the Brussels Ia Regulation
by Tobias Lutzi on October 4, 2018
Earlier today, the Court of Justice held that, under certain circumstances, special jurisdiction for an actio pauliana can be based on Art. 7(1) Brussels Ia (Case C-337/17 Feniks).
The actio pauliana is an instrument provided by the national laws of several EU member states that allows the creditor to challenge fraudulent acts by their debtor that have been committed to the creditor’s detriment. The ECJ already had several opportunities to decide on the availability of individual grounds of special jurisdiction for such an action, but has reliably denied their availability. In today’s decision however, the Court confirmed the availability of special jurisdiction for matters relating to contract, contrary to the proposition of AG Bobek (Opinion delivered on 21 June 2018).
Many readers of this blog will be aware of the Court of Justice’s earlier decisions on the availability of special or exclusive jurisdiction for a creditor’s actio pauliana.
In Case C-115/88 Reichert I, the question was referred to the Court in the context of a transfer of immovable property from Mr and Mrs Reichert to their son, which had been challenged in the French courts by their creditor, a German bank. The Court held that the actio pauliana did not fall under the head of exclusive jurisdiction for actions concerning rights in rem; accordingly, the French courts did not have jurisdiction based on what is now Art 24(1) Brussels Ia.
Still in the context of this transfer of property, the ECJ held in Case C-261/90 Reichert II that the heads of jurisdiction in what are now Art 7(2) (matters relating to tort, delict or quasi-delict), Art 24(5) (proceedings concerned with the enforcement of judgments) and Art 35 (provisional, including protective, measures) Brussels Ia would be equally unavailable.
The Court has never explicitly excluded the availability of the ground of jurisdiction for matters relating to contract in what is now Art 7(1) Brussels Ia. In his Opinion on Case C-339/07 Deko Marty Belgium, AG Ruiz-Jarabo Colombo still appears to understand the decisions in Reichert I and II as leading to the conclusion that within the framework of the Brussels Ia Regulation, jurisdiction for an actio pauliana ‘lies [only] with the courts in the defendant’s State of domicile.’ (ibid, [32]).
The Decision in Feniks
The case underlying today’s decision involved two Polish companies, Feniks and Coliseum, who were in a contractual relationship relating to a development project. When Coliseum was unable to pay some of its subcontractors, Feniks had to pay them instead (pursuant to Polish law), thus becoming the creditor of Coliseum. Coliseum subsequently sold some immovable property to a Spanish company, a transaction which Feniks now challenges in the Polish courts, relying on the provisions of the Polish Civil Code that provide for the actio pauliana.
While the Court considered the action to be ultimately based on the contract between Feniks and Coliseum (see below), it is not immediately clear to what extent the situation differs from the one in Reichert. Still, it is true that the question of whether such an action could be based on the head of special jurisdiction for contract was raised in neither of the two orders for reference. AG Bobek had nonetheless offered several important arguments for why this head of jurisdiction should not be available. In particular, he had argued that there was no ‘obligation freely assumed’ by the defendant towards the claimant (Opinion, [68]) and the contractual relationships between the claimant and their debtor and between the debtor and the defendant were ‘too tenuous and remote’ or too ‘detached’, respectively, to be considered for the purpose of establishing jurisdiction (Opinion, [65], [67]). More fundamentally, the Advocate General considered the ‘chameleon-like nature’ of the actio pauliana, which allows a creditor to challenge a wide range of legal acts, to prevent it from falling within the scope of any head of special jurisdiction (Opinion, [76]–[87]).
