Jurisdiction in Construction Disputes involving Cross-Border Fraudulent Transfers of Assets

Jurisdiction in Construction Disputes involving Cross-Border Fraudulent Transfers of Assets


CategoryArticles Author Michael McParland QC Date

Debtors often try to make themselves judgment proof by transferring their assets to third parties. Consequently, all EU Member States provide various legal remedies that empower a creditor to ask a court to declare such transfers ineffective as against them. These remedies, which originated in Roman law, are often grouped under the Latin name of ‘actio pauliana’. They have been described as a ‘series of techniques for granting protection to creditors in cases where the debtor diminishes his seizable assets to avoid paying his debts’ (I. Pretelli, (2011) 13 Yearbook of Private International Law, p. 590).

But where the legal ownership of assets has allegedly been fraudulently transferred to third parties in different Member States, which courts have jurisdiction under the Brussels I (Recast) Regulation to declare such transfers invalid?

This has been a long-standing problem, with the CJEU declaring in a number of cases that actio pauliana actions cannot fall within the exclusive or special jurisdiction provisions concerning (a) tort / delict; (b) rights in rem in immovable property; (c) enforcement of judgments; and (d) provisional measures.

Feniks & Reitbauer

Two decisions of the CJEU within the last 12 months have brought considerable clarity for cross-border litigators, especially for those with clients in the construction industry.

Case C-337/17 Feniks

The first of these was the decision of the CJEU in Case C-337/17 Feniks Sp. z o.o. v Azteca Products & Services SL (see here).

The facts of Feniks

Coliseum 2101 sp. z o.o. (‘Coliseum’), a Polish company, acting as a general contractor, concluded a contract with another Polish company, Feniks, acting as an investor.

The contract concerned the performance of construction works as part of a property investment project located in Gdańsk (Poland). For the purpose of fulfilling the contract, Coliseum concluded a number of subcontracts.

Coliseum failed to pay some of its subcontractors.  Feniks was therefore required under Polish law to pay a sum of money to them (on account of the provisions in the Polish Civil Code on the joint and several liability of the investor). Feniks therefore became a creditor of Coliseum for a total sum of 1396495,48 Polish zloty (PLN) (approximately € 336,174).

Faced with this debt, Coliseum entered into apparently closely connected agreements with a Spanish company, Azteca, for the sale of real property in Szczecin, Poland, which were said to be in partial fulfilment of prior claims by Azteca. The contract of sale had been concluded and performed entirely in Spain.

Coliseum being insolvent, on Feniks brought an action against Azteca in Poland, based on Article 527 et seq. of the Polish Civil Code seeking a declaration that the contract of sale was ineffective in relation to it, because of the fact that it was concluded by Fenik’s debtor in fraud of their creditor’s rights. Azteca challenged jurisdiction, claiming they could only be sued in Spain.

Faced with this challenge, the Polish court wondered whether they had jurisdiction under the special jurisdiction provisions for ‘matters relating to contract’ under Article 7(1)(a) of the Brussels I (Recast) Regulation?

The CJEU’s decision in Feniks

Advocate General Bobek advised that they did not.

Happily, the CJEU disagreed with the Advocate General, and helpfully declared that, in the case of an actio pauliana, where the person entitled to a debt arising under a contract requests that an act by which his debtor has transferred an asset to a third party, and which is allegedly detrimental to his rights, be declared ineffective in relation to the creditor, is covered by the special jurisdiction provisions for matter relating to contract under Article 7(1)(a) of the Brussels I (Recast) Regulation.

The CJEU held that Fenik’s claim lay essentially in breach of contractual obligations owed to them.  Once a claim was brought on that basis, it followed that the actio pauliana, fell within the meaning a matter relating to a contract. Article 7(1)(a) thus gave an alternative forum for a claim to be brought. If it did not, the creditor would be forced to bring proceedings before the court of the place where the defendant is domiciled, which may possibly have no link to the place of performance of the obligations owed by the debtor to his creditor.

The CJEU concluded (at paragraph 46) that:

“… it is for the creditor who holds the claim derived from a contract and who intends to bring an actio pauliana, to bring the action before the courts in ‘the place of performance of the obligation in question’ as prescribed by Article 7(1)(a) of Regulation No 1215/2012. In the present case, as the action brought by the creditor aims to preserve its interest in the performance of obligations derived from the contract concerning construction works, it follows that ‘the place of performance of the obligation in question’ is, according to Article 7(1)(b) of this regulation, the place where, under the contract, the construction services were provided, namely Poland”.

Case C-772/17 Norbert Reitbauer and Others v Enrico Casamassima (10 July 2019)

Now, the Court’s decision in Feniks has been confirmed on 10 July 2019 in Case C-772/17 Norbert Reitbauer and Others v Enrico Casamassima. The decision is currently only available in German and French (see here).

The facts of Reitbauer

The case in Reitbauer concerned contracts for renovation works at a house in Villach, Austria. A couple, domiciled in Rome had purchased the house: one “M” paid the money, the other “C” was registered as the sole owner. Reitbauer were the building contractors undertaking the renovation works. Payments to them stopped when the works exceeded the original budget. The builders sued the registered homeowner C in Austria for damages.

Ms C however, before an Italian court confirmed that she owed €349,772.95 to M in respect of the monies he had lent for the purchase of the house, and undertook to repay him over 5 years under an agreed Italian court settlement. A mortgage was also registered on the Austrian house in C’s favour. C undertook to register a mortgage on the Austrian property to guarantee the claim.

A deed (the pledge) was drawn up by a notary in Austria to guarantee the Italian court settlement, and a security interest was registered in the Austrian land register in favour of C. This took effect before judgments obtained by Reitbauer became enforceable, and thus these judgments ranked second in priority to the pledge in favour of C.

In order to enforce his rights under the pledge, M obtained a European Enforcement Order under Regulation 805/2004 from the Italian courts in respect of the agreed settlement debt, and then obtained a court order in Austria requiring C to sell the house by auction, which duly occurred. Almost all the proceeds of this auction would go to C.

To try and prevent this, Reitbauer applied to the Austrian courts seeking actio pauliana type relief. C challenged jurisdiction, and the matter was referred to the CJEU

The CJEU found in Reitbauer’s favour, declaring that:

  • Reitbauer’s claims did not fall within the exclusive jurisdiction provisions of Article 24;
  • Following Feniks, the Court ruled that the claim fell within the provisions of Article 7(1)(a) of the Brussels I Recast Regulation: (paragraphs [56]-[62]). It was therefore permissible for Reitbauer to bring a claim in Austria, as that was were the renovation work had been provided.
Conclusion

Together, both cases may save a lot of disputes and prevent a lot of “cross-border debt dodging”.


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