Enforcement Proceedings and Insolvency Proceedings: Judicial Attribution Impossible

Imagine: you are in Sète, you lent a significant sum to a friend who is a trader, and he guaranteed repayment by a mortgage on his beautiful house with a view of the Étang de Thau. Business goes wrong, your friend is placed in liquidation (collective proceedings that manage all the debts of a bankrupt company). You think: "I will ask the judge for the house to be attributed to me in payment, as allowed by Article 2458 of the Civil Code (text that allows the mortgage creditor to request that the property remain with them in exchange for the debt)." Wrong! The French Supreme Court, in a judgment of 28 June 2017, said no. Why? Because this request is considered an individual action, prohibited in the event of collective proceedings. This article explains everything simply.

This decision directly concerns owners, creditors and real estate professionals. Whether you are in Montpellier, Béziers or elsewhere, understanding what is permitted or prohibited when a debtor is in difficulty is essential to protect your interests. So, what does the French Supreme Court actually say? What are the alternatives? And how to avoid ending up in a dead end?

Let's dive into the facts, the judges' reasoning, and above all, what it changes for you. Follow the guide.

The Facts: A Story Like Many Others

Mr X, owner in Béziers of a commercial building, had taken out a loan from a bank, secured by a mortgage (real security that allows the creditor to seize the property if the debt is not paid). Business declines, Mr X is placed in liquidation. The bank, unpaid, then turns to the enforcement judge (judge specialised in forced recovery measures) to request that the property be attributed to it in payment of its debt, on the basis of Article 2458 of the Civil Code. At the same time, the liquidator (trustee responsible for realising the debtor's assets to satisfy creditors) has been subrogated to the bank's rights and has requested the sale by auction of the property.

The enforcement judge ruled in favour of the liquidator: he ordered the sale of the property at a reserve price of €100,000, after completion of the legal formalities (publicity, conditions of sale, etc.). The bank appealed, arguing that the judicial attribution should take precedence over the sale. The Court of Appeal upheld the sale. The bank then appealed to the French Supreme Court.

Before the French Supreme Court, the question was simple: is a request for judicial attribution of the mortgaged property made by a creditor after the opening of collective proceedings admissible? In other words, can the creditor, despite the liquidation, obtain the property in payment, or must he submit to the rule of the stay of individual actions?

The Reasoning of the Court — Analysed

The French Supreme Court dismissed the bank's appeal. Its reasoning is based on two essential points.

First, it recalls that Article L. 622-21 of the Commercial Code (which governs collective proceedings) prohibits any legal action aimed at obtaining payment of a sum of money from the date of the judgment opening the proceedings. This is the principle of the stay of individual actions: once the collective proceedings are opened, each creditor can no longer act alone to recover his debt; he must declare his claim and await the collective distribution.

Second, the Court characterises the request for judicial attribution of the mortgaged property. This request, it explains, "aims at the payment of a sum of money": indeed, the creditor requests that the property be attributed to him in exchange for his debt, which extinguishes the debt to that extent. It is therefore a method of payment. Consequently, it falls within the scope of the prohibition set out in Article L. 622-21.

The Court notes that there is no derogation for judicial attribution of the property comparable to that provided for judicial attribution of the pledge (security over movable property, for which the law allows the pledgee to request attribution of the property in payment, even in collective proceedings). The legislator has provided an express exception for the pledge, but not for the mortgage. In the absence of a derogatory text, the request for judicial attribution of the mortgaged property is inadmissible during the observation period or liquidation.

However, note: this reasoning applies to collective proceedings opened after 1 January 2006 (date of entry into force of the ordinance of 18 December 2005). Before that, the solution was different. Today, the case law is clear: the mortgage creditor cannot obtain judicial attribution; he must be content with a forced sale, organised by the liquidator or by the enforcement judge.

