Credit Assignment and Assignment of Litigious Credit in Spain

How is it regulated in Spain?

Credit Assignment in Spain, as stated in Article 1528 of the Spanish Civil Code, comprises that of all ancillary right thereof, such as any sort of collateral, guaranty, mortgage, pledge or privilege. In other words, it is an agreement whereby credits, rights or actions pertaining to a person (natural or legal) are transferred by them to another entity onerously or gratuitously. This person (natural or legal) then assumes the same position as the original creditor, known as the substitution of creditor, including their rights and guarantees.

Onerous contracts are those in which some service, interest, or condition is imposed on what is given or promised, although unequal to it in value. Whereas, the objective of gratuitous contracts is to benefit the parties involved, without any promise of potential profit or advantage.

What can the debtor do in the event of an assignment?

In the event of an assignment, the type of knowledge that the debtor has is very important. The best course of action for the debtor is to pay before having knowledge of the assignment, which liberates them from the debt. This is summarised in Article 1527 of the Spanish Civil Code: the debtor who, prior to becoming aware of the assignment, should pay the creditor, shall be released from the obligation.

However, if the debtor sends payments to the previous creditor after the debt has been assigned and with knowledge of the change of creditor, it is likely that the payments will not be accepted which could cause the debtor to unintentionally breach the contract.

In the event of assignment of litigious credit, the debtor can be liberated by paying the credit at the price bought, the court costs and the interests, since the date of payment, to the creditor. As explained below, a credit is ‘litigious’ as soon as there is a response to the claim filed. Therefore, the debtor may exercise his right to extinguish the debt within nine (9) days, starting from the assignee’s demand for payment.  This is summarised in Article 1535 of the Spanish Civil Code.

Assignment of Litigious Credit in Spain

Credit is considered in litigation from the day the plaintiff submits to the court its response to a formal judicial claim, the object of which is the existence of credit. They will be considered credits in litigation until a final court order.

Litigious credits are also relevant to Vulture Funds who acquire debt considered to be weak or in default from the bank which they pay for in a lump sum (or a flat rate amount). This is often bad news for the debtor as if the funds are held by specialist companies such as Vulture Funds, they are a lot more difficult to contact and they often refuse to put proposed agreements in writing etc. Additionally, with a third-party acquisition of the debt, a debtor can only pay the set amount to extinguish his debt (as mentioned in Article 1535) but will never know the specific price of his debt. This leads to the question of what if it is possible to determine the price of an individual credit, could this individual price be considered a “production unit?”

• The Supreme Court understands that the application of this “production unit” would be possible when a claim or debt is considered as litigious as soon as a state of Defence is submitted with a certain unbundling of a single price.
• On the other hand, it could never be considered a “production unit” as the assignment of the credit does not serve as an economic solution. Rather assignment of litigious credits is the sale of a portfolio, in which the credits are perfectly-identified and the overall sale price is the result of applying to each of them a percentage. This makes it possible to easily identify the price paid for the specific credit for which the retract is interested.

What are the requirements for the assignment of Litigious Credit?

Even now in 2020, the Spanish Supreme Court has not established a clear criterion for the assignment of Litigious Credit and except for Article 1535, it remains a grey zone with a lack of clarity in Spain.

There is no requirement for the debtor to be notified of the assignment but there are several other requirements, such as:

• Credits have to be subject to transfer and can be transferred unless: it is prohibited by law OR the parties agree to prohibit the transfer.
• A special form is only required in the event:
  • A public deed is needed for the assignment of credits that come from an act recorded in a Public Deed.
  • Public deed and registration is needed for mortgage-backed claims.