In today’s decision, the Court very much rejects these arguments. After having established the applicability of the Brussels Ia Regulation – the action not falling into the scope of Regulation No 1346/2000, which would exclude them from the Brussels Ia Regulation (see Art 1(2)(b) Brussels Ia; Case C-339/07 Deko Marty Belgium, [19]) – the ECJ reiterates that the decisive criterion for jurisdiction to be based on Art 7(1) Brussels Ia is the existence of a legal obligation freely entered into by one person towards another on which the claimant’s action is based (Feniks, [39]; see also Joined Cases C-359/14 and C-475/14, ERGO Insurance, [44]); the claimant does not necessarily have to be party to the contract, though (Feniks, [48]; see also Joined Cases C-274/16, C-447/16 and C-448/16 flightright, [61]). According to the Court,
[42] … both the security that Feniks has over the debtor’s estate and the present action regarding the ineffectiveness of the sale concluded by the debtor with a third party originate in the obligations freely consented to by Coliseum with regard to Feniks upon the conclusion of their contract relating to those construction works. [own emphasis]
In such a case, the creditor’s action is based on the breach of a contractual obligation (ibid, [43]).
[44] It follows that the actio pauliana, once it is brought on the basis of the creditor’s rights created upon the conclusion of a contract, falls within ‘matters relating to a contract’ … .
Accordingly, the contract between Feniks and Coliseum being for construction works to be carried out in Poland, the Polish courts would have jurisdiction under Art 7(1)(b) Brussels Ia (ibid, [46]).
Special Jurisdiction under the Brussels Ia Regulation
One of several interesting details of today’s decision is the degree to which the Court’s approach to the grounds for special jurisdiction differs from the Advocate General’s opinion. According to AG Bobek, the actio pauliana might be
[97] … one of the rare examples that only allows for the applicability of the general rule and an equally rare confirmation of the fact that ‘… there is no obvious foundation for the idea that there should always or even often be an alternative to the courts of the defendant’s domicile’.
Importantly, for AG Bobek, requiring the claimant to rely on the general ground of jurisdiction provided in Art. 4(1) Brussels Ia would not be a problem because
[93] … the defendant’s domicile is precisely the key connecting factor for the purpose of application of Regulation No 1215/2012.
– an argument that seems to echo the Court of Justice’s considerations in Case C-256/00 Besix, [50]–[54].
Besides, allowing for special jurisdiction to be based on Art 7(1) Brussels Ia because the defendant must be aware of the fraudulent nature of the transaction for the action to succeed would amount to
[94] … effectively presuming the existence of the awareness of the fraud on the part of the transferee.
Put differently, if the Court could justify the unavailability of special jurisdiction for matters relating to contract for claims brought by a sub-buyer against the manufacturer in Case C-26/91 Jakob Handte by the fact that such jurisdiction would be unforeseeable and ‘therefore incompatible with the principle of legal certainty’ (ibid, [19]), does the mere allegation that the buyer of a plot of land has been aware of the fraudulent character of the transaction really justify its application?
The Court of Justice seems to believe it does. Indeed, it appears to have remained rather unimpressed by the above considerations when arguing that if the claim could not be based on Art 7(1) Brussels Ia, then
[45] … the creditor would be forced to bring proceedings before the court of the place where the defendant is domiciled, that forum, as prescribed by [Art 4(1) Brussels Ia], possibly having no link to the place of performance of the obligations of the debtor with regard to his creditor.
Adrian Briggs October 5, 2018, 10:44 am
If is matter of obligation, and if it is not within Art 7.2 (Reichert II), the basic arithmetic of Kalfelis, and everything which has followed and ratified it, places it within Art 7.1. If that is so, it leads to the conclusion which the Court arrived at, perhaps even more directly than its perfectly sensible view that the question whether rights created by a contract can be asserted against a non-party is a matter relating to a contract. Nothing to see here, I think.
Johann Ladenburger October 5, 2018, 12:42 pm
Ad Adrian Briggs: indeed, that logic could have worked if the Court said that actio paulina was a matter relating to the second contract, by which the debtor disposed of its assets to a third party. There indeed the fiction could be maintained that what is being challenged is the “validity” (but in fact rather relative opposability) of that (second) contract. But the Court “attached” the pauliana to the first contract, which makes absolutely no sense whatsoever. With that logic, as the AG rightly pointed out, anything and everything happening later “downstream” on the timeline would be a contractual matter, effectively between whatever party to the original contract and a a third party.
