Research on Mortgage Claims - What should creditors do when real estate is insolvent?

Author | Lawyer Guo Xiangfeng

Introduction

According to Article 414 of the Civil Code of the People's Republic of China (hereinafter referred to as the Civil Code), when the same property is mortgaged to two or more creditors, the proceeds from the auction or sale of the mortgaged property shall be paid offorderIt is determined according to the time sequence of mortgage registration. This means that, in general, the mortgage registered first (first charge) has priority over the mortgage registered later (second charge) in the order of repayment.

However, if the first mortgage claim is not enough to repay in full, the second mortgage claim will usually participate in the distribution according to the remaining price according to the chronological order of registration after the first mortgage claim is satisfied. In judicial practice, even if the first mortgage claim is not paid in full, there are some possible exceptions, so that the second mortgage claim can participate in the distribution of mortgage auction funds.

As an attorney, the author has recently participated in several cases involving the acquisition and disposal of real estate mortgage claims, and has initiated litigation or enforcement procedures. This is a summary of the legal application and practical experience in the handling process. It is a summary of the case handling and a source of inspiration. Colleagues and peers are welcome to help each other and jointly improve the execution ability.

background

China's real estate market has been sluggish in the past few years. Many owners have mortgaged their houses on different platforms through various channels for different purposes or needs. With the continuous decline in housing prices, these owners who have mortgaged their houses multiple times have taken the lead in abandoning their houses and cutting off the supply.

Recently, some media broke out: the appraisal value of a house in Shenzhen has dropped from 6 million to more than 2 million. In this case, the principal and interest of the creditor of the first mortgage are not guaranteed, and the situation of the creditor of the second mortgage is even more conceivable. So, what kind of legal means can the creditor of the second mortgage who also guarantees the creditor's rights and enjoys the priority quickly and maximize the realization of its claims? It is worth exploring in depth!

concept

The so-called second mortgage claims, also known as net worth loans, are the claims formed by the second mortgage loan of the real estate, that is, the real estate in the first mortgage loan is mortgaged and applied for a loan again. Under normal circumstances, 70% of the appraised value of the real estate minus the balance of the mortgage loan is the amount of the second mortgage loan. For example, if the mortgage loan balance is 5 million, the second mortgage loan amount is:

10million × 70% - 5 million = 2 million.

Legal path

Article 403 of the Civil Code stipulates that if a chattel is mortgaged, the mortgage right shall be established when the mortgage contract takes effect; without registration, it shall not be opposed to a bona fide third party.

Article 409 of the Civil Code provides that the mortgagee may relinquish the mortgage or the order of the mortgage. The mortgagee and the mortgagor may agree to change the order of the mortgage and the amount of the secured creditor's rights. However, if the change of the mortgage has not been agreed in writing by the other mortgagees, it shall not have an adverse impact on the other mortgagees.

Article 410 of the Civil Code stipulates that: If the debtor fails to perform the due debts, the mortgagee may agree with the mortgagor to receive compensation at a discount for the mortgaged property or at the price obtained from the auction or sale of the mortgaged property. If no agreement is reached on the way to realize the mortgage, the mortgagee may request the people's court to auction or sell the mortgaged property.

Article 506 of the Supreme People's Court's Interpretation on the Application of the Civil Procedure Law of the People's Republic of China stipulates that after the enforcement procedure begins, if other creditors of the person subject to enforcement who have obtained the basis for enforcement find that the property of the person subject to enforcement cannot satisfy all their claims, they may apply to the people's court to participate in the distribution.

Creditors who have priority or a security interest in property seized, seized or frozen by the people's court may directly apply to participate in the distribution and claim the priority right of compensation.

Articles 207 and 208 of the Civil Procedure Law provide that: After the people's court accepts the application of the security owner to realize the security interest, if it meets the law, it shall rule to auction or sell the secured property, and the parties may apply to the people's court for enforcement according to the ruling; if it does not meet the law, it shall rule to reject the application, and the parties may file a lawsuit with the people's court.

Based on the above legal provisions, as a mortgage creditor's right, the legal realization path of the second mortgage creditor's right includes:

(1) By reaching an agreement with the mortgagor, directly auction or sell the mortgaged property and receive priority in repayment;

(2) By applying for the intervention of the people's court, directly auction or sell the mortgaged property and receive priority in compensation;

(3) In the event that the application for the realization of a security interest is rejected, a lawsuit may be brought to the people's court.

(4) After entering the execution procedure, they may directly apply to the court to participate in the distribution and receive priority compensation without litigation.

(5) In order to seize the first opportunity, dominate the auction time and auction reserve price, take the initiative to file a lawsuit against the court for mortgage disputes.

Practice path

(1) A mortgage creditor gives up the mortgage or the order of the mortgage

According to Article 409 of the Civil Code, the mortgagee can give up the mortgage or the order of the mortgage. If the creditor of the first mortgage gives up the mortgage or the order of the mortgage, the creditor of the second mortgage can participate in the distribution of the mortgage auction money.

(2) The creditor and the mortgagor agree to change the order of the mortgage

According to Article 409 of the Civil Code, the creditor of the first mortgage and the mortgagor can agree to change the order of the mortgage. If the creditor of the first mortgage and the mortgagor agree to change the order of the mortgage, then the creditor's rights of the second mortgage can participate in the distribution of the mortgage auction funds. It should be noted that according to Article 409 of the Civil Code, the change of the mortgage without the written consent of the other mortgagees shall not have an adverse impact on the other mortgagees.

