Case 2: The deceived seller

of ownership remains valid.4 A cannot vindicate the painting. He has only a claim against B based on unjust enrichment (§ 812 s. 1 sent. 1, alternative 1 BGB, condictio indebiti).

Generally, only someone who has a real right in property can resist an execution against it. According to § 771 ZPO, a third party, who claims to have a right in property against which a bailiff is executing, can bring an action in court resisting the execution, provided that his right is one ‘that prevents the transfer of ownership’. Evidently, not even ownership by a third party will prevent a ‘transfer of ownership’ because of the rules on bona fide acquisition.5 The wording of § 771 ZPO is thus misleading. It is generally interpreted as meaning all rights of third parties that prevent an asset from forming part of the pool of assets belonging to the debtor that are available to insolvency creditors.6 Such rights include full ownership and security ownership.7 Claims in personam for the recovery of an asset only fall within § 771 ZPO if they result from a contract which provides for the grant of possession, for example, a leasing contract. Claims in unjust enrichment do not fall within that category. Since A’s claim is only in unjust enrichment, it ranks behind C’s claim.

The solution would differ if A was able to, and did, avoid the real agreement. This avoidance would render the agreement invalid from the beginning, in respect of B and third parties alike.8 Thus, the transferor would never have lost ownership.9 Third parties who acquire a real right in goods in between transfer and avoidance are protected only by the rules on bona fide acquisition (§§ 932--936 BGB).10 Yet, since attachment in an execution or in insolvency proceedings is not an acquisition by way of a transaction, §§ 932--936 BGB do not apply. Therefore, A could vindicate the painting from B or C, as applicable, if he was entitled to, and did, avoid not only the contract of sale but also the real agreement. In general, an error or other fault concerning the contract of sale does not extend to the real agreement.11 An exception, however, is made for

4Cf. Mayer-Maly, Münchener Kommentar/Mayer-Maly § 142 BGB n. 10; Larenz/Wolf,

Allgemeiner Teil des deutschen Bürgerlichen Rechts § 23 n. 78.

5 See further infra, German report, case 5(a).

6 Cf. Jauernig, Zwangsvollstreckungsund Insolvenzrecht 59.

7 See further infra, German report, case 10(a).

8 Münchener Kommentar/Mayer-Maly § 142 BGB n. 13; Palandt/Heinrichs § 142 BGB n. 2.

9 Larenz, Allgemeiner Teil des deutschen Bürgerlichen Rechts 482.

10See further infra, German report, case 5(a).

11Palandt/Heinrichs Überblick vor § 104 BGB n. 23; Münchener Kommentar/Mayer-Maly § 142 BGB n. 10; see also Van Vliet, Transfer of Movables 35 f.

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fraudulent misrepresentation which usually entitles the defrauded party to avoid the contract and the real agreement alike.12

a u s t r i a

A is entitled to demand that the painting be returned to him. If a sale is invalidated because of fraud (§ 874 ABGB), such an avoidance has effect ex tunc.13 This means that the parties are treated as if the contract had never been made; B is treated as if he never became the owner of the painting. Ownership in such a case reverts with effect ex tunc to the seller. A can vindicate the painting and he has a claim against B based on unjust enrichment (§ 1431 ABGB). As the painting does not therefore form part of B’s assets, his creditors are not entitled to execute against it.

An execution does not amount to bona fide acquisition, therefore B’s creditors cannot, under this principle, acquire any rights in the painting.

g r e e c e

If the contract of sale only has been avoided (article 154 A.K.),14 the real agreement remains valid because of the principle of abstraction. The transfer of ownership of movables is not invalidated by the absence of a legal cause. A has simply a claim against B to return his enrichment, that is to say the transferred painting (articles 903 A.K. ff.).15 As a claim in unjust enrichment is an obligation in personam, A cannot resist the execution.

