The defendant's defence in civil proceedings for creditor fraud - in particular the requirement of intent to harm creditors

Legal Insight

March 2018 

George Kefalas, LL.M. (mult.), Μ.Sc.

Summary: The increase in the number of bad loans and the intensifying efforts in recent years by banks to collect on their loans have contributed to an increase in litigation involving lender foreclosure. This note discusses in detail the issue of the purpose of harming creditors, a condition, the existence of which the lender (the bank) must invoke and prove. It presents the elements and allegations that can be raised by the defendant (debtor) in such an action and lead to its dismissal and discharge from liability. 

Α. Introduction

About a year ago, an article was published on our website entitled "The defendant's defense in the civil trial of lender embezzlement (Pauline action)". The article focused on the formal defects in the claim which the defendant can rely on and which can lead to its dismissal as inadmissible. 

However, despite the fact that the formal requirements of an action for defraud (burglary in legal terminology) are indeed very high, with the result that it is often dismissed on formal grounds, it is not excluded that the creditor's action may have been correctly drafted from a formal point of view and that the court may therefore be called upon to enter into the substance of the case. Such cases have led to the drafting of this note, which examines the most appropriate plea that a defendant in such a case can raise in order to obtain relief, namely the dismissal of the action. Focusing on cases where the creditor is - as is usually the case - a credit institution, we present allegations which our courts have accepted as establishing a lack of intention to harm the creditors and, therefore, a failure to satisfy the factual rule of law that provides for the possibility of the transfer of an asset being held to be fraudulent. 

Β. The intention to harm creditors as a condition for an attachment

The possibility of bringing an action for forfeiture (the name given to an action brought, for example, by a bank against a debtor who has transferred an asset and is now unable to service his debt) is provided for in Articles 939-942 of our Civil Code (CC). In particular, Article 939 states that: "Creditors have the right to demand, under the terms of the following articles, the breaking of any expropriation made by the debtor to their detriment, if the remaining property is not sufficient to satisfy them". Thus, for example, a bank may bring an action to "frustrate" the transfer of an asset sold or donated by the borrower-debtor, if the borrower made the transfer with the intention that the bank would not be able to recover its claim on the loan and its other property is insufficient to satisfy it. 

It is therefore necessary, in order for an action for fraud to be admissible, for the plaintiff-creditor to prove that the debtor intended to injure him, i.e. to make it impossible for him to obtain satisfaction from his other (i.e. other than the transferred asset) property. In other words, the debtor must have acted fraudulently and, according to the view still prevailing in the case-law, directly. In other words, the debtor must know - and not merely accept as a possibility - that the transfer of the asset will result in the bank being unable to satisfy the bank from the rest of his assets. Whether or not the debtor-borrower has acted fraudulently - and in particular directly - is determined at the time of the transfer of the asset. In other words, it is decisive whether at that time he knew that the transfer would result in the bank being unable to meet its obligations. If, on the contrary, he did not know this but merely foresaw it as a possibility, then, according to the prevailing opinion, the bank's claim cannot be upheld. 

C. Evidence to prove that the debtor did not intend to harm the creditor

Our courts are often confronted with the issue of lender fraud, usually following a bank's lawsuit against a borrower. In many of these cases, the court is called upon to rule on the defendant's claim that, at the time the transfer of the asset took place, he did not intend to harm the bank by it, but that, on the contrary, on the basis of his view of his financial situation at the time, he reasonably believed that the bank would not be harmed in any way. From our review of the case law we have compiled and set out below the elements and allegations that the debtor-defendant in an action for fraud can rely on in order to prove that there was no intention to harm his creditors at the time of the transfer. 

- A first element relates to whether, at the time of the transfer of the asset, the debtor was or was not regularly servicing his debt to the bank. If the debt was regularly serviced, it is evidence that the debtor did not act with the intention of harming the bank. 

