Baker & McKenzie : Recovery of Property. Overview of Court Practice.

On November 13, 2008 the Presidium of the Supreme Arbitrazhniy Court (the “VAS”) of the Russian Federation issued Information Letter No. 126 “Court Practice Overview Regarding Issues of Recovery of Property from Another Person’s Unlawful Possession” (the “Overview”).

At present all Arbitrazhniy courts have to follow the VAS instructions provided in the Overview when they adjudicate the actions of owners for retrieval of their property (including real property) from the other person’s unlawful possession (a civil law analogue of the common-law concept of replevin actions).

The Overview consistently develops the legal view on the inapplicability of legal regulations on restitution (Article 167 of the Civil Code of Russian Federation) to a good faith acquirer, which legal view was earlier presented in Ruling No. 6-P of the Constitutional Court of Russian Federation of April 21, 2003 (“Ruling 6-P”), and provides new clarification on the retrieval of property from another person’s unlawful possession.

An acquirer in good faith is a someone who 1) acquired property from a person that had no right to alienate it; and 2) was unaware and could not have been aware of the absence of such a right.

The recommendations provided in the Overview should be considered by prospective buyers (when assessing the possible risks of entering into transactions with problem assets), by acquirers in good faith (when protecting their rights to acquired movable and immovable property from unjustified claims of former proprietors), as well as by owners that have forfeited their property and wish to retrieve it from unlawful holders.


Preconditions for Recovery of Property

Under Article 302 of the Civil Code of Russian Federation, an owner may retrieve its property from the possession of a good-faith acquirer only if the owner (or the person authorised by the owner to hold the property) has forfeited the property against its will.

In its Overview the VAS has specified the cases in which the acquirer may not be recognized as an acquirer in good faith; and the cases in which the property is considered as having left the owner’s possession against the owner’s will.


Bad Faith

The acquirer may be considered as an acquirer in bad faith in the following cases:

  • if the property was alienated to the acquirer at a wittingly understated price, or if there were other circumstances related to the transaction that should have caused the acquirer to doubt the alienator’s rights to the property;
  • in the case of existence of interrelation between the acquirer and the person that alienated the property:
  • there is kinship or another type of relationship between the acquirer and the person that alienated the property (alienator);
  • the persons involved in the transaction for acquisition of the property participate in the charter capital of the companies that entered into the transaction;
  • one and the same person holds positions in the companies that entered into a transaction on acquisition of property;
  • there is kinship or another type of relationship between the persons that effected a transaction on acquisition of property on behalf of the companies;
  • if the property has not been yet transferred to the acquirer’s possession by the time the acquirer became aware of or should have become aware of the alienator’s bad faith;
  • if the acquirer paid for the property acquired under a transaction only after it became aware of or should have become aware of the absence of the other person’s right to alienate the property.

In the presence of any of the abovementioned circumstances the court may recognize the bad faith of the acquirer.

It should be noted that it was decided not to include in the Overview such a criterion of the acquirer’s bad faith as prompt reselling of the property by the latest alienator (for example if the alienator sold the real property to the acquirer the day after the alienator state registered its ownership right to such property).


Termination of Possession Against the Will of the Owner

The Overview provides another important condition for consideration of the owner’s claim to reclaim the property – the owner should have forfeited its property against its will. Specifically, the Overview contains the following clarification on this matter:

  • if the property was impounded from its owner upon a court decision (and for example was subsequently sold to a third party during enforcement proceedings or was transferred to the third party by the owner willingly in pursuance of the court decision), and in case this court decision was subsequently revoked, then such property is considered as having left the owner’s possession against the owner’s will.
  • It is interesting to note that the initial version (draft) of the Overview included the following examples when the property was considered to have left the owner’s possession at the owner’s will:

    • if the property of a legal entity was alienated by its sole executive body, even though the procedure for entering into a transaction was violated (for example, a major transaction was not approved by the board of directors);
    • even if the owner’s representative exceeded its powers when it made a transaction for alienation of property, the property is considered to be alienated at the will of the owner.

    Both of these (quite arguable) provisions were not included in the final version of the Overview. However, it should be noted that, although not included, these provisions may still become grounds for court decisions in similar cases.


    Other Provisions of the Overview

    The Overview’s provisions also confirm the legal opinion earlier presented in Ruling 6-P, according to which a party that alienated property to another party under an invalid transaction may not commence a replevin action against such another party in order to return the property.

    The Overview also includes clarifications concerning the limitation periods applicable to replevin actions.

    The final version of the Overview also left out certain provisions that were included in the draft. For example, one of the provisions not included in the final text was a clarification on the burden of proof under a replevin action.

    Should any questions arise in connection with the above, please contact Partners Konstantine Kouzine or Maxim Kuznechenkov at the Moscow Office of Baker & McKenzie at +7 (495) 787 2700, or Maxim Kalinin, Partner, at the St. Petersburg Office of Baker & McKenzie at +7 (812) 303 9000.