The assignment of the right to claim under a loan agreement to a natural person contradicts the provisions of the Civil Code of Ukraine - The Grand Chamber of the Supreme Court

The assignment of the right to claim under a loan agreement to a natural person is in contradiction with the provisions of part 3 of Article 512 and Article 1054 of the Civil Code of Ukraine, since obligations under a loan agreement are characterized by a special entity, namely a creditor - a bank or other financial institution.

If a bank assigns its right to claim under loan and mortgage agreements to a natural person, who then registers ownership of the mortgaged property and assigns it to a third party, the mortgagor, as the owner of the property, has the right to reclaim it from the ultimate purchaser. In order to reclaim property, the law does not require the invalidation of assignment agreements under loan and mortgage agreements, the invalidation and cancellation of a notary's decision to register ownership under a mortgage agreement, or the invalidation of a contract for the sale and purchase of real estate to the ultimate purchaser.

This was emphasized by the Grand Chamber of the Supreme Court.

In this case, three individuals (plaintiffs) owned an apartment as private property. The bank and one of the plaintiffs entered into a loan agreement. To ensure the fulfillment of obligations under this agreement, the bank entered into a mortgage agreement with the plaintiffs. The subject of the agreement was an apartment owned by the plaintiffs as private property.

Later, the bank assigned its claim under both agreements to another bank, which in turn assigned it to a financial company.

The financial company and the individual (defendant) entered into assignment agreements under the loan agreement and the mortgage agreement. On the basis of these agreements, a private notary registered the defendant's ownership of the apartment that was the subject of the mortgage. Several months later, the defendant entered into a purchase and sale agreement with another individual for the apartment at issue.

In their lawsuit, the plaintiffs claimed, inter alia, that the disputed agreement between the financial company and the defendant was a factoring agreement by its legal nature and, therefore, violated the provisions of Ukrainian civil law regarding the parties to such an agreement.

The courts of first and appeal instances dismissed the claim, stating that the financial company and the defendant had entered into an assignment (cession) agreement, which meant that the defendant, as a natural person, had the right to be a party to such a transaction.

Instead, the Grand Chamber of the Supreme Court found that the conclusion of the courts of previous instances was erroneous.

The Grand Chamber of the Supreme Court reaffirmed its legal position that a natural person of any status is not entitled to provide financial services, in particular under a loan agreement, as such services are provided only by specialized institutions, such as banks or other institutions authorized to conduct financial transactions and registered in the register of financial institutions. The assignment of the right to claim under a loan agreement to a natural person is in contradiction with the provisions of part 3 of Article 512 and Article 1054 of the Civil Code of Ukraine, since obligations under a loan agreement are characterized by a special entity, namely a creditor - a bank or other financial institution.

The same applies to the assignment of a mortgage if it secures the fulfillment of loan obligations.

As mentioned above, this right was transferred from the bank to a natural person as a result of successive assignment agreements under the loan agreement concluded with the plaintiff.

Since the assignment of the right to claim under the loan agreement to a natural person is contrary to the provisions of part 3 of Article 512 and Article 1054 of the Civil Code of Ukraine, the financial company could not assign the right to claim to a natural person.

Nor could the right to claim be transferred to the defendant, a natural person, under either the loan agreement or the mortgage agreement, so there were no grounds for state registration of his ownership of the disputed apartment. Likewise, he had no legal reason to alienate this apartment to another person. Thus, the claim for the reclamation of this property from the possession of the final purchaser for the benefit of all the plaintiffs - co-owners of the apartment - is justified and must be satisfied.

In order to reclaim property, the law does not require the invalidation of assignment agreements under loan and mortgage agreements, the invalidation and cancellation of a notary's decision to register ownership under a mortgage agreement, or the invalidation of a contract for the sale and purchase of the apartment to the ultimate purchaser.

In addition, the Grand Chamber of the Supreme Court noted that Ukrainian legislation provides the ultimate purchaser with additional effective legal remedies in the event that the apartment is reclaimed from his possession. Such a purchaser may restore his or her right, in particular, by filing a claim against the person from whom he or she purchased the apartment, including a claim for recovery of its value.

The Resolution of the Grand Chamber of the Supreme Court of 8 November 2023 in case No. 206/4841/20 (proceedings No. 14-55цс22) - https://reyestr.court.gov.ua/Review/115598838.

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