If both the contract of sale and the real agreement are avoided by court order, the effects of the juridical act are retroactive (article 184 A.K.). This means that the ownership transferred to B by the avoided real agreement will revert ipso iure to the transferor, A. In the case of movables, provision is made for the protection of a third party who, in

12Palandt/Heinrichs Überblick vor § 104 BGB n. 23; RG 24 Nov. 1908, RGZ 70, 55 at 57; BGH 22 Dec. 1965, DB 66, 818; OLG Hamm 2 July 1973, VersR 1975, 814; see also Van Vliet, Transfer of Movables 36; Zimmermann/Verse, in: Zimmermann/Whittaker 209 f.

13Koziol/Welser, Grundriß des bürgerlichen Rechts I 139; Schwimann/Apathy N 18/§ 870 ABGB; OGH SZ 32/14, SZ 61/26.

14The law requires a declaration of avoidance by the court. The requirement of a court judgment favours the security of transactions.

15Ef. Thr. 6/70 EEN 38, 834.

the meantime, has acquired ownership in good faith (article 1036 A.K.). Execution is not a transaction to which the rules on bona fide acquisition apply. A can, therefore, resist the execution and claim the goods in B’s insolvency.

f r a n c e

In order for A to avoid the sale, A must prove that his consent was obtained by fraud -- this is referred to as a dol.16 Fraudulent conduct must have been used by the contracting party in such a way that, without it, the counterparty would not have entered into the contract (C. civ, article 1116). The burden of proof lies on A. In the present case, as B was aware of the identity of the artist and induced A to believe it was worthless, it can be assumed that the requirement of fraudulent conduct is satisfied. Even if fraud is established, a party may not avoid the contract himself: a court order is always necessary.17 The avoidance of the contract has retroactive effect vis-à-vis the transferor and also third parties. A can, therefore, once the contract of sale has been avoided, vindicate the painting from B on the basis of his right of ownership. The court could also order the payment of damages.

The case is complicated by the fact that C has started an execution procedure against B’s property. In French law, execution procedures have been extensively modified by Law No 91-650 of 9 July 1991 (hereafter L.) and Decree No 92-755 of 31 July 1992 (hereafter D.). At present, a creditor wishing to execute against the tangible property of his debtor will use the procedure of saisie-vente (L. articles 50 ff., D. articles 81 ff.). In principle, pursuant to article 2102 C.civ, the debtor’s entire estate can be the object of an execution by creditors. In order to execute, the creditor must obtain an execution title. An execution title is, generally, a final court decision, that is, a decision that cannot be appealed. It could also be (L. article 3) a notary deed bearing a writ of execution, a document issued by a bailiff to certify the non-payment of a cheque by a bank or certain categories of decisions having the same legal effect as a judgment. Once the creditor has obtained an execution title, execution can be effectuated simply by the use of a bailiff, who will seal the assets. After one month, the sale of the assets by auction is permitted

16The fraude under French law is a separate term that has different consequences so far as avoidance is concerned.

17See C. civ, article 1117. A court order would not be required if both parties agreed to avoid the contract, but this exception clearly is not relevant to this case.

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(L. article 52). If the procedure is contested, the execution judge (juge de l’exécution, JEX) is competent.18 The creditor may execute against only those assets which belong to the debtor (L. article 50). If assets belonging to third parties are executed against, the true owner may, while the execution procedure is ongoing, bring before the JEX a rei vindicatio action in respect of those assets (action en distraction de biens saisis). This action suspends the execution procedure (D. article 126). A case has upheld a rei vindicatio action by the purchaser of a lot of wood which had been sold by the debtor before the execution procedure started, but remained on his premises.19 The plaintiff must specify all the elements on which his title to the asset is founded (D. article 128). If the asset has been sold, however, a rei vindicatio action is no longer possible (D. article 129). Indeed, article 2279 C.civ would assist the new buyer, unless he acted in bad faith (even if the asset had been stolen or lost, since the sale took place as an auction sale: article 2280 C.civ).20 If the proceeds of the asset sold have not been distributed to creditors, however, the true owner of the asset could lay claim to them. If the proceeds have been distributed, his only remedy would be a rei vindicatio against the debtor himself, which is usually worthless, as the latter will almost always be bankrupt. In exceptional cases, the owner may have an action against the executing creditor, if the latter knew that the former was the true owner of the assets.

