Banking Disputes in 2019

In 2019, the banking sector actually completed its adaptation to the revolutionary changes in jurisprudence that took place in 2018, when the new Supreme Court started its activity and also to new procedural legislation. In implementing the ideas of 2018, the Supreme Court strengthened its legal positions, which made it possible to eliminate any manifestations of “limited interpretation” by creative participants in banking controversies and, in some cases, developed its expertise and extended them to similar legal relationships. Such a consistent approach by the Supreme Court provided some stabilization and predictability of legal enforcement in resolving banking controversies.

In particular, the position of the Grand Chamber of the Supreme Court, stated in the decree of 21 March 2018 in case No. 760/14438/15-ц regarding the impossibility of foreclosure on mortgaged property by declaration of title turned out to be immutable. I would like to remind that the court concluded that “in view of the requirements of Articles 328, 335, 392 of the Civil Code of Ukraine in the context of Articles 36, 37 of the Law of Ukraine On Mortgage, the courts are not empowered to foreclose on mortgaged property by the declaration of a mortgage holder title”. Thus, any attempt by banks to push the opposite idea was unsuccessful. At the same time, with regard to mortgaged movable property, the situation is not so straightforward and, in practice, various legal positions exist.

On the one hand, the idea contained in the aforementioned decree of the Grand Chamber of the Supreme Court is continuing on the grounds that it is in principle impossible to acquire ownership title via a court judgement because “Article 392 of the Civil Code of Ukraine does not create, but confirms the existing ownership title previously acquired by the plaintiff” (see decrees of the Supreme Court of 26 June 2018 in case No. 904/9931/16, of11 September 2018 in case No. 902/1087/16, of 9 October 2019 in case No. 646/12750/14-c ). Moreover, the Supreme Court even extends the application of legal findings in case the mortgagee sells the collateral to a third party (see the decree of the Supreme Court of 27 November 2019 in case No. 461/5007/15-c), also considering this method of foreclosure as extrajudicial. On the other hand, the Supreme Court delineates legal relations governing the foreclosure on the mortgaged and pledged property (movable property) in the context of the application of such remedy as acquisition of ownership title under court judgement (see the decree of the Supreme Court of 14 November 2018 in case No. 910/2535/18 and of 11 December 2018 in case No. 910/21156/16). The essence of such delineation is that the analogy with Article 392 of the Civil Code of Ukraine in the case of foreclosure on the mortgaged movable property is relevant and inapplicable, since foreclosure on mortgaged property is governed by the special rules contained in Articles 24, 25, 26, 29 of the Law of Ukraine On Securing Creditors’ Claims and Registration of Encumbrances. Thus, the position in this category of cases is not clear and requires the intervention of the Grand Chamber of the Supreme Court.

A similar stable situation has arisen in controversies where the decisions of state registrars in the field of state registration of real rights to real property and their encumbrances are appealed against. A reminder that the fundamental positions were, in this sense, set out in the decree of the Grand Chamber of the Supreme Court of 4 September 2018 in case No. 823/2042/16, where the court shifted away from the usual criterion for asserting administrative jurisdiction of the controversy — the presence of procedural violations in the actions of the state registrar (including if the claimant is not the applicant for the registration action). The court’s position is that, in this case, there is still a controversy over civil law between the parties, without which the protection of the person’s rights will not be proper and effective. Thus, the controversy should be referred to civil or commercial proceedings (depending on the parties involved). The last hope to renew administrative jurisdiction was buried by the decree of the Grand Chamber of the Supreme Court of 30 January 2019 in case No. 755/10947/17 where, in turn, the court shifted away from the legal positions of the Grand Chamber of the Supreme Court stated in decree of 14 March 2018 in case No. 619/2019/17 that, subject to the actual settlement of a civil law controversy, a controversy with a public officer (in particular, the unlawfulness of the state registrar’s actions) is public and legal and subject to review in administrative proceedings. Thus, no matter what gaps the parties to a controversy find, a similar category of cases will be dealt with in the course of economic or civil proceedings.