Adrian Briggs October 5, 2018, 1:16 pm
Well, maybe. If we accept or agree that the matter was one relating to a contract, the only question, if there are more contracts than one, is which one. The issue in relation to the first contract was whether the civil law allowed it to have some impact on a non-party (recipient from the debtor); the issue in relation to the second contract would be whether the civil law gave some advantages to a non-party (original creditor). It appears that the claimant opted for the first, not the second, of these. Once the claimant decides which contract to use as the basis for its claim, everything else falls into place, roughly where the Court said it did. On this occasion, I think Mr Bobek overreached himself.
Tobias Lutzi October 5, 2018, 1:48 pm
With regard to the earlier point (on Kalfelis), are we certain that this is a matter of obligation, though? In Reichert II, the Court of Justice had held that
“[19] [t]he purpose of such an action is not to have the debtor ordered to make good the damage he has caused his creditor by his fraudulent conduct, but to render inef­fective, as against his creditor, the disposition which the debtor has made. It is directed not only against the debtor but also against the person who benefits from the act, who is not a party to the obligation binding the creditor to his debtor […].”
Johann Ladenburger October 5, 2018, 2:54 pm
If I understood the events correctly, then:
1/ Feniks concludes contract concerning property development with Coliseum (Contract 1)
2/ Coliseum contracts with sub-contractors. Coliseum fails to honour those contracts. Because of the joint and several liability of developers under Polish law, Feniks is obliged to pay the subcontractors. Thus, Feniks becomes creditor of Coliseum as a matter of statutory liability (which is quite intriguing, because that also means that the creditor-debtor relationship between was not arising directly under the first contract, but as a consequence of statutory joint liability).
3/ Coliseum sells a plot of land to Azteca (Contract 2).
There was never a contractual relationship between Feniks and Azteca.
Now if one throws out of the window all the case law on “only the parties to a contract being allowed to sue under special jurisdiction for contracts”, and interprets “a matter relating to contract” as meaning that any third party that wishes (on whatever ground) to sue any element of contract between two other parties (which it seems to me is what A. Briggs is suggesting?), then even then: what exactly is then Azteca suing “in a matter relating to contract 1”?
The subject matter of the pauliana against Azteca is: “please declare that the transfer of the property to the value of the land cannot be invoked against me”. As I was suggesting before, there could perhaps be the construction of saying that this might be a “matter relating to contract no 2”, because at least there is some match in the subject matter of that contract (if successful, it means either “the property transfer cannot be invoked against me” or “compensate me directly the sum of the value of the property”). But apart from that, “civil law” knows no effects of contracts on the third party (not to speak of the fact that pauliana is not just a matter of contract, but may be directed against any legal act to the detriment of the creditor).
Adrian Briggs October 5, 2018, 3:07 pm
Nothing is truly certain, I suppose, but if you look at where the paulian action appears in civil codes (or, at least, the ones I have looked at), it sits in the obligations/contracts part/section, and is conceived of as dealing with the effect of contracts on others. I am not shocked by the idea that there are cases in which the burdens of a contract may impinge as such on a non-party; if, in the nature of things, this will be successful only in a few cases, that is a point which goes to the merits, not to the jurisdiction of the court asked to determine those merits . The Court seems to be inching towards an approximate understanding that the sorting-out of consequences resulting from a contractual obligation can be seen as matters relating to that contract; and even if this is not quite what Mr Darmon had in mind, all those years ago, it just goes to show that sometimes it takes a while for an idea to be rediscovered and repurposed. After all, it would be surprising to be told that the creditor’s attempt to rely on his contract against the defendant was unrelated to that contract: if not to that contract, then to what ?
Piotr Stenko October 8, 2018, 3:58 pm
Some quick comments from the Polish perspective:
Re: Actio pauliana: At least in Poland it serves to “protect” the possibility to (compulsorily) perform obligations, not contractual obligations per se. The “obligation secured by the actio pauliana” may result from e.g. statutory liability for damages (delict /Unerlaubte Handlung) and/or unjust enrichment and, as a consequence of some controversial judgments: it even could “secure” fiscal obligations.
