Selling a Non-Existent Right of Claim Does Not Give Rise to Legal Effects - SC Grand Chamber

PJSC "Ukrainian Professional Bank" entered into loan agreements No. 1 and No. 2 with borrowers. In order to secure the loan agreements, mortgage agreements were concluded, according to which land plots were transferred to the mortgage.

On May 27, 2015, the guarantor under the guarantee agreement transferred funds to repay the loan under loan agreement No. 1. PJSC "Ukrainian Professional Bank" issued a certificate to the borrower confirming that there was no debt under loan agreement No. 1. These circumstances were established by the judgment of the Commercial Court in the Kyiv region in case No. 911/3878/15, which refused PJSC "Ukrainian Professional Bank" to satisfy the claim for debt recovery under loan agreement No. 1.

After the payment of funds, the encumbrance of land plots with mortgages to secure loan agreement No. 1 was terminated.

On May 26, 2015 PJSC "Ukrainian Professional Bank" entered into a collateral agreement of property rights with another bank, according to the terms of which it transferred property rights under loan agreement No. 2. These circumstances were established by the judgment of the Kyiv Commercial Court in case No. 910/22730/15, which refused PJSC "Ukrainian Professional Bank" to satisfy the claim for debt recovery under loan agreement No. 2.

The encumbrance of land plots with a mortgage to secure loan agreement No. 2 was subsequently also terminated as a result of the full performance of the parties' obligations.

"Safe Invest" LLC became the new owner of the land plots on which mortgage encumbrance under loan agreements No. 1 and No. 2 was terminated.

On May 28, 2015, PJSC "Ukrainian Professional Bank" was classified as insolvent, there was appointed an authorized person of the Deposit Guarantee Fund (the Fund), and on August 28, 2015, the banking license was revoked and the liquidation procedure was initiated.

In the course of its activities, the Fund reported that it had discovered transactions that were void in accordance with the provisions of Art. 38 of the Law of Ukraine On the System of Guaranteeing Deposits of Individuals, in particular, the guarantee agreement (under which the loan was paid out under loan agreement No. 1) and the collateral agreement (under which PJSC "Ukrainian Professional Bank" transferred property rights under loan agreement No. 2).

On March 30, 2020, the Fund organized electronic tenders for the sale of a pool of PJSC Ukrainian Professional Bank’s assets. The asset pool included, in particular, property rights under loan agreements No. 1 and No. 2.

"FC Investohills Vesta" LLC became the winner of the tenders, as a result of which it and PJSC "Ukrainian Professional Bank" concluded agreements on the concession of claim rights and the sale and purchase of property rights. According to the concluded agreements, the rights of claim and other property rights were transferred to "FC Investohills Vesta" LLC, in particular, under loan agreements No. 1 and No. 2.

On June 24, 2020, "FC Investohills Vesta" LLC sent a request-notification to "Safe Invest" LLC about the payment of debt under loan agreement No. 2.

"Safe Invest" LLC filed a lawsuit against PJSC "Ukrainian Professional Bank" and "FC Investohills Vesta" LLC to invalidate the open tenders, the protocol of the electronic tender and the contract for the sale of property rights concluded in the result of the tenders held by the Fund. "Safe Invest" LLC substantiated its claims by the fact that at the time of the auction and the conclusion of the contested agreement, PJSC "Ukrainian Professional Bank" had no rights of claim under mortgage agreements, since mortgage encumbrances of land plots under mortgage agreements had been terminated back in 2015.

The courts of first and appellate instances granted the claim. The SC Grand Chamber cancelled the judgments of the courts of first and appellate instances and adopted a new decision - on the refusal to satisfy the claim.

Legal conclusions reached by the SC Grand Chamber in the case

1. Distinguishing between factual circumstances and circumstances of a prejudicial nature. The binding nature of judicial decisions for successors

The SC Grand Chamber noted that the court decisions in cases No. 911/3878/15 and No. 910/22730/15 contained both the factual circumstances established by the courts, which have a prejudicial nature, and the legal assessment provided by the court to such circumstances. At the same time, the SC Grand Chamber emphasized that since the dispute on debt recovery by PJSC "Ukrainian Professional Bank" as a claimant of debt under loan agreements had already been resolved by court decisions in cases No. 911/3878/15 and No. 910/22730/15 (the claims were denied), these decisions were also binding for the legal successors of PJSC "Ukrainian Professional Bank" in disputed legal relations.

Retrial of a case already resolved by the court, on the grounds that the plaintiff waived the right to claim, which he had requested the court to enforce, on the claim of a person to whom the right to claim had been assigned either by the plaintiff himself, or by making a chain of concessions of claim rights, is unacceptable.

2. If as a result of the tender a contract of sale is drawn up, then it is the contract that can be appealed in court

Commenting on the requirements for invalidation of open tendering (auction) and the electronic auction protocol, the SC Grand Chamber stated that the tendering was a transaction. If it results in a contract of sale, the contract may be appealed, whereas claims for invalidation of the tender (auction) and the electronic auction protocol are not appropriate and effective remedies.

