Spanish banks beware of insolvent Dutch nationals with holiday homes
In a GRR column in May last year, I reported on a Dutch bankruptcy case in which a Spanish bank with a secured claim learned an expensive lesson when dealing with the bankrupt Dutch owners of a Spanish holiday home.
The bank, Alicante-based Caixa Rural Altea Cooperativa de Credit Valencia (Caixaltea), collaborated in the sale and transfer of title of a holiday home in Spain owned by the two Dutch nationals without the permission of their insolvency practitioner (IP), who had been appointed in insolvency proceedings in the Netherlands.
The facts of the case, which gave rise to another ruling by the Court of Appeal Arnhem-Leeuwarden last month, go back eight years. The two Dutch nationals were declared bankrupt in June 2016 and their court-appointed IP informed the bank of the insolvency proceedings the following month. At that time, the bank knew that the transfer of the house was scheduled for 6 weeks later, on 3 August 2016. One week before the transfer was due to take place, the bank requested a translation of the insolvency judgment, which the IP sent on 5 August, two days after the house was transferred. After the transfer, the debtors deposited surplus value from the sale into an account with another bank.
The IP called the Spanish bank to account for its breach of duty of care. The IP complained that due to its breach he was unable to prevent the holiday home that was sold by the debtors during the proceedings from also being transferred by them to the buyers, and that the proceeds had been withdrawn from the insolvent estate.
At the first instance ruling last year, a Dutch court ruled in favour of the IP, finding Caixaltea could have been expected to ask the IP for a translation of the bankruptcy judgment immediately after receiving his e-mail, and it would have received the before the planned transfer of the holiday home if it had done so.
On appeal, the Arnhem-Leeuwarden appeal court sided with the IP again in a 13 August ruling, finding the Spanish bank liable. It reiterated that the original EU Insolvency Regulation (Regulation 1346/2000) applied in the case, meaning Dutch law applied to the insolvency proceedings.
But it noted that Spanish law applied to the effects of the insolvency proceedings on a contract giving the right to acquire or use immovable property. A right in rem such as that of a mortgage on a property located in a country other than the country where the insolvency proceedings were opened remains unaffected by those proceedings. The content of the right of mortgage is determined by Spanish law.
In its ruling last month, the appeal court first dealt with the meaning of a duty of care for a bank. It embraced the principle that the social function of a bank can entail a special duty of care towards third parties whose interests it must take into account.
In Dutch jurisprudence, the idea is that banks play a central role in banking and securities transactions and with the provision of services in such areas, that banks are experts in those areas and that they have information that others lack. But the Spanish bank argued its strict duty of care was primarily aimed at its clients by virtue of the contractual relationship with them, and only secondarily at third parties whose interests it must take into account on the basis of what is appropriate in social relationships according to unwritten law.
The answer to the question of whether the duty of care towards the IP had been breached depended on the circumstances of the case. According to the bank, the circumstances of the case did not lead to an affirmative answer to the question. In particular, the bank argued it did not “delay” too long after the IP had informed it of the insolvency of its account holders. According to the bank, the first instance court wrongly ruled that it had acted negligently towards the estate by not immediately requesting a translation of the bankruptcy judgment. It said it could not have known that something was “wrong” and that haste was required. They also disputed the idea that the IP could have prevented the holiday home from being transferred to the buyer if the bank had requested a translation more quickly.
But the appeal court disagreed, rejecting the bank’s defence that the IP’s request was complied with insofar as he asked for quick action: the account was blocked immediately. The bank said if the first instance court’s reasoning was valid, the bank was apparently expected to respond to the IP within 48 hours, which the banks said could not be expected under the circumstances.
But the appeal court said It must have been clear from the IP’s email of 20 July 2016 (or at least it should have been taken seriously into account) that the IP was not aware of the sale, and that he had no reason to urge the bank to act quickly on that basis, to hurry up with sending an English (or Spanish) translation of the judgments in which the insolvencies were declared or to take other preventive action.
The court reasoned that the IP did not mention a response period in his email and did not mention an imminent sale or transfer. Unlike the IP, however, the bank was aware of the sale and the intended transfer. Therefore, there was indeed reason to suspect that, in the words of the bank, “something was wrong”; after receiving the email of 20 July 2016, it had to seriously consider its clients’ lack of power to dispose of the property. Plus, the court ruled, the bank knew the debtors lacked power to transfer ownership of the property within the planned period and to receive a purchase price for it.
The Court of Appeal stressed that, given such knowledge, the bank should have acted with such expediency as was necessary for a timely translation. Its own grievances imply that it would have fulfilled this duty of care if it had requested a translation within two days. Valid arguments for the defence that this could not be expected of the bank were not put forward. The size of the bank branch or the time of the request cannot be regarded as such, the appeal court found.
The court then took the role of the parental adviser: if there had been any doubts about the authenticity of the email or the legal consequences of the insolvencies of the two Dutch nationals, it would have been easy for the bank to inquire, it said – possibly with the help of its legal department. In any case, it was simultaneously possible, responsible and even necessary for the bank to urgently request a translation from the IP.
Given the period that, according to the bank itself, could be used for the expected receipt of the requested translation and given also the knowledge about the time of the intended transfer, the bank could have been expected to request a translation with great urgency, within 48 hours. The appeal court concluded that, by not doing so, the bank breached its duty of care under the specific circumstances of the case and is liable for the damage suffered by the IP as a result.
Could the IP have stopped the transfer if a translation had been requested earlier?
If the translation had been requested within the aforementioned period, it would then have been clear to the bank in time that quick action was required. If the bank had done so, the IP would still have had time to point out to the notary that the transfer could not proceed without his consent. The buyers could also have been informed.
The bank did not contest the starting point of the IP and the court of first instance that the transfer to the insolvent debtors could have been stopped, which the court determined meant that the bank was liable for the damage suffered by the IP as a result of the transfer. In the judgment, the appellate court calculated damages at a level 30% lower than what was ordered in first instance: a total of more than €168,000 euros instead of €215,000 euros.
In all, what I wrote a year ago, has been confirmed. The bank learned an expensive lesson that it should seriously reconsider the internal structure and organisation between its head office and branches when it has to deal with European holiday homeowners living outside of Spain. The Court of Appeal specifically indicated where the emphasis should be placed.
There are estimates that of the Dutch people who own a second home, 100,000 of the second homes are in the Netherlands and 50,000 of them are abroad. In Europe, it is not only Spanish banks that should understand the legal system that governs Dutch nationals buying real estate located outside of the Netherlands, financed with a (secured) loan from a bank in the country of the house’s location.
References
Court of Appeal Arnhem-Leeuwarden 13 August 2024, ECLI:NL:GHARL:2024:5140.
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication and the column appeared in GRR on 23 September 2024. See www.globalrestructuringreview.com