b e l g i u m

The invalidity of the contract of sale results in a retransfer of property rights to the seller. Third parties who have acquired rights in the goods are protected, however, under article 2279 C.civ.21 Hence, in case of a subsequent sale by the buyer, the purchaser will be protected.22 The same protection is granted to a pledgee. However, in contrast to the

18The JEX has exclusive competence to hear disputes arising out of execution procedures. He is usually a judge from the Tribunal de grande instance, but may also be the President of the Commercial Court if requested prior to the filing of a claim that falls within this court’s jurisdiction. In both cases, the competent judge is the judge of the court of the district in which the debtor lives or in which the asset is

located.

19Civ. 14 Jan. 1959, D 1959, Som, 100.

20On articles 2279 and 2280, see French report, case 5(a)

21See Belgian report, case 1.

22De Page, Traité élémentaire de droit civil belge II 753, nr. 829, C; Waelbroeck, Le transfert de la propriété dans la vente d’objets mobiliers corporels en droit comparé 77, n. 71.

termination of the contract,23 the principle of article 2279 C.civ. does not extend its protection to the creditors of the buyer if the contract is avoided on the grounds of fraud or mistake.

p o r t u g a l

As stated above,24 Portuguese law is based on the principle of causality, which means that any flaw in the contract of sale also affects the transfer of ownership. The consequence of this approach is that the invalidity of the sale can affect the position of third parties who acquire in good faith. Such parties are only protected when, in respect of things subject to registration, their acquisition was registered prior to the registration of the invalidity action (article 291◦ C.C.). In all other cases, if the court holds the contract of sale to be invalid, the law regards the position to be as if the transfer of ownership never occurred. A can therefore vindicate the painting, provided that, at the same time, he gives up the price received in respect of it (article 290◦ C.C.).25

The insolvency of B makes it more difficult to obtain a favourable court order. When A establishes his claim, he will be entitled to vindicate the painting. A’s claim must, however, be made in the insolvency proceedings, at the same time as all other actions concerning the assets of the debtor (article 154◦ CPEREF), which may result in considerable delay (article 201◦ CPEREF).

s p a i n

If the parties are experts on the subject matter, the contract may not be avoided. If, however, the parties are not experts, then the contract may be avoided on the basis of a mistake related to the object (article 1266 CC). In such cases the price is the key element.26 Contracts may be avoided when there is defect of form, from the retrospective avoidance of dealings with assets of the debtor’s estate within the suspect period,27 and from the lack of consent of the contracting parties (articles 1290-- 1301 CC). Any contract entered into under these circumstances can be

25See Mota Pinto, Teoria Geral do Direito Civil 616 ff.; Castro Mendes, Teoria Geral do Direito Civil II, 294 ff.; Ascens˜ao, Direito Civil. Teoria Geral II 332 ff.; Carvalho Fernandes, Teoria Geral do Direito Civil II, 396 ff.

26See Morales Moreno, in: Comentario del Código Civil II 461.

27See Spanish report, case 1(a).

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declared null and void by the judge, and once he gives such a ruling the seller can claim rei vindicatio.

Execution against the painting by C is valid (article 594.1 LEC). A may not challenge the sale of the painting if it has been acquired in good faith by a third party. However, once the judge has declared the contract of sale to be void, A can claim rei vindicatio against B’s creditors (in this case, a third-party claim to ownership) (article 595 LEC). A, in order to vindicate, must submit some evidence of his claim in writing to the judge.

