Bankruptcy Law: Seizure and Sale of Property Possible if in Debtor’s Possession. If Not…

The bankruptcy trustee is required to take possession of the bankruptcy debtor’s real estate after the opening of the bankruptcy proceedings and to liquidate it as soon as possible to satisfy creditors. However, if the real estate is in the possession of any other person, a complex circle of court disputes begins. This problem has not been resolved by any of the many amendments to the Bankruptcy Law.

We witness daily that legal amendments do not achieve the effect they are intended to achieve in a short period, at least according to the announcements of the legislator. Instead, legal uncertainty increases because the implementation of the amended provision largely depends on how well it is understood by those who should apply it, such as employers, traders, tax authorities, courts, and citizens.

We also witness that legal provisions that would be necessary to change for efficiency and protection of the rights of those affected remain unchanged because, well, that is how the legislator decided (although we are always left without an explanation for the denial). I am sure that in every industry there is a consensus on changing at least five things that would increase the efficiency of that industry. But the profession, especially practitioners, have little influence on the amendment of legal provisions even though they participate in legislative groups. Their participation is often merely cosmetic.

Unfilled Gap

Thus, in the Bankruptcy Law, although it has been amended three times in the last eight years, the amendment of one provision that would significantly affect the goal of that law, i.e., the efficient satisfaction of at least part of the claims of bankruptcy creditors, is missing. The bankruptcy trustee is required to take possession of the bankruptcy debtor’s real estate after the opening of the bankruptcy proceedings and to liquidate it as soon as possible. The sooner the real estate is liquidated, the sooner creditors will receive the monetary benefit realized from its sale. The final price achieved for the real estate in the sale process is primarily influenced by its condition and location, but also by whether the real estate is free from things and persons. Namely, often the bankruptcy debtor’s real estate is in the unlawful possession of other persons at the time of the opening of the bankruptcy proceedings, so the bankruptcy trustee is obliged to take all actions to take possession from those persons.

However, there is no effective means of taking possession of real estate for all cases. The Bankruptcy Law distinguishes between situations when the unlawful possessor of the real estate is a responsible person of the bankruptcy debtor up to the day of the opening of the bankruptcy proceedings, i.e., a former director, from the situation when any other person is in unlawful possession of the real estate. In the first situation, the bankruptcy trustee can, in accordance with Article 216, paragraph 2 of the Bankruptcy Law, based on the enforcement decision on the opening of the bankruptcy proceedings, request the court conducting the bankruptcy proceedings to order that person to surrender the real estate and determine enforcement actions to forcibly implement that order. Along with the order for surrender, the court may also ex officio determine coercive measures against that person. For the implementation of that order, the court is authorized to request police assistance.

How to Bypass Creditors

However, if any other person is in possession of the real estate, the bankruptcy judge, in accordance with Article 216, paragraph 3 of the Bankruptcy Law, will schedule a hearing at the request of the bankruptcy trustee and invite the person who, according to the bankruptcy trustee’s claims, is in possession of the real estate. But if that person opposes the bankruptcy trustee’s request for surrender of possession, it is sufficient for them to simply state ‘that they oppose the surrender of possession’, the court will, based on Article 216, paragraph 3 of the Bankruptcy Law, reject the bankruptcy trustee’s request and refer it to litigation for the realization of the right to surrender possession.

Before the decision in that litigation becomes final, at least three years will pass, and after that, it is necessary to initiate a new procedure, namely an enforcement procedure for the eviction of that person. If in the meantime some third person enters into possession of the real estate, also unlawfully, which is frequent, then the entire procedure must be restarted, now against that third person. It should be emphasized that all costs of conducting the procedure are ‘financed’ from the funds belonging to the creditors, which reduces the bankruptcy estate from which creditors are ultimately satisfied. Namely, it is often questionable whether the costs of conducting procedures for surrender of possession after the finality of decisions made in those procedures can be satisfied from persons who were in unlawful possession of the real estate.

A Small Change is Needed

To prevent such damage to creditors, it would be sufficient to apply the identical solution from Article 216, paragraph 2 of the Bankruptcy Law to all other persons and additionally indicate that enforcement is carried out against any person who is found in the real estate at the moment of taking possession. This would reduce the number of proceedings before the court, the bankruptcy trustee would take possession of the real estate sooner, the real estate would be sold free from the possession of any persons, and practice has shown that such real estate ultimately achieves a higher price in the sale process.

This would also protect the interests of creditors and the bankruptcy proceedings would end significantly sooner than is the case when proceedings are conducted for surrender of possession. Why the legislator places other persons in a more favorable position than the legal representative of the debtor up to the opening of bankruptcy remains unexplained. But the key is that the amendments to the Law promise that everything will be nicer, easier, and more efficient. And it won’t.