Assignment by creditor of the right to claim under principal and mortgage obligations in favour of different persons is not a ground for termination of mortgage obligation - SC GC

The rights of claim under the principal obligation and the rights of claim under the mortgage obligation as a security for the principal obligation cannot be simultaneously assigned by the creditor in favour of different persons. However, the occurrence of such an anomaly cannot be interpreted as a ground for termination of the mortgage obligation.

Such a conclusion was formulated by the Grand Chamber of the Supreme Court.

According to the circumstances of the case, the bank and the borrower entered into a loan agreement and a mortgage agreement. Subsequently, the bank entered into an agreement with a financial company to assign the right of claim and all related rights under the loan and mortgage agreements. However, a court decision restored the bank's status as a mortgagee.

In connection with the introduction of the temporary administration and the subsequent liquidation of the bank, the plaintiff and the bank entered into agreements on the assignment (sale and purchase) of the right to claim under the loan and mortgage agreements at an electronic auction.

In view of the improper performance of the obligations, the plaintiff filed a lawsuit against the borrower to foreclose on the mortgaged property.

The borrower filed a counterclaim, in particular, to declare the mortgage agreement terminated, arguing that the plaintiff had not acquired the rights of a mortgagee due to the nullity of the assignment agreement under the mortgage agreement, which was not notarised. In other words, the assignment of rights under the mortgage agreement did not take place simultaneously with the assignment of the right to claim under the loan agreement, as required by Article 24 of the Law of Ukraine ‘On Mortgage’.

Considering the dispute, the Grand Chamber of the Supreme Court noted that, as a general rule, the assignment of the right of claim under a mortgage agreement must be made simultaneously with the assignment of the right of claim under a loan agreement. The rights of claim under the principal obligation and the rights of claim under the mortgage obligation as a security for such principal obligation cannot be assigned by the lender in favour of different persons at the same time, since the law does not provide for an ‘abstract mortgage’ (without connection with the principal obligation due to the lender).

Violation of the procedure for transferring the mortgage right to its transferee, which has resulted in such an anomaly as an ‘abstract mortgage’, does not terminate the mortgage within the meaning of Article 17 of the Law of Ukraine ‘On Mortgage’.

The legislation establishes a mandatory requirement for notarisation of a mortgage agreement and an agreement on assignment of rights under such an agreement.

In the context of the case, the Grand Chamber of the Supreme Court noted that the parties to the agreement on assignment of rights under a mortgage agreement concluded as a result of the auction are not deprived of the opportunity to notarise it in the future, as well as to register information on such assignment.

In addition, according to the State Register of Real Property Rights, the mortgagee of the apartment is a financial company. At the same time, there is a court decision that refuted the presumption of the latter's registration status as a mortgagee. This decision takes precedence in determining whether the bank or the financial company is the real mortgagee. In this context, the legal basis of the mortgage right should be assessed first and foremost, rather than its formal registration in the relevant state register, as the justus titulus prevails in determining who is the rightful holder.

Thus, the bank is the proper mortgagee in this case, as its title has been confirmed by a court decision, although this decision has not yet been enforced in terms of restoring the record of the bank's mortgage. In contrast, a financial company that has a formal registration of a mortgage is not a proper mortgagee, as there is no legal basis for this.

Given the factual circumstances of this case, the Grand Chamber of the Supreme Court concluded that the mere failure to notarise a transaction concluded as a result of an auction for the sale of property (assets) of a bank being liquidated, which was conducted in compliance with the requirements of the law, cannot indicate the voidance of the auction as a whole. Instead, it is actually a failure to formalise the contractual relationship between the bank and the successful bidder. This does not terminate the mortgage and does not deprive the primary mortgagee (original lender) of the right to finalise the contractual relationship, enter into a notarised agreement and enter information on the assignment of the right to claim under the mortgage agreement in a certain state register in case of execution of a court decision confirming its right as a mortgagee and entry in the state register of the right to mortgage the right to complete the bidding procedure.

Resolution of the Grand Chamber of the Supreme Court of 22 May 2024 in case No. 754/8750/19 (proceedings No. 14-202цс21) - https://reyestr.court.gov.ua/Review/119583712.

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.