“Close relationship” of the parties to a transaction detrimental to creditors
Through a fraudulent transfer claim against a third party, a creditor impacted by the debtor’s dishonest behaviour can enforce its rights against property transferred by the debtor to a third party. This allows the creditor to challenge the effectiveness of a transaction carried out with a third party to the creditor’s detriment.
Awareness of detriment must be shown
For a creditor to win a fraudulent transfer case against a third party, under Polish law the court must find that the third party knew, or by exercising due diligence could have known, that the transaction with the debtor was detrimental to the debtor’s creditors. (For more on these types of claims, see the article “Fraudulent transfer claim against a third party: A basic instrument for protecting creditors against debtors’ insolvency.”)
We should be clear from the start that this is not an easy showing for the creditor to make. Fortunately, the parliament is aware of this problem, and has strengthened the creditor’s procedural posture in defined situations. Under Art. 527 §3 of the Civil Code: “If, as a result of a debtor’s legal act performed to the creditors’ detriment, a person who is in a close relationship with the debtor gained a financial benefit, it is presumed that the person knew that the debtor acted knowingly to the creditors’ detriment.” This establishes an important legal presumption of a third party’s awareness of the detriment to creditors.
The meaning of the presumption in Civil Code Art. 527 §3
Before we explain in more detail when it can be said that there is a “close relationship” between the parties to a transaction, we must pause to examine the notion of a “presumption.” What is it, and what is its practical significance in the judicial process?
A legal presumption means that the law states certain consequences to be drawn by the court once certain other facts have been proven. The relevant facts must be shown by the person claiming the benefit of the presumption. Thus legal presumptions provide a certain shortcut in presenting evidence to the court. Once a litigant has successfully invoked a presumption, the burden of proof on the issue shifts to the party against whom the presumption is made. To defend itself, that party must rebut the presumption with some strong counter-evidence. This can be done, but it is difficult.
To take an example, suppose a debtor sells a large property in a prestigious location to his sister, with whom he shares close emotional ties, as manifest in various life matters. In this example, the debtor has disposed of his only valuable asset, thus preventing his creditors from satisfying themselves by executing against the property.
Here, operation of the presumption under Art. 527 §3 is triggered. The court considering a fraudulent transfer claim against a third party, brought by a creditor, must assume that the debtor’s sister was aware that her brother was acting to his creditors’ detriment when he sold the property to his sister. The court will follow the presumption, and now it is the sister who will have to prove to the court, by presenting evidence, that despite the “close relationship” linking her and her brother, she did not know that the sale of the property to her was detrimental to his creditors.
Who should prove the existence of a “close relationship,” and why?
If this presumption did not exist, the creditor would have to directly prove that the person close to the debtor acted with the intent to harm the creditor. And proving someone’s state of mind can be complicated and difficult, in terms of evidence and procedure.
If, on the other hand, the third party seeks to rebut this presumption, proof of ignorance is required—and in practice that is even harder.
Thus, a creditor bringing a fraudulent transfer claim against a third party should consider the presumption in Art. 527 §3. To invoke the presumption, the creditor first has the burden of proving that there was a “close relationship” between the parties to the allegedly fraudulent transfer triggering the presumption.
Who are the “persons in a close relationship” with the debtor?
Civil Code Art. 527 §3 does not define what is meant by the concept of a “close relationship,” nor is there any statutory enumeration of persons considered “close.”
We will first deal with the intuitive (rather than legal) understanding of what it means for people to be “in a close relationship” as referred to in Art. 527 §3. The person does not necessarily have to be a member of the debtor’s family (i.e., they do not have to be related by blood or marriage). Conversely, persons related by strict family ties need not always be “close” for purposes of Art. 527 §3.
Fortunately for harmed creditors, there has been a noticeable trend in court rulings to expand the concept of a person “in a close relationship” to include ties between fiancés, persons cohabitating outside of marriage, ties of friendship or gratitude, or even a commonality of personal, financial or business interests (even if they are not permanent).
