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Priority in cases involving a mortgage that has been preceded by attachment and succeeded by bankruptcy of the debtor: a puzzle for advanced players

Priority in cases involving a mortgage that has been preceded by attachment and succeeded by bankruptcy of the debtor: a puzzle for advanced players

Priority in cases involving a mortgage that has been preceded by attachment and succeeded by bankruptcy of the debtor: a puzzle for advanced players

08.10.2015 NL law

What is the priority of recourse in cases where a mortgage has been preceded by an attachment on the same asset and succeeded by bankruptcy of the debtor? In the matter of FGH Bank N.V. versus Aannemingsbedrijf Fraanje B.V. (ECLI:NL:GHDHA:2015:281), the Court of Appeal of The Hague ruled that the attachor has priority over the mortgagee, thereby following previous case law by the Dutch Supreme Court. Many legal academics do not accept that this is the solution to the priority puzzle. This blog purports to briefly explain why.

If an attachment is succeeded by an act of disposition (beschikkingshandeling), like the encumbrance of an asset with a mortgage, Section 505 (2) Dutch Code of Civil Procedure (“DCCP“) provides that this act of disposition cannot be invoked against the attachor who attached the asset prior thereto. In the case discussed here, this means that the mortgagee cannot enforce its right of mortgage – particularly the associated right of priority  – against the attachor.

In Ontvanger/Amro (ECLI:NL:HR:1985:AC9072, paragraph 3.4) the Dutch Supreme Court held that the mortgagee in cases where the mortgage is both preceded and succeeded by an attachment in fact ranks behind the first attachor. Following Banque de Suez/Bijkerk q.q. (ECLI:NL:HR:1988:AC3064, paragraph 3.1), this also applies in the event of bankruptcy of the debtor, albeit that the amount of the claim for which the asset was previously attached is added to the bankruptcy estate .

In the case at hand, the Court of Appeal ruled that the mortgagee ranks behind the attachor in accordance with Banque de Suez/Bijkerk q.q. This leaves one wondering whether this application of Section 505 (2) DCCP is correct. As pointed out in legal literature, the fact that the mortgagee does not rank ahead of the attachor does not automatically result in the attachor ranking ahead of the mortgagee. In other words: not ranking ahead does not necessarily mean ranking behind. The attachor can ignore the mortgagee’s right of mortgage. The attachor is not, however, in the position to ignore the mortgagee as co-creditor of the debtor. Yet that is basically what the Court of Appeal of The Hague does by following the Dutch Supreme Court in ranking the mortgagee behind attachor.

The preceding attachor may ignore the subsequent right of mortgage, not the mortgagee itself. Consequently, the mortgagee does not rank ahead of the attachor. Nothing more, nothing less. Hence, arguably the better view would be that attachor and the mortgagee are treated on an equal footing as to the amount of the claim the asset was attached for prior to the encumbrance of the asset with the mortgage. In the event of bankruptcy of the debtor, the mortgagee would rank pari passu with all ordinary creditors as to that amount. We may now only hope for a mortgagee brave enough to challenge the Dutch Supreme Court regarding its long standing case law on this point.

The post Priority in cases involving a mortgage thas has been preceded by attachment and succeeded by bankruptcy of the debtor: a puzzle for advanced players is a post of Stibbeblog.nl

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