Standing and involvement of NPL Servicers in legal proceedings

Legal Insight

May 2022

George Psarakis LL.M. (mult.), PgCert

(republished from Euro2Day)

Summary: About 3 years ago we wrote the following: "It is a fact that one of the issues that are of great concern to Greek citizens in the current period is the "red" loans and in particular the transition to the new reality of Loan and Credit Management Companies (Servicers). This note refers to two important procedural parameters of the legal dispute between Servicers and Borrowers" (see here). We now have several court decisions and therefore we can summarize the 4 main problems.

About 3 years ago we wrote the following: "It is a fact that one of the issues of great concern to Greek citizens in the current period is "red" loans and in particular the transition to the new reality of Loan and Credit Management Companies (Servicers). This note refers to two important procedural parameters of the legal dispute between Servicers and Borrowers" (see here). About 3 years ago we wrote the following: "It is a fact that one of the issues that are of great concern to Greek citizens in the current period is "red" loans and in particular the transition to the new reality of Loan and Credit Management Companies (Servicers). This note refers to two important procedural parameters of the legal dispute between Servicers and Borrowers" (see here). We now have several court decisions and therefore we can summarize the 4 main problems that Servicers face in terms of legitimacy when trying to litigate bank claims.

1. A first issue concerns the beneficiary of the collection of the contested debt. In simple terms, when the Servicer legally claims the collection of any amount, should it seek payment of that amount to the Servicer, who is merely administering it, or to the fund that has purchased the receivable? In principle, it is argued that if the Servicer is recognised as having the power to conduct the litigation on behalf of the Fund, it also has the power to demand payment of the claim to itself. So if the debtor wants to stop the auction, for example, he should pay the debt to the Servicer and not to the Fund. Similarly, the cheque for payment preceding the attachment should, as a word at the end of the cheque, order the debtor to pay the Servicer and not the Fund. This issue is of course of enormous practical importance, since if payment is demanded to an unauthorised person, any act of enforcement may be declared void.

Based on the decision of the Athens Court of First Instance No.91/2021, it was held that the Servicer is entitled to demand payment to the Servicer initially, unless otherwise provided for in the relevant power of attorney between Servicer-Fund, in which case it may demand payment to the Fund ("Therefore, it is first of all possible, in accordance with the more specific provisions of the parties, not to award or to award limitedly to E. The power to demand payment to the Fund, even though the Fund is exclusively entitled to conduct the proceedings or accelerate the enforcement in its own name and on behalf of the acquiring company'). 

However, the opposite view has also been argued, i.e. that in principle the Fund is the beneficiary, to whom the Servicer should demand payment of any amount, unless otherwise specified in the Servicer-Fund power of attorney. In this respect, the decision of the Patras Single Court of First Instance No. 8/2022 ruled in this regard: "From the above content of the above powers of attorney, it is clear that the defendant was granted the power to take any action, whether in or out of court, [... ] but she has not been granted the power to accept in any manner whatsoever, either as a direct representative or as an indirect representative or as a person authorised to do so or as a person entitled to receive payment, in the context of any relationship, payments, whether voluntary or involuntary, since such power cannot be derived in her favour without more from the law ...".

a) The copy of the annex from the pawnshop served to the debtor does not include the specific claim at issue but other unrelated claims (see decision of the Thessaloniki Court of Appeal, no. 1236/2021: "However, the aforementioned printed page 5347, which the additional intervener produces by way of reliance, does not concern the opposing party-appellee-appellant-whom the additional intervention ...of ..., since it does not refer to loan agreements concluded by him as a creditor, co-debtor or guarantor, but refers to other creditors or co-debtors of the appellant from consumer and mortgage loans, namely. .... and ..., which are not shown to have any connection with the appellant". See also the decision of the Piraeus Court of Appeal No 78/2020: "In particular, the private agreement produced and invoked on 30 April 2018, which was drawn up between the appellant and the aforementioned company, states, inter alia, that ... but the annex attached to the private agreement mentions various numbers, without any additional information, none of which is connected to the loan agreement in dispute..."). 