Herewith, in 2019, as they say, there were no surprises, and we would like to focus upon individual court judgements that have changed or have given a chance for changing the vector of settling banking controversy.

Continuing the topic of controversies in the field of mortgage lending, we should pay attention to the decree of the Grand Chamber of the Supreme Court of 29 May 2019 in case No. 310/11024/15-c, where the court shifted away from the opinion of the Supreme Court of Ukraine, stated in the decree of 5 April 2017 in case No. 6-3034ts16, under which the mortgagee has the right to satisfy their claims on the basis of the court judgement on the foreclosure on the mortgage through its sale by the mortgagee to a third party in accordance with Article 38 Law of Ukraine On Mortgage, despite the fact that the parties to the mortgage clause agreed such remedy as being extrajudicial. In other words, specifying in the mortgage agreement the possibility for the creditor to foreclose extrajudicially the mortgage by sale of mortgage property to a third party is also an obstacle to applying this remedy in court.

The position of the Grand Chamber of the Supreme Court of 26 February 2019 in case No. 907/9/17 is also interesting, as the Court shifted away from the findings of the Supreme Court stated in decree of 23 January 2018 in case No. 2-340/461/16-c regarding payment of court fees in controversies on mortgage foreclosure, noting that such claims “have value appraisal, property nature, and the amount of court fees for their filing is fixed by the requirements of Article 4 of the Law of Ukraine On Court Fees, based on the amount of monetary claims the plaintiff to be satisfied thereunder.” I would like to remind you that the position, which the Grand Chamber of the Supreme Court is considered to be false, is that the court fee should be paid as a non-property claim when a lawsuit on foreclosure of the mortgage property is filed to the court.

Another progressive position is stated in the decree of the Grand Chamber of the Supreme Court of 16 January 2019 in case 373/2054/16-c, where the court stated that “the accrual of 3% per annum provided by part two Article 625 of the Civil Code of Ukraine is compensatory, not punitive, because it is a remedy for protecting property rights and interest, which is to obtain compensation from the debtor. When calculating 3% per annum, the overdue amount specified in the contract or court judgement should be taken as the basis, not its equivalent, in the national currency of Ukraine.” Thus, the court, while shifting away from the legal opinion stated in the decree of the Supreme Court of Ukraine of 2 July 2014 in case No. 6-79цс14, and also in the decree of the Supreme Court of 25 July 2018 in case No. 308/3824/16-c, gave the green light for accrual of 3% per annum in foreign currency, and emphasized that foreign currency can be not only be a currency of liability, but also the currency of its execution.

In the context of recovery of monetary liabilities in accordance with Article 625 of the Civil Code of Ukraine, one more decree of the Grand Chamber of the Supreme Court of 8 November 2019 in case No. 127/15672/16-ц should be noted, where the court moved away from the conclusions of the Supreme Court on the application of the limitation period to claims for recovery of funds provided by Article 625 of the Civil Code of Ukraine, having determined that “a debtor’s failure to fulfil a monetary liability is a continuing offence, therefore, the right to lawsuit for money recovery under Article 625 of the Civil Code of Ukraine arises for the creditor from the breach of the monetary liability till its elimination and is limited by the last three years that preceded the filing of such lawsuit.” I would like to remind that in accordance with the opposing position of the Supreme Court, as stated in decree of 18 July 2018 in case No. 331/3787/16-ц, of 5 December 2018 in case No. 754/7151/15-ц, of 19 December 2018 in case No.206/7190/14-ц, the initial date for the commencement of the limitation period is the effective date of the court judgement on debt recovery. Therefore, any additional requirements (including in accordance with Article 625 of the Civil Code of Ukraine) may be declared during it and accrued over a period of three years following the court judgement.

