LAW FIRM DIRECTORY

Dispute Resolution

VALENTIN GVOZDIY,
managing partner and attorney at GOLAW Law Firm

EKATERINA MANOILENKO,
partner and attorney at GOLAW Law Firm

Foreclosure not inevitable

New legislation provides for various ways of securing and satisfying the claims of creditors, but regulates with caution the area of foreclosure on mortgaged property. This allows unscrupulous debtors to avoid their obligations and responsibility for failure to perform their obligations. Creditors set their hopes on legislative changes scheduled to come into force from January 2019

,

The crisis in the Ukrainian economy has led to a massive non-return of borrowed funds and, as a result, to an increase in the number of credit-related disputes. Although the pledge (mortgage) agreement is still one of the most common ways of securing monetary obligations, its availability does not guarantee the creditor that its claims against the debtor will be satisfied through this collateral.

Both the shortcomings of Ukrainian legislation and the active actions of unscrupulous debtors are obstacles to foreclosure on mortgaged property. And while the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Concerning the Restoration of Lending", aimed at protecting the rights of creditors and mortgage holders, was scheduled to come into force at the start of 2019, debtors continue to use various means to prevent debt recovery and to avoid liability for failing to fulfill their obligations.

 

On the way to foreclosure

The fantasy of debtors has no limits when it comes to creating obstacles. Avoidance of receiving a warning from the creditor on its intention to foreclose on mortgaged property, imposition of additional encumbrances on mortgaged property, sale of mortgaged property to third parties — these are just some of the methods they use.

Reconstruction, division, change of the area and functional purpose of such property, assignment of new postal addresses to mortgaged property are also popular ways of releasing real estate from pledge, resulting in a new property that is not specified in the mortgage agreement or court decision with respect to satisfaction of the mortgage holder claims.

In accordance with the provisions of the Law of Ukraine "On Mortgage", the Supreme Court of Ukraine (SCU) becomes the defender of creditors rights in most cases.

For example, in the court ruling dated July 6, 2016 in case No. 6-1213цс16, the Supreme Court of Ukraine concluded that the disputed apartment is not a newly-created property.

Similar conclusions were made by the Supreme Court (SC) in its ruling dated April 18, 2018 in case No. 910/4650/17, where it stated that a newly-created real estate item can only be considered an item created without reference to another, already existing real estate item, if it was created without using its constituent structural units. That is, it is impossible to recognize the building as a newly-created real estate item if it consists of a previously existing real estate item with modified external and/or internal characteristics.

 

Foreclosure practice

When making a decision on foreclosure on a mortgaged property, the creditor should determine the method of foreclosure. Article 33 of the Law of Ukraine "On Mortgage" envisages that foreclosure on a mortgaged property shall be carried out on the basis of a court ruling, a notary writ of execution or an agreement (mortgage clause) on satisfying the requirements of the mortgage holder.

Registration of the creditor's title to a mortgaged property is, at first glance, the fastest and simplest option to satisfy the property claims at the expense of the mortgaged property. At the same time, many banks and financial institutions, foreclosing on mortgaged property, had earlier appealed to a court with requirement to recognize their title to a mortgage property.

Until 2016, such claims were, as a rule, satisfied by the courts. The crucial point was the adoption by the Supreme Court of Ukraine of a ruling dated March 30, 2016 in case No. 6-1851цс15. In its ruling, the Supreme Court of Ukraine arrived at the conclusion that the possibility of emergence of title on the basis of a court ruling is provided for only in Articles 335 and 376 of the Civil Code of Ukraine.

In 2017, the SCU held an ambiguous position regarding the recognition of a creditor's title to a mortgaged property. On the one hand, the Supreme Court of Ukraine emphasized that the transfer of title to a mortgaged property is an extrajudicial way of foreclosure and shall not be applied by a court. On the other hand, it repeatedly emphasized that although courts had erroneously applied the provisions of the law, they correctly resolved the dispute to all intents and purposes, protecting the rights of the creditor violated by the borrower’s failure to fulfill mortgage-backed liabilities and, therefore, did not cancel the ruling in favor of mortgage holders. This position is set out in the rulings of the Supreme Court of Ukraine dated April 27, 2017 in case No. 756/16227/13-ц, dated September 13, 2017 in case No. 761/32495/­15-ц, dated August 9, 2017 in case No. 466/8679/13-ц.

The Supreme Court seems to have put an end to discussion of this question. The Grand Chamber of the Supreme Court in its ruling dated March 21, 2018, in case No. 760/14438/15-ц, arrived at the conclusion that the transfer to a mortgagee of a title to mortgaged property in accordance with Articles 36, 37 of the Law of Ukraine "On Mortgage" is an extrajudicial resolution which shall be carried out by agreement of the parties without going to court. At the same time, the courts a quo, following the results of consideration of this case, refused to satisfy the claims in default of jurisdiction. At the same time, the Grand Chamber of the SC supported the position of the Supreme Court of Ukraine that there are three ways to satisfy a creditor’s claims secured by a mortgage through foreclosure on mortgaged property: a judicial way based on a court ruling (in particular, by selling a mortgaged property on the basis of a court decision) and two extrajudicial ones based on a notarial writ of execution and under an agreement on satisfying the requirements of the mortgage holder. In turn, extrajudicial means are implemented by transferring to a mortgage holder a title to the mortgaged property or by granting it the right to sell the mortgaged property on its own behalf to any third party.

 

Follow-up demands of the creditor

By choosing an extrajudicial way of foreclosure on mortgaged property, the creditor risks remaining without the capability to recover from the debtor the amount of debt not covered by the mortgaged property. Thus, part 4 of Article 36 of the Law of Ukraine "On Mortgage" envisages that after the completion of an extrajudicial settlement, any subsequent claims by the mortgage holder regarding the debtor’s fulfillment of its basic obligation shall be invalid, which, in turn, has caused many legal fights, since in practice the value of the collateral does not always cover the amount of debt owed even in its financial part.

The Supreme Court has not yet formed an unambiguous position in this regard. Quite a lot of discussion were caused by the Supreme Court ruling dated March 15, 2018 in case No. 927/84/16, which many debtors interpret in their favor although, in our opinion, their arguments are decontextualized.

It is worth recalling that the changes relating to the restoration of lending are aimed at resolving this controversial issue, since they imply that after the completion of an extrajudicial settlement, any subsequent requirements of the mortgage holder regarding the execution by the debtor – legal entity or debtor – individual entrepreneur of its primary obligation shall be valid unless otherwise specified in the mortgage agreement, loan agreement or agreement on satisfying the requirements of the mortgage holder.

Despite the positive changes introduced by the new Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Concerning the Restoration of Lending", creditors continue to bear all the aforementioned risks and, therefore, should take them into account when concluding agreements and providing loan funds.

In mortgage and pledge agreements, it is important to provide for all possible methods of foreclosure, as well as to stipulate a detailed procedure for foreclosure. In addition, banks and financial institutions should constantly monitor the legal status of collateral and information on the debtor and its activities.