Re: liability for payment to subcontactors: this is indeed, as mentioned by Johann Ladenburger a statutory liability, which arises “in the context of” or “in connection with” a construction contract but only if subcontractors are engaged (subject to certain further conditions). This is a merely statutory instrument (I am aware of only one judgment which – in a very specific public procurement case –held that the duty to pay the subcontractors is the general contractor’s obligation under the contract between the client (investor) and the general contractor, but this view has not become widely represented / popular so far). Hence this is not a matter – directly – relating to the concluded contract.
re: first vs second contract: This is actually quite intriguing as the Regional Court in Szczecin has in fact opted that the basis for the international jurisdiction would be the place of performance of the “challenged” contract, i.e. the (allegedly) detrimental one (i.e. the transfer of the asset from Coliseum to Azteca). This is also a view which in my opinion could be defended. The ECJ has in my opinion quite controversially opted to determine the jurisdiction on basis of the place of performance of the first contract.
Even though I am mainly on creditors’ side – this is insofar controversial, as the party to the allegedly fraudulent transaction (if not fraudulent) has no way to ascertain itself where it could be sued. The protection of the counterparty suffers (in the context of predictability of the forum), especially should e.g. the actio pauliana concern damage claims or “prospective” / future creditors of the debtor. Especially in case of the latter, the party to the allegedly fraudulent transaction (acquirer) has no way to foresee the prospective forums (especially if it is not acting in cooperation with the debtor, to the debtors creditors’ detriment i.e. in a situation where such party’s rights should be respected). Such third party’s knowledge is then established as a consequence of the actio pauliana litigation. Needless to say however, in practice such a party has to appear in the litigation and defend itself unless it opts to have a default judgment.
Additionally, ECJ’s position is quite controversially economically, as it could significantly increase transaction costs in international acquisitions.
In this context, Adrian Briggs’s comment “The issue in relation to the first contract was whether the civil law allowed it to have some impact on a non-party (recipient from the debtor); the issue in relation to the second contract would be whether the civil law gave some advantages to a non-party (original creditor)” the answer is quite simple (at least from a civil law/bankruptcy perspective): if you are acquiring an asset at an undervalue you have to consider that the transaction could / will be subject to a challenge (claw-back action etc., whether bankruptcy related or not).
Hence (i) should we accept that the “matters relating to a contract” under art 7 extend to the (relative) ineffectiveness (voidability etc.) of such contract vis a vis third parties and that (ii) third parties, not being parties to the challenged contract could use this head of jurisdiction, then it is quite obvious, that (iii) the “challenged transaction” is relevant here and determines the place of performance and in consequence the jurisdiction in such case.
It is unfortunately beyond me as to why has the ECJ opted to determine the jurisdiction on the basis of a contract which has very little (or in the present case: almost nothing) to do with the claim at stake.
noname October 18, 2018, 7:43 am
The reason for Article 5/7(1) and its special jurisdiction in matters relating to a contract “is the existence of a close link between the contract and the court called upon to hear and determine the case.” (see C-386/05 in N 22). It reflects an objective of proximity.
In the present case, there is no link between the contract Coliseum-Feniks on the one hand (the place of execution which determines jurisdiction here!), and Azteca on the other hand. As mentioned by others above: the question in a pauliana is “to render inef­fective, as against his creditor, the disposition which the debtor has made”, and not the validity of the original contract. There is no intrinsic reason why the court at the place of execution of the first contract should be best placed to decide whether the receiving third-party e.g. acted in good faith (which can be a relevant question in a pauliana). Thereofore, the objective of proximity would have advocated for a different decision.
As said in C-147/12 N 31: “rules of special jurisdiction must be interpreted restrictively and cannot give rise to an interpretation going beyond the cases expressly envisaged by the regulation”.
The CJEU seems to contradict itself.