Separately, we would like to highlight the legal positions that the banking sector has (at least temporarily) managed to circumvent. These are the conclusions stated in the decrees of the Grand Chamber of the Supreme Court of 28 March 2018 in case No. 444/9519/12 and of 4 July 2018 in case No. 310/11534/13- ц. Thus, the court concluded in the mentioned decrees that it was impossible to accrue interest on the use of a loan beyond the loan’s term or in the case the creditor enjoys the right to early repayment of the loan stipulated by Part 2 Article 1050 of the Civil Code of Ukraine. The position of the Grand Chamber of the Supreme Court, which, in my view, is a manifestation of exclusive loyalty to debtors in view of specific contentious legal relationships analysed by the court, has proven to be practically impossible in cases where there are special arrangements between debtor and creditor for interest accrual beyond the term stipulated in the loan agreement (see the decrees of the Supreme Court of 13 December 2018 in case No. 913/11/18, of 10 October 2018 in case No. 910/750/18, of 14 May 2019 in case No. 910/22858/17). And, since the specified “gap” contains, in the opinion of judges of the Supreme Court in case No. 912/1120/16,  an exceptional legal problem that had not been finally resolved in available case law, the case was referred to the Grand Chamber of the Supreme Court. The case has now been accepted for consideration by the decree of the Grand Chamber of the Supreme Court of 10 September 2019. The resolution of this “conflict” may, according to the court, place a definitive point in uncontrolled accrual of annual interest after the loan repayment date stipulated in the agreement.

By way of conclusion, I would like to mention another exceptional legal problem that has not yet been resolved, but which has a significant impact on many controversies. The issue here is application of Part 4 Article 36 of the Law of Ukraine On Mortgages (revision of 4 February 2019), which stipulates that upon completion of extrajudicial settlement any subsequent mortgagee’s claims to a debtor on fulfilment of the basic obligation are invalid. The variations on speculation are, in this context, quite obvious, and they are very actively used by debtors, especially in cases where according to Article 37 of the Law of Ukraine On Mortgage the creditor acquired extrajudicially mortgaged property, the value of which is not sufficient to repay all the debt. In the majority of such cases, the Supreme Court directly applies the provisions of the said article and considers the obligations to be settled (see the decrees of 15 March 2018 in case No. 927/84/16, of 20 June 2018 in case No.757/31271/15-ц, of 26 February 2019 in case No. 914/355/17,of 2 April 2019 in case No. 873/26/18, of 17 April 2019 in case No. 204/7148/16-ц, of 27 February 2019 in case No. 643/18466/15-ц, of 27 February 2019 in case No. 263/3809/17, of 2 April 2019 in case No. 873/26/18). Moreover, even the debt recovered under a court judgement long before the extrajudicial settlement is considered repaid (in the relevant part, which was not repaid by the mortgage property). An exception to this general, in my opinion, negative rule is a number of the decrees of the Supreme Court (of 14 November 2018 in case No.910/2535/18, of 19 September 2019 in case No. 910/9508/17, of 20 June 2019 in case No. 904/9795/16) where the court considers that, provided there is a mortgage property securing specific monetary liabilities, not yet been forfeited, and on the account of which such liabilities have not yet been settled, there is no reason to consider such monetary liabilities as repaid in accordance with Part 4 of Article 36 of the Law of Ukraine On Mortgage. At the same time, as mentioned above, the situation with unsecured liabilities is frankly pitiful. In their turn legislators, understanding the negative impact of such speculation on credit relations, eliminated the gap with the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine on Resumption of Lending (3 July 2018 No. 2478-VIII). Therefore, the problem has partially lost its relevance, if we talk about legal relationships that arose after the law came into effect on
4 February 2019. In other cases, the intervention of the Grand Chamber of the Supreme Court is still required to regulate legal enforcement.

Summarizing the analysis of current case law, it is worth noting that the year appeared to be a busy one for the banking sector, despite the stabilization of the legal positions of the new Supreme Court. This is due more to adaptation to last year’s “deviations” from legal positions, which resulted in reorientation of participants to other methods of judicial protection (often effective only in the legal sense of the word). In any case there is, in my opinion, a positive trend: the controversies became more predictable due to the fact that the Supreme Court is fulfilling its key mission, that of ensuring sustainability and unity of case law. This, in turn, made it possible for creditors to plan more accurately a claim settlement in courts and counter protection to debtors.