The Condition of the Lenders' Intent to Harm in Fraud

LEGAL INSIGHT

(update 2021 - in red characters the updates of the article)

Republished from www.lawnet.gr

April 2021

George Kefalas, LL.M. (mult.), Μ.Sc.

Summary: In a previous article we addressed the issue of intent to harm creditors in civil trespass, setting out the defenses that a defendant may raise in a burglary action. The aggressive actions of banks and management companies have resulted in an enrichment of the relevant case law in recent years, the findings of which are set out in this note. With the gradual lifting of the suspension of courts and executions, the relevant issue has become more topical than ever.

Α. Introduction

In our previous articles we have analysed the possible lines of defence that a defendant in a burglary action may invoke, which may refer to formal defects in the claim (see here), but also to the lack of the existence of an intention to harm creditors, a prerequisite necessary for the affirmation of an act of fraud. 

In this note, we focus again on the lack of intent to harm creditors, citing judgments and reflections from recent court decisions. 

Β. The intention to harm creditors as a condition for abuse

The possibility of bringing an action for forfeiture (so called, for example, an action brought 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 that the borrower-debtor sold or donated, 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, fraudulent intent on the part of the debtor is required. Whether or not the debtor-borrower acted fraudulently is determined at the time when the asset was transferred. 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. 

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

Our courts are often confronted with the issue of creditor foreclosure, usually following an action by a bank or debt management company 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, 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 facts and allegations that the debtor-defendant in a foreclosure action may rely on in order to prove that there was no intention to harm his creditors at the time of the transfer. In fact, the following are also quotes from the most recent judgments of the courts of substance.

- 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. Thus, according to the recent decision 4418/2019 of the Athens Court of First Instance, the fact that the credit was serviced for another nine months after the transfer was an indication that the transferor did not intend to cause harm. The Larissa Court of Appeal's decision 31/2020, where the credit was still being serviced for more than three years after the transfer, also held the same.

- The solvency of the debtor at the time of the transfer is also critical. 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. Thus, the recent decision 4364/2019 of the Athens Court of First Instance held that the granting of new credit by the bank after the transfer took place contributes to the conclusion that the transferor did not intend to harm. The judgment states verbatim: 'This action proves in any event that even the transferor did not believe and did not even realise the existence of problems in servicing the original credit agreement at that time, otherwise it would not have signed the [...] additional act of granting additional sums of money'. 

- The fact that the bank proceeded to draw up an additional loan deed with the debtor, knowing of the fact of the transfer. The aforementioned decision No. 4418/2019 accepted that: "In this judgment the Court is further guided by the fact that on 18-12-2012, when the additional deed was signed between the creditor and the lending bank, the first defendant had already transferred her real estate to her children, and the relevant deed had already been entered in the public registers of the Land Registry and was therefore known to the lending bank. However, the lending bank did not claim any security in rem for the conclusion of this additional agreement and the renegotiation of the debt. 

- 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 of interest for the purpose of the lender's claim. 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. Relevant are the above mentioned decisions 4418/2019 and 31/2020, as well as 153/2020 of the Piraeus Court of Appeal, which accepted that the fact that the creditor was making payments six months after the transfer is taken into account in favour of the absence of a purpose of harm by the transferor. But also in 4361/2019 of the Athens Court of First Instance it is stated that: "....the lack of intention to harm the creditors [...] is proven, since for a period of four years after the establishment of the expropriation in question, [...] payments of considerable sums of money continued to be made to the mutual account". 

- Another element taken into account in the case law is the cooperation of the creditor with his creditor up to the time of the transfer (and thereafter). Smooth cooperation between the two until the transfer constitutes 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. The decision 153/2020 of the Piraeus Court of Appeal in order to reach its judgment on the lack of intention to harm the guarantor also took into account that: "moreover, in the financial year 2011 the creditor declared a taxable profit of 242,589.58 euros and in the financial year 2012 116,226.47 euros, evidence showing that the company at the time of the transfer under breach was not loss-making". 

- The existence of collateral (mortgage, pledge, lien) also confirms that there was no intention on the part of the debtor to harm the bank. Here it is indeed worthwhile to dwell a little further. 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. The recent decision 4418/2019 of the Athens Court of First Instance, in which: "The fact that, even after the bringing of the action in question and in view of its discussion, the first defendant rushed to adjust its debt to the plaintiff [...] and has paid a significant part of it (debt) by the time of the discussion, is also considered to be a factor, which emphasises that it was not the intention of the first defendant to fraudulently avoid paying its debts". 

D. Conclusion

The increase in bad loans in previous years has led banks and management companies to initiate enforcement proceedings against debtors, and also led to a number of foreclosure actions where assets were found to have been transferred by the debtor. The financial problems caused by the pandemic are bound to increase the number of cases brought before the courts in the near future. The relevant case law is constantly being enriched by a number of decisions, many of which focus on the existence or otherwise of fraud on the part of the debtor, as this is the main argument for rejecting the claim. 

(For more see here and here).