- The solvency of the debtor at the time of the transfer is also crucial. For example, the fact that the bank, at the time of the transfer, considered the debtor to be solvent or, even more so, that it granted him/her a new loan(s) at a time after the transfer, contributes to the conclusion that the debtor did not intend to harm the bank. 

- Particularly in the case where the debtor has been granted credit by the bank up to a credit limit (e.g. a mutual account allowing him to draw up to EUR 1,000,000), the question of whether or not the debtor had exhausted this credit limit is also relevant for the purpose of harming the creditor. Thus, for example, if at the time of the transfer of the asset the debtor had a credit limit of up to EUR 500 000, of which only EUR 200 000 had been disbursed, this fact also contributes to the conclusion that the debtor did not act with the intention of harming the bank.

- The fact that after the transfer of the asset the debtor-borrower continued - even for a short period of time - to make payments to service his debt is taken into account by the case-law as an indication that there was no intention to harm the bank. 

- Another element taken into account in the case law is the cooperation of the creditor with the creditor up to the time of the transfer (and afterwards). Smooth cooperation between the two until the transfer is an indication of the absence of an intention to harm on the part of the transferring debtor-borrower. 

- The financial and asset situation of the debtor at the time of the transfer of the asset also plays an important role. Especially in our country, transfers that took place especially before the consequences of the economic crisis crystallized have been found not to be fraudulent, when it is proven that the debtor's financial situation has dramatically deteriorated due to the crisis, while at the time of the transfer such a deterioration could not yet be foreseen. 

- The existence of collateral (mortgage, lien, pledge) also implies that the debtor did not intend to harm the bank. It is worthwhile to dwell on this point. Thus, if the loan was secured by a pledge on the debtor's property, which at the time of the transfer of the asset had a high commercial value, which subsequently declined, the decisive factor - in determining whether the debtor intended to harm the bank - would be the value as assessed at the time of the transfer. Because within the debtor's knowledge at the time of the transfer, that value existed. 

- The same is true with regard to any other property of the debtor at the time of the transfer, which is now being challenged as being in breach of contract. Let us take the example of a borrower who transferred a property to his child under parental responsibility in 2009. At that time he owed a loan balance of EUR 300,000, but also owned other real estate worth EUR 400,000. The fact that today the value of that property has fallen sharply and is estimated at EUR 150 000, for example, does not mean that there was any intention to harm the bank. For, at the time the parental benefit was drawn up, the debtor could not have been aware of the subsequent sharp fall in the value of the property. 

- Our case law has also held that a transfer made by a debtor to a relative, following the diagnosis of the debtor with a serious illness, was not intended to harm the creditor, but to secure the relative and avoid the higher inheritance tax. 

- Finally, the debtor's conduct subsequent to any resulting financial incapacity is also crucial. Thus, it has been held by case law that the fact that 'negotiations took place between the parties for the repayment of the debt [constitutes] conduct that contradicts the plaintiff's [bank's] allegations of fraudulent expropriation of its assets to its detriment', while the creditor's failure to bring an action for the offence of misappropriation (for the criminal offence of misappropriation, cf. See our article "The possibilities of defence in the crime of creditor's embezzlement") contributes to the lack of subscription in the person of the debtor of the element of fraudulence. 

D. Conclusion

Only one of the several conditions for establishing the civil "offence" of fraud has been set out above, that of the purpose of harming creditors. The allegations that the defendant can propose and the evidence that he can adduce to prove that at the time of the transfer he was not motivated by such a purpose to harm the bank are plentiful. Consequently, even if the creditor's claim is not defective in form, the debtor still has a number of claims in its quiver that can lead to the claim being dismissed, which is now in substance. The foregoing list of allegations is in no way limiting, but reflects in broad strokes allegations that have been before our courts and ultimately led to the vindication of the defendant. From the consideration of all the evidence cited and other evidence the court will be led to the conclusion; the stakes are high and the possibilities of the debtor's defence are equally great.

(for more see here and here).