The Federal Court of Justice has recently issued two judgments in relation to the assignment of loan receivables and land charges.
In its judgment of April 19 2011 the court confirmed that the assignment of loan receivables to a non-bank is valid. The court ruled on a case in which a borrower had entered into a loan agreement with a bank, the loan being secured by a land charge. The bank sold the claims out of the loan agreement (including the related security) against the borrower to an entity which was not in possession of a banking licence (a non-bank). The borrower stated that the bank was not entitled to assign the claims out of the loan agreement to a non-bank and claimed that the assignment constituted a breach of the Banking Act. Furthermore, the borrower stated that the assignment of the land charge was invalid, as the assignee had not become a party to the security purpose agreement. In response, the borrower demanded repayment of the interest paid to the assignee and deletion of the land charge.
First, the court decided that the assignment of the land charge was valid, even if the security purpose agreement was not assigned to the new beneficiary of the land charge. The land charge can be assigned according to Sections 1154 and 1192 of the Civil Code; an additional assignment of the security purpose agreement was not required for the valid assignment of the land charge. In an earlier ruling dating from March 30 2010, the Federal Court of Justice had stated only that the enforcement of the assumption of liability in rem and submission to execution is subject to the entrance of the assignee into the security purpose agreement. The validity of the assignment of the land charge, in contrast, is not subject to the transfer of the security purpose agreement to the new beneficiary of the land charge.
The assignment of the loan agreement as such is valid as well, as the court does not treat the assignment as a banking operation and therefore the assignment is not subject to a banking licence according to the act. Even if the assignment were in breach of Section 32 of the act, this would not cause the assignment to be invalid, as the general purpose of the regulations in the act is to punish a breaching party, rather than to render an agreement with a third party invalid.
On June 29 2011 the Federal Court of Justice ruled on an assignment of the land charge and the issuance of a so-called 'execution clause' to the assignee. It stated that the responsible notary is obliged to issue a new execution clause to the new beneficiary of the land charge in relation to the assigned land charge if he or she was provided with evidence of the assignment of the land charge by way of certified deeds. The objection that the submission to execution extends only to those claims which are covered by the security purpose agreement and the assignee of the land charge has not entered into the security purpose agreement can be raised only by way of a suit against the execution clause according to Section 768 of the Code of Civil Procedure. This judgment deviates from an earlier ruling of the same court in which it stated that:
- the submission to execution is granted only to the extent to which it is covered by the security agreement; and
- the proof of the valid assignment of a submission to execution should therefore include the proof of transfer and assignment of the related security purpose agreement which must be proved by certified deeds.
This should apply even if the debtor entered into a new security purpose agreement with the creditor.
On June 29 2011 the court stated that the March 2010 ruling has been criticised in the legal literature, especially because the notary – in his or her capacity as a formal institution only – would be obliged to check not only the assignment of a land charge, but also the underlying security purpose agreement (such a check would be beyond his or her competence). Furthermore, the entrance of the new beneficiary of the land charge into the security purpose agreement is a condition for enforcement of the land charge, but not a condition for the valid assignment of the land charge. The court therefore stated that the issuance of the execution clause is not subject to the entrance of the assignee into the security purpose agreement, as the notary issuing such clause is neither obliged nor entitled to check this.
However, the judgment does not state whether the assignee of the land charge must become a party to the security purpose agreement in order to enforce a land charge. It states only that the execution clause must be issued by the notary, and that the assignment of the land charge and of the submission to execution is valid even if the assignee is not bound by the regulations of the relevant security purpose agreement. However, the debtor can contest the execution clause by way of a suit against the execution clause according to Section 768 of the Code of Civil Procedure, although the judgment gives no guidance as to the result of such a suit.
For further information on this topic please contact Sebastian Bock or Nadejda Kysel at Noerr LLP by telephone (+49 69 97 14 77 0), fax (+49 69 97 14 77 100) or email ([email protected] or [email protected]).