Before the sale is avoided, A may request that the judge grant a precautionary measure (articles 721 ff. LEC) in order to prevent third parties from acquiring the painting in good faith (for example, by ordering the chattel, formerly in the defendant’s possession, to be deposited with a trustee or to be placed in judicial custody: article 727.3 LEC).

i t a l y

Will A recover the painting from B? The answer to the question is probably yes, although it cannot be regarded as entirely free from doubt, especially if the action to recover the painting is contemplated after the commencement of insolvency proceedings.28

The effect of the sale is to transfer ownership of the picture to the buyer under the principle of article 1376 of the Civil Code.29 The contract between A and B can be avoided, however, because it appears to be vitiated by fraud (dolo).30 Indeed, the contract must be avoided if A intends to recover the picture from B. For this purpose, A will have to start an action in court, according to articles 1441 ff. c.c. According to article 1445 c.c., avoidance of the contract for fraud, mistake or coercion does not affect the rights acquired by third parties in good faith pursuant to a non-gratuitous transaction (article 1445 c.c.).31 Hence, if B had sold the picture to Z -- ex hypothesi a good faith purchaser under a genuine sale -- Z’s ownership of the picture would stand even if A’s contract with B was avoided. The crucial issue, therefore, is whether

28Cf. Cass. 17 Jan. 1998, n. 376, Fallimento, 1999, 39; Dir. fall., II, 83 (contract terminated for facts antedating the opening of insolvency proceedings; action to recover the goods sold and delivered initiated after the opening of insolvency proceedings is rejected by the court).

29See Italian report, case 1.

30See on this point Graziadei, in: Zimmermann/Whittaker 224 ff.

31The contract vitiated by incapacity is subject to the opposite rule (article 1445 c.c.).

B’s executing creditor, C, stands in the same position as that of a third party who acquired rights for value in good faith from B over movable assets transferred to him. In this case, A’s claim to recover the painting would be defeated. There are, however, some reasons to think that the executing creditor cannot be regarded as a good faith purchaser of the painting. Hence, A should be able to recover the painting, though, as I have anticipated, opinions on the point may not be unanimous.

To argue in favour of A’s claim, one need only mention that article 1445 c.c. is usually considered to be an exceptional provision. The exception is to the principle that the avoidance of the contract has retroactive effect inasmuch as it aims to restore the parties to the same positions as they held before entering into the contract. Under Italian law, the retroactive effect of avoidance is not written large in the Code. It is rather taken for granted by the Code and illustrated by commentators and court decisions.32 Under Italian rules on transfer of property, judicial avoidance of the contract results in title to the picture automatically revesting in the seller because the passing of title to the buyer is undone the moment the contract is avoided. This interpretation of the Code explains why the provision of article 1445 c.c. is exceptional: it derogates in favour of an innocent third party.33 But there are no reasons to stretch this exceptional rule to cover the case of an executing creditor. Hence, A will recover the picture by proposing an action in court pursuant to article 619 c.p.c. This provision governs opposition to execution by third parties (opposizione del terzo assoggettato all’esecuzione). According to the letter of this article, only a third party who claims to be an owner, or to have another real right to the assets against which the executing creditor is proceeding, can oppose execution. The interpretation of article 619 c.p.c., however, extends the rules to claims for avoidance of the contract in cases like the one under consideration as well as to other claims.34 To recover the picture from the defendant, the claim to avoid the contract must be joined with a claim for delivery of the picture. This will usually be a personal claim, but it can also be a rei vindicatio.

32Sacco/De Nova, in: Trattato di diritto civile 544--545; Bianca, Il contratto 634--675.

33Mengoni, Gli acquisti ‘a non domino’ 33, n. 45; Tatarano, ‘Retroattività’, in: Enc. dir., XL, 90 (the principle which is derogated is resoluto jure dantis resolvitur et jure accipientis). For the opposite opinion: Roppo, Il contratto 873--875.

34Mandrioli, Corso di diritto processuale civile III, 162, n. 12; Punzi, La tutela del terzo nel processo esecutivo 197 (the point is not disputed). Cf. Cass. 4 Nov. 1982, n. 5789.