b) During the continuation of the enforcement proceedings, the entire management contract is not attached so that the debtor knows exactly what the Servicer's powers are (see No 57/2020 of the Naxos Court of First Instance: "Consequently, it is proven that the contract of 31.10.2018 for the transfer of receivables from T. P. SA to the company named "A. I. D. A. C.", the contract of 30.10.2018 for the management of business receivables, by which the company named "A. I. D. A. C." appointed the defendant as the manager of its receivables, as well as the annex to the contract of 31.1.2018, but only exact copies of the registration at the Athens Pledge Registry [...]'. Cf. See also judgment of the Thessaloniki Single Judge of the Court of First Instance of Thessaloniki No 9462/2021: 'It is presumed that the defendant never and in any way failed, as required by law, to notify, together with the aforementioned cheque for payment or with the aforementioned act of declaration of continuation of the auction and its legal documents, as provided for in Article 925 of the Civil Code and, in particular, did not notify the opposing parties of the entire sale and assignment contracts and the securitised business receivables management contracts relied on in the contested payment order, in the original or in official copies, but only extracts thereof. In this way, the defendants-appellants would be in a position to verify adequately and fully the active legitimacy of the enforcing party and in particular whether the management contract includes the creditor bank's claim, whether the assignment contract has been legally drawn up and whether it provides for the possibility of judicial enforcement of the claim"). 

c) Although the management contract is submitted, the part of the annex thereto which shows that the disputed claim is among those for which the Servicer has assumed the management (see e.g. decision of the Athens Court of First Instance No 560/2021) is not submitted: "This is because the opponent was not notified of the annex to the private agreement of ..., in which, according to this agreement, the loans for which the above-mentioned management company had management authority were listed, in order to determine whether the loan from which the defendant's claim arises was included". Cf. See also the judgment of the Athens Court of First Instance No 4485/2021: "While it is proved by the documents produced that the claim in question was indeed transferred to the foreign company in question, the same is not true of the fact that the defendant took over the management of the claim and therefore, as stated in the main recital, the procedural requirement of proof of the defendant's active legal capacity, which is necessary for the issue of a payment order, is lacking"). 

3. The third issue that arises, and it is quite serious, is that of the possibility for Servicers to carry out enforcement actions (foreclosure, etc.) on behalf of the respective Funds, when the transfer of loan receivables has not taken place under the law on "red loans" of 2015 (Law 4354/2015) but under the law on securitization of receivables of 2003 (Law 3156/2003). Much has been written on this issue (see also here) and it has already been accepted by part of the case law that the transfer under the 2003 law is not sufficient to confer the relevant legal status to the Servicers (see decision of the Athens Court of First Instance No. 4715/2021 and recent article by the Vice President of the Supreme Court: "Consequently, any procedural action attempted on behalf of the special purpose company for the purpose of obtaining claims, e.g. an action, intervention, main or additional, brought by it is inadmissible for lack of legitimacy"). If we accept this view, a serious problem arises in thousands of enforcement and accelerated auction actions as most transfers of "red loans" have not taken place under the 2015 Act but under the 2003 Act. Simply put, i.e., if we accept the above view, in most cases the foreclosure of e.g. a property cannot be carried out by the Servicer but only by the Fund itself.

4. The fourth and final issue is the possibility for the bank, which has already entrusted the management of the loan to a servicer, to exercise itself legal remedies (lawsuits, applications for payment orders, etc.) against the borrower. In other words, the question is this: when a credit institution has entrusted the management of the loan to a servicer, does it retain the right to bring legal proceedings or does it lose it altogether for the sake of the servicer, who alone is entitled to bring the borrower into court? This question arises when the loan has not been transferred to a fund but remains with the bank, which has simply entrusted its management to a servicer. If it is accepted that only the Servicer is entitled to bring the action, then the action brought by the bank will be dismissed as inadmissible and therefore, in the event of, for example, the expiry of any time limits, the bank's right will in the meantime have been lost ('time-barred') without any possibility of re-exercise. The answer to this question is, on the basis of the case-law to date, as follows: the legal status of the servicer is in principle concurrent (parallel) with that of the bank. The bank can therefore also exercise its rights in court if it wishes to do so. If, however, the management contract between the servicer and the bank provides for the exclusive authority of the servicer, then the bank obviously has no such right. Therefore, in the event that the bank initiates legal proceedings against the debtor for a claim whose management has been entrusted to a Servicer, the debtor may raise the corresponding objection and the bank will have to prove the absence of such a clause by producing the management contract itself. 

In conclusion, we should mention the following: the adoption of the relevant provisions for the transfers of "red loans" in 2015 (Law 4354/2015) took place under the pressure of time, in extreme conditions for the survival of the credit system and under the "strict" supervision of the media. After the law was passed, in a second year and away from the spotlight, several amendments were made to the relevant legislative framework, not always to the benefit of borrowers. However, it remains incomplete, with several loopholes, which are sometimes exploited by the relevant Servicers in order to speed up the collection process, sometimes by the borrowers in order to protect their assets.