Sale of real estate under threat of execution
A debtor can be guilty of hindering enforcement of a court order even when the order does not exist yet.
Polish Supreme Court judgment dated 17 November 2011 (Case No. V KK 226/11)
The Polish Supreme Court rarely addresses the “white collar” sections of the Penal Code. In the judgment dated 17 November 2011, the court issued an interpretation of Penal Code Art. 300 §2, which is one of the articles defining offences against creditors, providing that “any person who with the intention of frustrating enforcement of a ruling by a court or other state authority prevents or diminishes satisfaction of his or her creditor by removing, concealing, transferring, giving away, destroying, actually or apparently encumbering, or damaging his or her assets that are attached or threatened with attachment is subject to a penalty of imprisonment from 3 months to 5 years.”
The Supreme Court held that in order for an offence under this article to be committed, it is not necessary “at the time of commission of the criminal act that the ruling of which the perpetrator seeks to frustrate enforcement must already exist.” The offence may be committed “also at a time when execution is only threatened, and thus during a period when the creditor has unequivocally made it known that it has decided to pursue its claim by judicial means. It is therefore sufficient that the assets are threatened with attachment, if there is an objective, real and direct threat of attachment, and thus a danger which the debtor must face.”
In the case before the court, Ryszard O. and Czesława O. were found guilty of this offence by the district court in 2010 because on 22 March 2001 they sold real estate with the intention of frustrating enforcement of a claim in the amount of PLN 130,000 pursued by company M. The district court found that the sale of the real estate occurred under a threat of insolvency, when the real estate itself was threatened with attachment.
The defendants appealed and were found not guilty by the regional court. The regional prosecutor filed a cassation appeal, alleging a gross violation of substantive law affecting the judgment, in that the defendants were exonerated despite factual findings demonstrating that they had committed the offence as charged. The Supreme Court granted the prosecutor’s cassation appeal.
On 21 March 2001, the day before the defendants sold the real estate in question, the regional court had issued an order granting interim relief to secure the claim for payment by company M. by establishing a mortgage on the real estate. The defendants managed to sell the property before the order establishing the mortgage was served on them.
However, for the previous year a criminal case had already been pending against Ryszard O. and Czesława O., accusing them of fraud against company M. as the injured party, as well as a civil case brought by the company seeking payment of PLN 130,000—the amount of the loss suffered by the plaintiff as a result of the fraud allegedly committed by the same defendants.
Even though the order establishing the mortgage was not served on the defendants before they sold the property, they knew at that time that the company was pursuing its claims against them. There were both criminal and civil cases pending against them, and the motion dated 1 March 2001 seeking the mortgage to secure the claim had also been served on them. And at one of the hearings, when Czesława O. stated that she intended to sell the property in question, the company’s attorney reiterated the plaintiff’s motion for interim relief.
Even though at the time they sold their real estate the defendants had not formally been notified that the regional court had issued an order the day before granting interim relief, they had nonetheless sold an asset that constituted “property threatened with attachment” in order to frustrate company M.’s effective enforcement of the claim for PLN 130,000, which it was pursuing in the civil proceeding. Thus the actions of the defendants fulfilled all of the elements of the offence set forth in Penal Code Art. 300 §2.
The Supreme Court held that in exonerating the defendants, the regional court had erroneously found that it was necessary at the time of the sale of the real estate that the ruling of the court or state authority (in this case, the court order granting interim relief) already existed. The Supreme Court thus vacated the judgment of the regional court and remanded the case for rehearing.
In the justification for its judgment the Supreme Court pointed out that there is a consistent position in the literature that it is obvious from the reference in the law to assets “threatened with attachment” that at the time of the criminal act the ruling whose enforcement the perpetrator seeks to frustrate does not have to exist yet: “An action with the purpose of frustrating execution may occur before execution is commenced, as it is sufficient that the asset is threatened with attachment, and thus when the creditor has filed a statement of claim or unequivocally expressed its intention of commencing a legal action.”
The Supreme Court found that this offence may be committed at a time when execution is only threatened, when the creditor has clearly made it known that it will pursue its claims. It was clear in this case that company M. would take further judicial measures to obtain the amount it alleged to be due, and two cases—civil and criminal—were in fact already pending against the defendants in this regard.
The reasoning by the Supreme Court in this case should be borne in mind whenever a debtor attempts to protect its assets against creditors. Civil law and practice provide various instruments to protect the rights of debtors, but criminal law also imposes limits on the actions they may take.
Natalia Balcerzak and Janusz Tomczak, Dispute Resolution & Arbitration practice, Wardyński & Partners