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The above remarks must be read in the light of an important caveat. The answer to our case rests more on first principles than on clear authority. In Italy, those principles could be questioned by assuming that executing creditors should be put on the same footing as good faith purchasers for value. If such an argument were to prevail, case 2 would generate an opposite answer. There is presently little chance of making an accurate prediction about the actual outcome of our hypothetical case.

t h e n e t h e r l a n d s

According to article 3:44 para. 1 BW, a contract can be avoided on the ground that it was entered into as a result of ‘fraud’.35 The avoidance of a contract has retroactive effect; the contract is regarded as if it never existed.36 Consequently, when the contract constituted the causa traditionis of a transfer of ownership, the retroactive nature of annulment results in the transfer losing its validity. In other words, ownership of the painting is deemed never to have been transferred, even though the painting was paid for and delivered.

In the present case therefore, A may exercise the right of rei vindicatio and claim back his or her painting free of any rights of B or of B’s creditors, since the latter may execute only against B’s property. Third parties who acquire property in good faith are protected under Dutch law.37 However, execution against property is not regarded as an acquisition in this sense, hence the protection does not extend to B’s creditors.

e n g l a n d

In a normal case involving the sale of art, the buyer is not bound to disclose to the seller his belief or knowledge that the painting is more valuable than the seller thinks or should be attributed to a painter other than the one believed by the seller to be its creator. In this case, there has been a misrepresentation inducing the seller to enter into the contract, the effect of which, even in the absence of fraud, is to permit the seller to have the contract avoided (rescinded).38 Fraud, too, gives

35Aside from fraud, misrepresentation and mistake are also grounds for the avoidance of the contract: article 6:228 BW.

38A statutory right to damages exists in the case of negligent misrepresentations, namely, those where the maker of a misrepresentation is unable to rebut the presumption of fault: Misrepresentation Act 1967, s. 2(1).

rise to a right of avoidance (rescission), though the incidents of rescission may be slightly different in this case. A misrepresentation for present purposes is a false statement of material fact that at least in part induces entry into the contract. Even a statement of opinion may be regarded as a statement of fact if it rests upon an implied factual substratum that the maker of the statement has knowledge that supports the opinion.39 A misrepresentation need not be verbal to give rise to relief: it can take the form of conduct leading up to the sale.40

Rescission means that the parties are returned to their precontractual position. The effect of rescission, therefore, is that ownership will revest in the seller if it has already passed to the buyer. This will be so even if possession of the subject matter of the contract has been acquired by the buyer. In the meantime, the buyer is said to have a voidable title so that any disposition for value to a bona fide purchaser acquiring from the buyer a legal41 real interest in the painting will pass to that purchaser a real interest that overrides the seller’s equity of rescission. Apart from this case, the seller’s right persists even as against the buyer’s insolvency administrator,42 including a trustee-in-bankruptcy in whom the buyer’s assets vest.43 The reason is that the insolvency administrator is considered to stand in the shoes of the insolvent44 and to have his conscience burdened in the same way as the insolvent.45 That insolvency administrator cannot claim to be treated as though he were a bona fide purchaser.

In the case of goods, once a judgment has been handed down in favour of the claimant it may be enforced by means of a writ of fieri facias. The writ is delivered to the bailiff (sheriff) and at that point it binds the goods.46 The sheriff does not yet acquire a real right in the goods but has the right to execute against (seize) the goods so long as they can be found in his administrative district. The sheriff does acquire a real interest at the time of seizure but, just as that interest is liable to be overridden by a secured creditor whose enterprise charge (f loating charge) becomes fixed while the goods remain in the hands of the sheriff,47 so it should also be

39Smith v Land and House Property Corp’n [1884] 28 Ch D 7.

40Spice Girls Ltd v Aprilia World Service BV (unreported, 24 Feb. 2000).

44Madell v Thomas [1891] 2 QB 230, 238; McEntire v Crossley Brothers [1895] AC 457, 461.

45Relief against misrepresentation originated in equity, the principle being that even the wholly innocent maker of a misrepresentation was not entitled to retain the benefit of a contract once on notice that the misrepresentation had deceived the person to whom it was made: Redgrave v Hurd [1881] 20 Ch D 1.

46Supreme Court Act 1981, s. 138(1).

