A bad construction job. The contractual nature of the actio pauliana under Brussels Ia

Readers of this blog will be familiar with the European Court of Justice’s Feniks v Azteca ruling [1] – on which we reported earlier. There, the Court held that the actio pauliana – a form of fraudulent conveyance action – was a ‘matter relating to a contract’ for the purpose of Art 7(1) Brussels Ia (Regulation 1215/2012).[2] The upshot of this ruling was that the third party who allegedly frustrated the claimant’s contractual interest could be sued in the court of the place of performance of the defrauded contract (cfr Art 7(1)(b) Brussels Ia).

In Norbert Reitbauer aors v Enrico Casamassima (Case C-722/17 ECLI:EU:C:2019:285), AG Tanchev carefully reconsidered and further analysed the contractual nature of the actio pauliana.

1. Factual setting and issues

Mr Casamassima and Ms Isabel C. are resident in Rome and lived together, at least until the spring of 2014. In 2010, they purchased a house in Villach, Austria. While Mr Casamassima apparently funded the transaction, Isabel C. was registered in the land register as the sole owner.

Ms Isabel C. – with the ‘participation’ of Mr Casamassima – entered into contracts for extensive renovation works of the house with Reitbauer aors (the applicants in the preliminary reference proceedings). Because the costs of the renovation far exceeded the original budget, payments to Reitbauer aors were suspended. From 2013 onwards, Reitbauer aors were therefore involved in judicial proceedings in Austria against Ms Isabel C. Early 2014, the first of a series of judgments was entered in favour of Reitbauer aors. Ms Isabel C. appealed against those judgments.

On 7 May 2014 before a court in Rome, Ms Isabel C. acknowledged Mr Casamassima’s claim against her with respect to a loan agreement, amounting to EUR 349 772,95, which was granted by the latter in order to finance the acquisition of the house in Villach. Ms Isabel C. undertook to pay this amount to the latter within five years under a court settlement. In addition, she agreed to have a mortgage registered on the house in Villach, Austria in order to secure Mr Casamassima’s claim.

On 13 June 2014 a (further) certificate of indebtedness and pledge certificate was drawn up under Austrian law in Vienna by a notary to guarantee the above settlement (‘the first pledge’). With this certificate, the pledge on the house in Villach was created on 18 June 2014.

The judgments in favour of Reitbauer aors did not become enforceable until after this date. The pledges on the house of Ms Isabel C. held by Reitbauer aors, obtained by way of legal enforcement proceedings (‘the second pledge’), therefore ranked behind the first pledge in favour of Ms Casamassima.

In order to realise the pledge, Mr Casamassima applied in February 2016 to the referring court (the District Court in Villach, Austria) for an order against Ms Isabel C., requiring a compulsory auction of the house in Villach. The house was auctioned off in the autumn of 2016 for EUR 280 000. The order of entries in the land register shows that the proceeds would go more or less entirely to Mr Casamassima because of the first pledge.

With a view to preventing this, Reitbauer aors brought an action for avoidance (“Anfechtungsklage”) in June 2016 before the Regional Court in Klagenfurt, Austria against Mr Casamassima and Ms Isabel C. The action was dismissed by that court ‘due to a lack of international jurisdiction in view of [Casamassima’s and Isabel C’s] domicile’ outside of Austria. In July 2017, that decision became final.

At the same time Reitbauer aors filed an opposition before the district court of Villach, Austria at the hearing of 10 May 2017 regarding the distribution of the proceeds from the compulsory auction, and subsequently brought opposition proceedings against Mr Casamassima. In these opposition proceedings, Reitbauer aors sought a declaration that the decision regarding the distribution to Mr Casamassima of EUR 279 980,43 was not legally valid in so far as:

• Ms Isabel C. had damage claims against Mr Casamassima of at least the same amount as the claim arising from the loan agreement, with the result that Mr Casamassima’s claim no longer existed due to compensation (alleging that Ms Isabel C. confirmed that Mr Casamassima had placed orders with Reitbauer aors without her knowledge and consent); and
• the certificate of indebtedness and pledge certificate of June 2014 were drawn up merely as a formality and for the purpose of pre-empting and preventing Reitbauer aors from bringing any enforcement proceedings in relation to the house.

