- Financial investors can enforce levy of execution
- January 14, 2010 | Author: Tobias Hagner
- Law Firm: Sibeth - Munich Office
In a ruling of 16 April 2009 (VII. ZB 62/08), the Federal Court of Justice (Bundesgerichtshof) confirmed the existing practice of banks in selling debts and the underlying collateral even to purchasers without a banking licence.
In the case in question, a borrower had assigned to his bank a land charge for his property as security for the loan, and at the same time subjected himself to immediate levy of execution against all of his assets. The bank had assigned this land charge, and most recently it had been assigned to the trustee of an American financial investor. When the borrower no longer regularly paid the installments for the loan, the financial investor's trustee obtained a certificate of enforceability from the responsible notary, then used this certificate to enforce levy of execution against the borrower on the basis of his declaration of subjection to levy of execution against his entire assets. The borrower took action against this levy of execution. Both the Local Court (Amtsgericht) of Hamburg-Wandsbek and the District Court (Landgericht) of Hamburg agreed with the borrower and justified this by saying that the borrower cannot validly declare a submission to execution in the General Terms of Business if - as in the present case - the creditor enforcing the levy of execution, i.e. here the financial investor, is not a bank.
The Federal Court of Justice (Bundesgerichtshof) did not follow this interpretation. In the borrower's court action to contest the granting of the certificate of enforceability by the notary, the Federal Court of Justice ruled that only formal deficiencies could be contested, not deficiencies of content. It ruled that the question of whether the submission to execution could be effectively declared in the General Terms of Business was an examination of the content and could therefore not be taken into account. The Federal Court of Justice ruled that deficiencies in the content can only be contested in exceptional cases and if the errors are self-evident. But the court stated that this does not apply here because the notary would have needed to carry out an extensive examination of the submission to execution, so there is no self-evident error.
This ruling by the Federal Court of Justice is highly significant in view of the widespread assignment of claims arising from loans. The Court confirms the current practice of banks of assigning their loan claims, with the securities provided for these loans, as part of their refinancing. By contrast with the Local Court and District Court, the ruling of the Federal Court of Justice is also in harmony with the goal of limiting the risk associated with financial investments in the German Risk Limitation Act (Risikobegrenzungsgesetz), which largely came into force on 19 August 2008 and which permits the assignment of land charges. Under the German Risk Limitation Act, such an assignment is permissible even if it is made to a financial investor which operates in the market without a banking licence. Abuse in this area can be sufficiently prevented by the newly introduced statutory provisions, for example a compensation claim irrespective of blame and simplified protection against enforcement of execution. To further protect the borrower and increase transparency in the financial sector, the German Risk Limitation Act also modified the provisions of Section 309 No. 10 and Section 1192 of the German Civil Code (BGB). This means that the borrower is entitled to cancel the contract unless the new creditor is mentioned by name in the original loan agreement. But if the loan agreement is continued with the new creditor, the reciprocal rights which the borrower had in relation to the old creditor also apply in relation to the new creditor. The ruling of the Federal Court of Justice, in combination with the provisions of the German Risk Limitation Act, thus allows banks to sell their loans secured by land charges, even to financial investors.