47Re Opera Ltd [1891] 3 Ch 360; Taunton v Sheriff of Warwickshire [1895] 2 Ch 319.

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overridden by the revesting on rescission of the buyer’s real interest in the seller. Again, just as the executing creditor, acting through the sheriff, must complete the execution before a secured creditor’s f loating charge becomes a fixed charge on crystallisation, so too should that execution creditor be defeated by the seller if the property in the painting revests in the seller before completion of the execution. The reason is that the sheriff takes subject to existing equities.48 Execution is completed in the case of insolvency when the goods are seized and sold and the proceeds remitted to the judgment creditor.49 In non-insolvency cases, where the law is unclear, it may be that execution is completed when the goods are seized and sold.50 Certainly, if the painting remained in the hands of the sheriff, a seller rescinding the contract would be entitled to demand its return.

i r e l a n d

There is no right in Irish law to avoid a contract on grounds of fraud, etc., and so revest title in the seller once third parties have acquired rights against the property which forms the subject matter of the contract. Therefore, in this case A cannot claim the painting free of any rights of B, or of B’s creditor. A merely has a contractual claim against B.

s c o t l a n d

A can claim the painting back, free of the rights of B or of B’s creditor. Although ownership of the painting will by now have vested in B, and although in general a termination/avoidance of a sale contract has only personal effect, not real effect, the present circumstances constitute an exception to the general rule. If a transfer (by A) is induced by the fraud of the transferee (B), A can avoid the contract, and the avoidance will be effective against B’s creditors (though not against a person who buys

48Re Standard Manufacturing Co. [1891] 1 Ch 627, 641.

49Insolvency Act 1986, s. 183(3)(a); Bluston & Bramley Ltd v Leigh [1950] 2 KB 548. Where the judgment debt is for more than £500, the sheriff must retain the proceeds of sale for fourteen days and, in the case of a corporate winding-up within that period, must pay the proceeds to the company liquidator: Insolvency Act 1986, s. 183(3).

50In the case of receivership and secured creditors, the point was left open by Lindley LJ in Taunton v Sheriff of Warwickshire [1895] 2 Ch 319, 322, and in Re Opera Ltd [1891] 3 Ch 360.

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in the execution. In such a case, A would only have an unsecured claim (a concurrent claim) based on unjustified enrichment against B’s insolvency estate.

d e n m a r k

According to Danish law, B’s creditors normally enjoy no better position than B. There are some exceptions to this principle, but, if B is in possession of movables and this possession is based on an agreement which is invalid, A will be able to reclaim ownership of the asset not only against B but also against the creditors of B.56 In the present case, where B has used fraud against A, A can reclaim the painting free of any rights of B and B’s creditors.

s w e d e n

A transfer may be declared void according to, for instance, the rules on fraud in section 30 of the Contracts Act (lagen om avtal, 1915). These rules seem to be applicable to case 2, in which case the transferor becomes entitled to have the property separated from the assets of the bankrupt available to insolvency creditors or to the execution creditors of the transferee (a ius separationis). The transferor will thus be entitled to the return of the painting free of any rights of the transferee or his creditors.57

The ius separationis may arise even if the invalidity of the transfer is caused in part by events which occurred after the conclusion of the contract, as exceptionally may be the case when the transferor’s presumptions are frustrated.58

When the contract thus is voidable also in relation to the buyer’s creditors, the transferor has a right of separation even if he had permitted the buyer to dispose of the goods prior to payment (cf. cases 4--8).59

If the invalidity gives the transferor a right of separation in the transferee’s insolvency, the transferor may also vindicate the goods from a third party who has bought the goods from the transferee, unless the third party has taken possession of the goods (chattels) in good faith.

56Cf. Elmer/Skovby, Ejendomsretten I 157 ff. and Ørgaard, Sikkerhed i løsøre 71.

57NJA 1995, 162.

58NJA 1985, 178, where the seller delivered raw materials in the false belief, supported by the buyer, that the government would support a shipyard.

59NJA 1985, 178.