What few people know is that this solution is consistent with the spirit of collective proceedings: to prevent certain creditors, better informed or quicker, from appropriating the debtor's assets to the detriment of others. The auction guarantees an equitable distribution of the price among all creditors.

What This Changes for You — Practically

If you are a mortgage creditor (bank, individual who lent with a mortgage) and your debtor is in liquidation, you cannot request that the property be attributed to you. Your only option is the forced sale, which will be orchestrated by the liquidator or, failing that, by the enforcement judge. The proceeds of the sale will be distributed among all creditors according to their rank.

If you are the owner of a mortgaged property and you are in collective proceedings, you cannot propose attribution to your creditor to extinguish the debt either. The sale is inevitable. However, you can try to sell the property by private treaty with the liquidator's agreement, which may allow better conditions.

Concrete example: in Sète, an owner of a flat mortgaged for €120,000 is placed in liquidation. The creditor cannot claim the flat; it will be sold at auction. If the sale fetches €150,000, the creditor will be reimbursed from the proceeds, and any surplus will go to the debtor (or be distributed among other creditors).

If you are a potential buyer of a property seized in the context of collective proceedings, you can participate in the auction. The price is often below market value, but beware of hidden defects and delays.

undefined, I have come across cases where creditors tried to circumvent the prohibition by requesting judicial attribution before the opening of collective proceedings. But if the opening occurs before the judge has ruled, the request becomes inadmissible. So you have to act quickly, but not hastily.

Four Tips to Avoid This Type of Dispute

• Declare your claim quickly: as soon as collective proceedings are opened, declare your mortgage claim to the insolvency practitioner within two months of the publication of the judgment in the Bodacc. Failing that, your claim is extinguished.
• Anticipate difficulties: if your debtor shows signs of default, do not wait for liquidation. Propose a rescheduling, take additional security, or seize the property before the opening of collective proceedings.
• Prefer an amicable sale: in agreement with the liquidator, you can sell the property by private treaty, which avoids seizure costs and may allow a better price. The mortgage creditor must agree if the price is lower than the amount of his claim.
• Consult a lawyer lawyer: each case is unique. A lawyer specialising in real estate law and collective proceedings can advise you on the strategy to adopt (enforcement proceedings, claim declaration, negotiation with the liquidator).

Further Analysis: Related Case Law and Developments

The French Supreme Court had already laid down the principle in a judgment of 13 January 2015 (n° 13-21.576): a request for judicial attribution of a mortgaged property is an action for payment, prohibited in collective proceedings. The 2017 decision confirms and clarifies this solution. However, for the pledge, Article 2361 of the Civil Code expressly authorises judicial attribution even in collective proceedings (Cass. com., 10 July 2012, n° 11-19.393). This difference in treatment is explained by the movable nature of the pledge, whose attribution is deemed less disruptive to the body of creditors.

The trend of the courts is therefore clear: to protect the principle of equality among creditors. In the future, it is unlikely that the legislator will introduce a derogation for the mortgage, as this would create an imbalance. Mortgage creditors must therefore incorporate this risk into their analysis: in the event of collective proceedings, they lose the possibility of recovering the property directly.

Key Points to Remember

FAQ:

• Can I request attribution of the mortgaged property if my debtor is in judicial reorganisation? No, the same prohibition applies during the observation period (Cass. civ. 2, 13 Jan. 2015).
• What if the request for attribution was made before the opening of collective proceedings? If the judge has not yet ruled, the request becomes inadmissible. If the attribution judgment was issued before the opening, it is valid.
• Can I sell the property by private treaty after the opening of proceedings? Yes, with the agreement of the liquidator and the mortgage creditor. This avoids seizure costs.
• What is the benefit of a mortgage if I cannot obtain the property? The mortgage gives you a preferential right over the sale price. You will be paid before unsecured creditors.
• Can I request judicial attribution if the debtor is a non-trader individual? Yes, because collective proceedings only apply to traders, artisans and legal entities. For an over-indebted individual, judicial attribution remains possible.

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