3. A person who has acquired property rights sold as a result of an auction cannot re-register the right of mortgage without recourse to court

The SC Grand Chamber drew attention to the fact that it was impossible for the state registrar to commit extrajudicial actions aimed at depriving the plaintiff of the right of ownership of the property, because:

• if there is no consent of the owner of the property to re-registration of the right to mortgage, it can be carried out only by a court decision;
• the State Register of Real Estate Rights contains information on the initial state registration of the right to mortgage on the basis of the relevant contract and on the termination of such right. The re-registration of the right to mortgage based on such a contract contradicts this information.

Under such conditions, the state registrar must refuse to re-register the mortgage right.

Given the above, the satisfaction of the plaintiff’s claim to invalidate the disputed contract would not protect his right to property. Such a right is duly protected.

4. Conditions under which the Fund may transfer the rights of claim under loan agreements to another person

One of the key issues for resolving this case was to establish if PJSC "Ukrainian Professional Bank" had / didn't have the rights of a creditor under loan agreements.

The SC Grand Chamber reiterated its legal conclusion (in particular, set out in the resolution of the SC Grand Chamber dated May 16, 2018 in case No. 910/24198/16) on the legal nature of the order of the authorized person of the Fund and its legal consequences for third parties - such an order is an internal administrative document of the bank valid within this legal entity. Orders (decisions) on nullity of transactions may not establish obligations for third parties, including bank counterparties. Therefore, the mere fact of issuing an order on the nullity of the transaction cannot be considered a violation of the rights of the other party to the transaction and does not create any obligations for the counterparties of the bank.

Consequently, the Fund cannot independently apply the consequences of the nullity of the transaction. It follows that the Fund had to recourse to court with a claim for the application of the consequences of null and void transactions.

The rights of a creditor in an obligation are transferred to another person (an acquirer, a new creditor) if the agreement on the concession of claim rights with such a person is concluded precisely by the creditor. Therefore, if such an agreement was concluded by a person who does not have the right to claim for any reason (for example, if the right to claim was previously assigned to a third person or if the right to claim does not exist at all, in particular in connection with the termination of the obligation to perform), that is if this person is not a creditor, then the rights of the creditor in the obligation are not transferred to the acquirer.

In view of the above, the SC Grand Chamber stated that at the time of the conclusion of the contract for the sale of property rights between PJSC “Ukrainian Professional Bank” and "FC Investohills Vesta" LLC, PJSC “Ukrainian Professional Bank” did not have the rights of a creditor in obligations under the loan agreements.

5. The agreement may be declared invalid in accordance with part 1 of Art. 203 of the Civil Code of Ukraine if there are shortcomings in its content, but not in the subject composition

The courts of first and appellate instances declared the agreement invalid on the basis of the provisions of part 1, Art. 203 of the Civil Code of Ukraine, according to which the content of the transaction cannot contradict this Code, other acts of civil legislation, as well as the interests of the state and society, its moral principles. At the same time, the provisions of part 1, Art. 203 of the Civil Code of Ukraine directly envisage that they apply specifically to the content of the transaction (the totality of its terms), and not to its subject composition.

In case a person assigns a right of claim that does not belong to him, there is no subject vested with the right to such assignment in the legal relationship. According to paragraph 1, part 1 of Art. 512 and Art. 514 of the Civil Code of Ukraine, in this case the replacement of the creditor in the obligation does not take place. Similarly, the assignment of a terminated right of claim (i.e. a property right of claim that does not exist at the time of the conclusion of the relevant agreement with any subject) also does not create any legal consequences for the person - the owner of the property encumbered with a mortgage.

6. Invalidation of a sale and purchase agreement is an ineffective remedy if the property is held by a third person who is not a party to the agreement

The courts of previous instances also established that "FC Investohills Vesta" LLC had sold the relevant property rights to "FC Assisto" LLC. The SC Grand Chamber stresses that challenging a chain of agreements for sale and purchase of property rights (or other transactions) is not an effective remedy. Under such circumstances, the satisfaction of the stated claim for the invalidation of the contract of sale and purchase of property rights will not lead to the renewal of the rights of the plaintiff.

7. The rights of the property owner (plaintiff) are duly protected in accordance with the law, and any person cannot deprive the plaintiff of the right of ownership to land plots without a court decision. In order to protect the interest in legal certainty, the plaintiff may file a claim, in particular for recognizing the right of mortgage as absent

In the context of determining the appropriate and effective remedy under these circumstances, the SC Grand Chamber remarked that the claim for recognition of the transaction as invalid is a way to protect the rights of the plaintiff, and not a way to protect the interest in legal certainty claimed by the plaintiff.

At the same time, the owner of the property is not deprived of the right to apply with a demand, in particular, to recognize the right of mortgage as absent, and it is this method of protection that can be appropriate and effective in disputable legal relations. However, the above does not mean that the plaintiff is obliged to use this method of protection, since he is duly protected due to the fact that it is impossible for the state registrar to perform actions aimed at depriving the plaintiff of the right of ownership of the property.

The resolution of the Grand Chamber of the Supreme Court of September 15, 2022, in case No. 910/12525/20 (proceedings No. 12-61гс21) – https://reyestr.court.gov.ua/Review/106558719.

This and other legal positions of the Supreme Court can be found in the Database of Legal Positions of the Supreme Court - lpd.court.gov.ua/login.