The question arose which jurisdictional rule should be applied to Reitbauer aors’ opposition proceedings in the Villach court. Three candidates could be identified:

1. Enforcement jurisdiction (Art 24(5) Brussels Ia). Applying this rule to Reitbauer aors’ claim would confer jurisdiction to the court in Villach, Austria, since this court is in charge of the enforcement proceedings against which the opposition is targeted.
2. Jurisdiction over immovable property (Art 24(1) Brussels Ia). Again, jurisdiction would be in Villach, Austria.
3. Contract jurisdiction (Art 7(1) Brussels Ia). This rule would confer jurisdiction to the place of performance of Reitbauer aors’ defrauded contracts, pointing to Villach, Austria.
4. If none of the aforementioned rules apply: Art 4 Brussels Ia, which confers jurisdiction to the courts of the Member State of the defendant’s domicile. In the case at hand, that would be Italy – an outcome Reitbauer aors, being based in Austria, want to avoid by invoking one of the three previous grounds of jurisdiction.

AG Tanchev’s analysis of these regimes will be addressed in turn below.

2. Enforcement jurisdiction and jurisdiction over rights in rem

AG Tanchev’s analysis commenced with Art 24(5) Brussels Ia, which provides that ‘in proceedings concerned with the enforcement of judgments, the courts of the Member State in which the judgment has been or is to be enforced’ has exclusive jurisdiction. Briefly summarised, he argued that eforcement jurisdiction is not applicable to the objections brought by Reitbauer aors:

Objections concerning the non-existence of a claim underlying a judicially ordered auction and concerning the invalidity of the creation of the pledge for that claim under a loan agreement do not have a sufficiently close connection with enforcement proceedings.

Para 46

Then, AG Tanchev considered whether the action brought by Reitbauer aors could be covered by Art 24(1) Brussels Ia. That provision allocates jurisdiction in proceedings that have as their object rights in rem in immovable property or tenancies of immovable property, to the courts of the Member State in which the property is situated. Rejecting the applicability of Art 24(1), the AG argued that the objections formulated by Reitbauer aors are not sufficiently closely related to a right in rem resting on the house in Villach, Austria. The real object of the objection proceedings are the first pledged in favour of Mr Casamassima and Reitbauer aors’ allegedly defrauded rights in personam.[3]

3. Contract jurisdiction

The unavailability of enforcement or in rem jurisdiction led AG Tanchev to contract jurisdiction enshrined in Art 7(1) Brussels Ia. This special ground of jurisdiction confers jurisdiction to the ‘place of performance of the obligation in question’, which is to be localised in accordance with the applicable law (the so-called ‘conflicts method’). For two types of contracts, sale of goods and services, Art 7(1)(b) objectively defines that place of performance.

As per Feniks v Azteca, Reitbauer aors’ objection proceedings would be subject to Art 7(1) Brussels Ia, as they aim at protecting Reitbauer aors’ contractual interests (an aim comparable to the actio pauliana brought in Feniks v Azteca). The practical result would be that the court of the place of performance of the construction contracts would have jurisdiction – as this is the contract that was allegedly defrauded by the first pledge in favour of Mr Casamassima.[4]

The Feniks decision leaves little room to doubt that the objection proceedings are ‘matters relating to a contract’ subject to Art 7(1) Brussels Ia. However, AG Tanchev did not seem prepared to accept that conclusion without any reservation and seems to agree with the resistance with which the Feniks ruling has been met. The ruling was criticised for creating unpredictability to the extent that the third party could be sued in the place of performance of a contract of which they may be ignorant.[5] A solution to remedy this criticism would be to take into account the intent or knowledge of the third party: if they acted with the intent of frustrating the interests of the plaintiff, the fraudulent conveyance action would be a matter relating to a contract subject to Art 7(1) Brussels Ia.[6]

In Reitbauer aors, AG Tanchev opined that contract jurisdiction applies to the actio pauliana, in as far as the defendant (the third party who facilitated the fraudulent conveyance) was aware of the consequences of his or her acts:

… knowledge of a third party should act as a limiting factor: … the third party needs to know that the legal act binds the defendant to the debtor and that that causes harm to the contractual rights of another creditor of the debtor (the applicants).