Perhaps this is a decision specific to Polish law, and cannot be transferred to what is generally understood as a pauliana in German or Swiss laws? Any thoughts on this are welcome…
Piotr Stenko October 18, 2018, 12:40 pm
“In the present case, there is no link between the contract Coliseum-Feniks on the one hand (the place of execution which determines jurisdiction here!), and Azteca on the other hand. As mentioned by others above: (…) There is no intrinsic reason why the court at the place of execution of the first contract should be best placed to decide whether the receiving third-party e.g. acted in good faith (which can be a relevant question in a pauliana)”
Exactly, this could only be followed if under the actio pauliana, the claimant would be required to demonstrate that its debtor and the third party not only acted to the creditor’s detriment, but also did it in order to e.g. impede this (specific) creditor’s chances of enforcement. This does not however seem to be the case, as even in pauliana actions concerning transactions to the detriment of “future” creditors, the creditor is obliged (under Polish law obviously) to demonstrate that the parties to the transaction in question acted with the intent to harm future creditors. It is generally held that the claimant is not obliged to demonstrate that the parties to such transaction intended to affect the claimant.
“Perhaps this is a decision specific to Polish law, and cannot be transferred to what is generally understood as a pauliana in German or Swiss laws? Any thoughts on this are welcome…”
Notwithstanding the fact that this would derail the goal of an uniform interpretation of the Jurisdiction Regulation, this is definitely not a case under Polish law 🙂
noname October 25, 2018, 9:10 am
The longer I think about this case, the less I understand it.
What seems obvious is that we cannot talk about “the pauliana” any more; we have to differentiate, as Piotr Stenko put it, depending on the cause that gave rise to the initial obligation; and this can be e.g. statutory liability for damages (delict /Unerlaubte Handlung) and/or unjust enrichment, or maintenance obligations.
Developing on the decision of the CJEU: think about a child with residence in country A, who has a maintenance obligation against his father in country B, who gave away all his assets to somebody in country C. If this child iniates an actio pauliana against the person C, does it mean that the child can use his privileged forum in country A for this pauliana, because such a pauliana would be based on a maintenance claim and therefore be a maintenance obligation related action?
noname October 26, 2018, 6:16 am
Some questions to Piotr Stenko:
1) Is there any condition attached to the pauliana (outside of insolvency proceedings) in Polish law, e.g. that before initiating a pauliana, the creditor must have already initiated enforcement proceedings against the debtor, and only if those led to a lack of payment, then a pauliana can be initiated?
2) what are the consequences regarding the contract against which the pauliana is initiated: will the contract become void, or is it just an “inopposability” vis-à-vis the plaintiff, whereas the contract remains valid as such?
Many thanks for your help. This will help to further analyse to which degree this case can be generalized.
Piotr Stenko October 29, 2018, 9:14 am
re: “1) Is there any condition attached to the pauliana (outside of insolvency proceedings) in Polish law, e.g. that before initiating a pauliana, the creditor must have already initiated enforcement proceedings against the debtor, and only if those led to a lack of payment, then a pauliana can be initiated?”
AFAIK there are no views which would foresee the existence of such a condition.
In the course of the pauliana litigation, it must inter alia be established that the debtor either: (i) was insolvent whilst disposing of the asset or (ii) became insolvent as the consequence of such disposal.
Both initiation of enforcement proceedings as well as the existence of a judgment concerning the claim secured by the action pauliana are not required, the only “related” condition is the existence of the “secured” claim upon the date of issuing the pauliana judgment.
Thus the fruitless enforcement serves only for evidentiary purposes, in order to demonstrate that the debtor is insolvent.
“2) what are the consequences regarding the contract against which the pauliana is initiated: will the contract become void, or is it just an “inopposability” vis-à-vis the plaintiff, whereas the contract remains valid as such?”
The contract becomes ineffective (inopposable) vis-à-vis the plaintiff but remains valid as such (it is valid erga omnes).
The successful pauliana creditor may then conduct enforcement from the specific asset acquired of a third party (which is still treated as its rightful owner).
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