Therefore, in the case of the first mortgage creditor giving up the mortgage, the mortgage order or changing the mortgage, other mortgagees still need to agree to make the second mortgage creditor participate in the distribution of mortgage auction funds.

(3) The behavior of the creditor of the first mortgage damages the interests of the creditor of the second mortgage

Article 410 of the Civil Code stipulates that if the agreement between the mortgagor and the mortgagor to receive the preferential payment based on the discount of the mortgaged property damages the interests of other creditors, the other creditors may request the people's court to revoke the agreement. Therefore, if the agreement reached between the creditor of the first mortgage and the mortgagor damages the interests of the creditor of the second mortgage, the creditor of the second mortgage may request the people's court to revoke the agreement.

(4) Reassessment of the value of the collateral

If the value of the collateral is reassessed during the auction process, and the evaluation results show that its value is higher than the amount of the first mortgage claim, then after the first mortgage claim is satisfied, the remaining price can be used to repay the second mortgage claim.

(5) The creditor of the first mortgage agrees to the creditor of the second mortgage to participate in the distribution

In practice, the creditor of the first mortgage may agree to the creditor of the second mortgage to participate in the distribution of mortgage auction funds, especially when the creditor of the first mortgage thinks that the creditor's claim of the second mortgage also has a certain protection value.

(6) The mortgage of the creditor has not been registered or the registration is invalid

Article 403 of the Civil Code stipulates: If a mortgage is made with movable property, the mortgage right shall be established when the mortgage contract takes effect; without registration, it shall not be opposed to a bona fide third party. Article 414 of the Civil Code stipulates: If the mortgage right of immovable property is not registered, it shall be paid in proportion to the creditor's rights. Therefore, if the mortgage right of the first mortgage creditor is not registered or the registration is invalid, its mortgage right may not be recognized, so that the second mortgage creditor can participate in the distribution.

(7) Although the first encumbered creditor's right has been registered, the procedures for confirming the creditor's right are defective

The Intermediate People's Court of Jinan City, Shandong Province (2019) Lu 01 Zhiyi No. 1056 "Li Bin, Shandong Zhongsheng Juxin Real Estate Development Co., Ltd. Enterprise Loan Dispute Enforcement Review Enforcement Ruling": First, the mortgagee has the right to mortgage the mortgaged property, and the realization of its rights is to enjoy the priority to receive compensation for the auction proceeds, which cannot prevent the people's court from disposing of the mortgaged property.

Second, the exercise of the right of priority in repayment shall be conducted through litigation procedures, and the authenticity of the creditor's rights and debts, the validity of the mortgage contract, and the scope of priority in repayment shall be reviewed by the people's court. In this case, the authenticity of the creditor's rights claimed by the dissenters and whether they have the right of priority in repayment of the auction price of the mortgage have not been confirmed by an effective judgment.

Third, the purpose of setting up the mortgage is to ensure the performance of the main contract and enable the creditor to fully realize the creditor's right. Therefore, the basis for exercising the priority right must be the authenticity of the creditor's right... But the existing evidence cannot prove that the dissident has a creditor's right against the person subject to execution. Therefore, there is no factual basis for the dissident to request protection of his priority right to the real estate and land involved.

Therefore, if there are defects in the confirmation procedure of the first mortgage creditor's right, which makes the first mortgage creditor unable to fully exercise its priority right, then the second mortgage creditor may have the opportunity to participate in the distribution of mortgage auction funds.

(8) Special circumstances stipulated by law

Hezhou Babu District People's Court (2020) Gui 1102 Zhiyi No. 3 "Hezhou Jintai Industrial Co., Ltd., China Agricultural Bank of China joint stock company Hezhou Bagui Sub-branch Financial Loan Contract Dispute Enforcement Review Ruling": "Civil Code" Article 417 (formerly "Guarantee Law") No matter whether the buildings on the land use right to be auctioned are mortgage-secured property, they cannot prevent the court from auctioning.

The buildings on the auction land are collateral, and all the proceeds from the auction can be used to repay the mortgage debt; if the buildings on the auction land belong to new houses, the proceeds from the auction of the new houses belong to the debtor.

According to the relevant provisions of the Civil Code, there may be special circumstances, such as part of the value of the collateral is not legally within the scope of the protection of the first-mortgage creditor's right, and this part of the value can be used to repay the second-mortgage creditor's right.

It should be noted that these exceptions to the realization of the second mortgage claim are not absolute, and whether and how to apply them need to be determined according to the specific circumstances of the case and the judgment of the court.

And finally.

In practice, the creditor of the second mortgage should actively participate in the litigation and enforcement procedures, claim their rights, and provide corresponding evidence to support their claims. If the second mortgage is the first one, if it is assessed that the price obtained after the auction may not be enough to satisfy the creditor's rights, it is necessary to clearly inform the client that there may be no legal risks such as refund or very little refund after the auction. At this time, it is necessary to choose carefully whether to start the auction procedure.

In addition, after the first court has completed the real estate evaluation and before the auction announcement is issued, the situation of losing the right to dispose of due to the expiration of the seizure has occurred from time to time in practice. Therefore, special attention should be paid to the period of seizure and timely renewal in the process of evaluating the auction, and the right of first seal cannot be lost due to the expiration of the seizure.

Helping clients achieve efficient and favorable execution results is the purpose of execution and disposal attorneys. Only by constantly learning, actively practicing, and continuously summarizing and improving can practitioners in the field of execution gradually improve their professional capabilities and lay a good foundation for participating in the agency work of execution cases.

Lawyer Profile

Lawyer Guo Xiangfeng

Senior Partner of

Main attack: final execution + insurance refusal

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