Para 84

… the defendant’s knowledge of the existence of the contract(s) at issue is important.

Para 92

This suggestion, in turn, has been criticised for putting the horse before the cart. It would require a court to prejudge on the merits of the case, as the existence of knowledge or intent will be decisive for the success of an fraudulent conveyance action under the applicable law.[7] While it is true that deciding on jurisdiction should not lead a Court to do a great deal of investigation into the merits, private international law inevitably requires some form of prejudging.[8] Its terminology is essentially private law terminology, which is amply demonstrated by the fact that the scope of applicability of Art 7(1) Brussels Ia hinges on the question whether a suit is a ‘matter relating to a contract’. Here, a court will have to determine the existence of a matter relating to a contract – which is essentially a private law concept – in order to determine whether the ground of jurisdiction enshrined in that provision applies. Once jurisdiction under that rule is established, a court may very well decide that no contract exists at all under the applicable law.

While much can be said about the Feniks ruling, the odds that the Court will accept AG Tanchev’s nuanced application of the ruling seem low. First, the Feniks ruling may be too recent to be distinguished already.[9] Second, the Court did not seem too concerned about predictability in the Feniks ruling, holding without much consideration that the defendant in that case could reasonably foresee to be sued in the place of performance of the contract.[10]

4. Conclusion

AG Tanchev’s opinion in Reitbauer aors once more demonstrates how arduous a task determining adjudicatory jurisdiction in cross-border litigation can be. The AG nevertheless succeeded at provided a compelling matrix for the Court and national judges to successfully navigate the varying competing jurisdictional regimes of Brussels Ia. It seems to be unlikely at this stage, however unfortunate, that the Court will follow the AG’s suggestion to nuance the recent Feniks v Azteca ruling regarding the applicability of contract jurisdiction (Art 7(1) Brussels Ia) to the actio pauliana. Regardless, the seeds for a more nuanced approach may have been planted by AG Tanchev.

[1] Case C-337/17 ECLI:EU:C:2018:487.

[2] Provided that the Insolvency Regulation 2015/848 was inapplicable. In the insolvency context, see C-339/07 ECLI:EU:C:2009:83, Christopher Seagon v Deko Marty Belgium NV.

[3] Opinion of AG Tanchev, paras 71-78.

[4] ibid, paras 53-54, 55-60.

[5] T Lutzi, ‘”Feniks” aus der Asche: Internationale Zuständigkeit für die actio pauliana nach der EuGVVO’ [2019] RIW 256.

[6] M Poesen, ‘Once More Unto the Breach: the Actio Pauliana is a Matter Relating to a Contract’ (2019) 15 ERCL 64.

[7] Case C-337/17 ECLI:EU:C:2018:487, Feniks v Azteca, Opinion of AG Bobek, para 94.

[8] G Van Calster, ‘Your laws or mine? On a European Ius Commune for Third Party Interests in Private International Law’, in F Guillaume, I Pretelli (eds), Les nouveautés en matière de faillite transfrontalière et Les banques et les assurance face au tiers – Actes de la 28e journée de droit international privé du 27 mai 2016 (Schultess 2016) 149.

[9] G Van Calster, ‘Tanchev AG in Reitbauer: contract, pauliana and exclusive jurisdictional rules. Suggests restriction of CJEU Feniks to cases of fraus‘ (GAVC, 10 March 2019) consulted on 12 June 2019.

[10]Feniks v Azteca (n 1), para 47.