A creditor’s claim secured by a mortgage

Under Article 133 of the Bulgarian Obligations and Contracts Act, the debtor’s entire estate stands as security for the creditor’s claim. The creditor can choose whether to seek satisfaction from assets specifically pledged as security in its favour, if any, or from other available assets. A debtor’s act that diminishes those assets, or makes recovery from them significantly more difficult, is therefore prejudicial to the creditor. A mortgage confers the rights set out in Article 173 of the Act: the mortgage creditor is entitled to preferential payment from the proceeds of the mortgaged property in the order of priority under Article 136(1), point 3, regardless of a change in ownership or whether the property would otherwise be exempt from seizure. A debtor who mortgages property in favour of a third party thus prejudices the creditor within the meaning of Article 135(1).

Where the prejudicial act follows the creation of the creditor’s claim, the debtor knows of the prejudice. Where the debtor disposes of property without consideration, it suffices for the creditor to prove that the debtor knew of the obligation owed to that creditor. See judgment No. 18 of 4.02.2015 of the Supreme Court of Cassation in civil case No. 3396/2014, Fourth Civil Division, Civil Chamber, reporting judge: Presiding Judge Svetla Tsacheva.

Legal scholarship and case law recognise that a mortgage may be granted for value or gratuitously, depending both on the relationship between the mortgagee and the owner and on the underlying transaction. In judgment No. 97 of 30.05.2013 in civil case No. 442/2012, the Fourth Civil Division of the Supreme Court of Cassation held that a mortgage agreement cannot invariably be assigned to either category. The parties’ express agreement matters: did they provide for remuneration or another benefit to be given by the secured creditor to the mortgagor? Examples include insuring the property, deferring payment or allowing instalments on the secured debt, reducing interest, or waiving accrued interest. The court also included cases where the parties would not have entered into the principal agreement without the mortgage. In the absence of these or comparable circumstances indicating an exchange of value, the mortgagee, as defendant to an Article 135 action, has no legally protected interest of this kind. The claimant need not prove that the mortgagee knew of the prejudice in order to have the mortgage declared ineffective against the claimant.

Some of the examples in that decision, including where the principal agreement would not have been made without the mortgage, are disputed in legal scholarship. See Professor M. Markov, “The Mortgage as an Agreement for Value or a Gratuitous Agreement”, Commercial and Obligations Law, 2017, No. 1.

This article does not give a legal opinion or advice on any particular situation or person. For assistance with an individual case, consult a lawyer who practises property law and the law of obligations.