How to defend your property against foreclosure? Actio pauliana is not that terrible

Let’s assume that due to the coronavirus epidemic, an entrepreneur was forced to close his company in March last year and is still facing further restrictions. Unfortunately, like most Poles, he has loans – and the bank was not willing to reach a settlement and significantly reduce the installments. In this situation, should such a person politely – as the system orders – sell his assets to pay off debts to the financial sector?

For me, the answer is obvious: your duty, absolutely paramount, is to protect your family. And not caring about maintaining a good reputation in banks as someone who always repays his debts on time.

Of all the anti-debt collection activities and advice, the most controversial issue is the issue of securing the debtor’s assets. Often, “system” lawyers comment on this matter and comment on my publications, for whom the protection of property against possible enforcement is completely inconsistent with applicable law.

What scares us about the law and lawyers?

The fact is that both the Civil Code (Article 527 – regarding actio pauliana) and the Criminal Code (Article 300) do not allow such activities. Therefore, if we read the quoted provisions literally, the matter is apparently clear: securing the debtor’s assets involves certain risks.

Okay, but if we do nothing, we will definitely lose this property. And if we are talking about, for example, an apartment or a house in which the debtor’s family lives: doesn’t he have the right (or even obligation!) to protect his home from robbers?

In this part of the Guide, I will deal with the actio pauliana. It commonly seems to people who have heard something about this subject that the effective application of actio pauliana means the invalidation of the concluded transaction. This means, for example, “reversal” of a donation, and then the subject of the donation returns to the donor.

But it’s different. Here is the relevant provision of the Civil Code, explaining what this legal action is:

Article 527 § 1 “When, as a result of a legal act of the debtor performed to the detriment of creditors, a third party has obtained a financial benefit, each of the creditors may demand that this act be recognized as ineffective in relation to him, if the debtor acted with the knowledge of harming the creditors and the third party knew about it or by exercising due diligence could have found out.”

Translating into Polish: a creditor who effectively uses the actio pauliana may carry out enforcement against property that the debtor disposed of to a third party. But the property does not return to the debtor.

When are we dealing with the classic accusation of “escape with property”? And what can cause a creditor to use an actio pauliana? It is definitely a donation of real estate to a member of the immediate family. In a situation where this is the only defensive act performed by the debtor, the creditor’s use of actio pauliana seems very simple: it will not be easy for the recipient to demonstrate that he had no knowledge of the donor’s debts. Although, theoretically, it could have happened.

One activity is not enough!

Therefore, professional security of the debtor’s assets should be much more… subtle. The judgment of the Supreme Court of November 14, 2012 (ref. no. II CSK 206/12) proves that even a minor inconvenience (an additional, simple action) significantly interferes with the procedure of applying the actio pauliana.

What happened? The mother (debtor) gave her daughter the apartment. Then the recipient (the debtor’s daughter) performed action no. 2, establishing a personal easement in favor of the mother. The above made possible enforcement of this property very difficult.

The Court of Appeal clearly sided with the debtor in this case.

Here are three quotes from the justification:

• “before signing the donation agreement, the daughter did not ask her mother about the debts”

• “the claim for declaring an ineffective legal action consisting in the granting of a personal easement to the apartment by the recipient for her mother’s benefit did not deserve to be accepted, because the recipient is not a debtor of the plaintiff, and her mother (the donor) did not deepen her insolvency in this way, but obtained a benefit “property”

• “encumbrance of real estate with a limited property right is not an act harmful to the plaintiff”

I don’t know how this case ended. However, the conclusion is obvious: effective security of real estate requires more serious actions than sticking to one activity, e.g. making only a donation. Any additional move, even as simple as establishing a personal easement, can cause a lot of confusion when trying to apply actio pauliana.

For obvious reasons, I will not be able to present you with a wide range of solutions that will prove to be much more effective (for the debtor) than the case described above. If I reveal the weapon to my opponent, it will be easier for him to figure out the patent, to the detriment of anyone who wants to protect their assets in a given way.

An advantage for those who plan to fight for a better tomorrow and decide to protect their assets is the experience (not only mine) from recent years. Well, in the case of classic cash loans, consumer loans or most liabilities for the SME sector, financial institutions do not use this form of recovering funds from the credit or loan granted. Except in exceptional situations.

Theory is theory… And what about practice?

Specifically: over the last five years, I have only had to deal with an attempt to use actio pauliana once. And it was an unsuccessful attempt. I’m talking about issues that have come to my attention since 2016. The creditor who tried to “attack” the property donated to a third party in this way was not a bank or a loan company – but a housing community. Due to the properly, i.e. professionally planned, transaction, the creditor’s actions ended in failure.

Let us consider why banks rarely use this weapon against their debtors? In my opinion, it is mainly an effect of scale.

Why is this happening? Well, for at least a dozen years, granting loans has had little in common with the classic banking I encountered in the 1990s. Lending is governed by chance or an ambitious sales plan to be implemented. As a result, a huge number of borrowers fail to repay their installments. This forces banks to simplify and standardize their debt collection and execution procedures as much as possible.

These procedures do not involve searching for property that recently belonged to the debtor. It is also true that the vast majority of our compatriots who are in financial trouble are passively waiting for events to unfold, not getting rid of their assets before the expected execution. Very few people do it. But thanks to this, the chance that such an action will be completely successful is really very high.

However, the situation is not so different when the creditor is a natural person or an entity that really wants to recover the debt from the debtor – we are talking about amounts awarded by the court. In such situations, as my experience also shows, creditors often resort to this weapon (i.e. they use the actio pauliana against the debtor) who has sold his assets in order to protect him from bailiff enforcement.

Therefore, when analyzing the question of whether to give the property to creditors without a fight or to protect it at all costs, it is obvious that the latter option must always be chosen. In this case, it is enough to make a simple profit and loss calculation: after all, by securing my assets, I can only win. Moreover, the probability that something will go wrong is very small. However, we must always remember: let’s do it professionally!

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Krzysztof Oppenheim: financial expert, associated with banking since 1993. He specializes in, among others, in anti-debt collection, assistance for Swiss franc borrowers and indebted entrepreneurs, as well as in consumer bankruptcy. Vice-chairman of the Working Team for Bankruptcy and Restructuring operating within the Entrepreneurs’ Council of the Ombudsman for Small and Medium-sized Entrepreneurs. Founder of the Debtor’s Rights Foundation “Debtor also Man”. He has been running an anti-debt collection law firm since July 2016.