“Closeness” can be found in the maintenance of business relations, making of a loan repayment guarantee, or planning of joint business activity. In assessing “closeness,” the court should examine the facts on the ground, such as emotional ties, friendship, and financial or economic ties (e.g. P. Nazaruk, commentary on Art. 527 in J. Ciszewski et al. (eds.), Civil Code: Revised Commentary (LEX/el. 2024)). The case law also takes the view that Art. 527 §3 refers to a relationship of closeness between two persons that justifies the assumption that one of them is in possession of information about the current financial situation of the other (Supreme Court of Poland judgment of 24 April 1996, case no. I CRN 61/96).
A commonality of interests justifying a finding of a close relationship is inferred by the courts for example in a situation where the debtor has carried out a transaction with a partnership in which the debtor’s spouse was a general partner, sharing a household with the debtor and also jointly and severally liable to the creditor under a fraudulent transfer claim, against whom execution proved ineffective (Supreme Court judgment of 7 March 2013, case no. IV CSK 452/12).
Recently, the Supreme Court held (in the judgment of 16 November 2023, case no. II CSKP 1592/22) that the assessment of “closeness” under Art. 527 §3 does not refer only to familial relationships, or personal relationships more broadly, but can also apply to professional or business relationships. According to the court, a relationship of closeness may even arise from sporadic business contacts between the debtor and a third party, accompanied by other types of relations, financial or otherwise.
It is momentous in practice that in that case the Supreme Court held that when determining whether a connection exists between parties to a transaction, the courts should conduct a thorough assessment grounded in the realities of the specific case. Thus, in a given case, the court may find that “closeness” came into being as defined in Art. 527 §3 of the Civil Code even there were only occasional business contacts between the debtor and the third party, but for example they had a close personal friendship.
In another case (judgment of 30 March 2022, case no. I ACa 467/20), the Kraków Court of Appeal observed: “It is clear from life experience that when spouses live and function together—and this has been the case here with Mr and Mrs K.—they tend to talk about financial situations that could have a major impact on their personal and family situation, even if only one of the spouses conducts a business generating large turnover. The defendant must have been aware of the financial condition of her husband’s business, which is why the two jointly made certain property transfers.”
In that case, the court stated that since the agreements between the spouses were complex and atypical, it should be recognised that both spouses must have discussed in advance the wording of the agreements and the need to conclude them, and decided on them together. In our view, this ruling vividly illustrates how favourable the presumption under Art. 527 §3 is to creditors. In that case, it was first established that the spouses shared a spiritual, physical and economic bond. On this basis, it was established that the wife was aware of her husband’s financial situation, and from all of this it was concluded that she understood the meaning of the agreements entered into before a notary and knew that her husband was acting with knowledge of harming the creditor.
At this point, we should mention that another presumption serving aggrieved creditors is found in Civil Code Art. 527 §4 (“If, as a result of the debtor’s legal act performed to the creditors’ detriment, a financial gain is obtained by a business entity in permanent economic relations with the debtor, it is presumed that the business entity was aware that the debtor was knowingly acting to the creditors’ detriment”). However, this provision refers to “permanent economic relations” between the third party and the debtor, while the presumption under Art. 527 §3 can operate even when there were only sporadic business contacts between the debtor and the third party, or even when the third party was not a business entity. One presumption does not exclude the other.
Conclusion
To enjoy the benefit of the presumption under Art. 527 §3 of the Polish Civil Code, the creditor must show the existence of a close relationship between the debtor and the third party who has obtained a material benefit to the creditor’s detriment. One of the methods to collect evidence of “closeness” will be an analysis of economic ties (e.g. analysis of the persons affiliated with companies as disclosed in the National Court Register, analysis of who has guaranteed loans to the debtor, etc) and personal ties between these persons. The search for such ties can be difficult, but even a big effort can pay off.
Aleksandra Cygan, adwokat, Adam Studziński, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners
