Vol 8 (2011) - Issue 5

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Foreclosure under Spanish Insolvency Law, Or How to Win the Race

Introduction

Since the present economic crisis began in 2007, the number of foreclosure proceedings in Spain has increased constantly. According to official statistics published by the Spanish General Council of the Judiciary1 from 2007 until the end of 2010, a total of 271,570 foreclosure proceedings were filed with the Spanish courts. Whereas 2007 ended with 25,943 proceedings filed, in 2008 this number increased by 126.2% to 58,686 and was followed by 93,319 proceedings in 2009 and 93,622 in 2010. The 2010 figure is almost four times greater than that of 2007.

Generally, foreclosure proceedings are filed by financial institutions against both companies and private individuals in order to pursue outstanding mortgagerelated debts against assets given as collateral. But what happens when the debtor is declared insolvent prior to or during the foreclosure process and what effects do such an insolvency proceedings have on the foreclosure procedure? This scenario is more than likely, as another look at the statistics shows that according to these figures the insolvency proceedings also increased steadily from 1,589 proceedings in 2007 to 7,136 in 2010.

The present article will try to answer these questions and to provide lenders with information which, despite the debtor having filed for insolvency, may help to conduct a foreclosure proceeding adequately. This article refers exclusively to effects of such proceedings on company insolvency. The first section sets out the stages of a foreclosure procedure in Spain. The second section analyses the effects of such a procedure on insolvency proceedings. This is followed by the conclusions.


Stages of the foreclosure procedure

Prior to analysing the effects of a declaration of insolvency on foreclosure proceedings it is worth explaining briefly the essentials of said proceedings in order to allow a greater comprehension of the following section.

The Spanish Civil Procedure Act (LEC) includes, in addition to provisions regulating general monetary enforcement court procedures, procedural rules for the special court foreclosure procedure (articles 681 to 698 LEC). By virtue of this special procedure, the lender may seek foreclosure of the mortgage in order to claim repayment of the secured debt, including interest, by selling the property at public auction. Prior to the claim, the debt must have been declared due for immediate payment.

To commence the procedure, the lender must file the foreclosure claim with the Court of First Instance in the area in which the mortgaged property is located, this Court having jurisdiction for such suits. The claim must, amongst other things, contain information regarding the mortgage deed on which the claim is based, specification of the sum being claimed, the name of the person against whom the foreclosure is applied and details of the mortgaged property.

Once the Court receives the claim, it will issue an order giving leave for the action to proceed, ordering the beginning of the foreclosure proceeding and the serving of a notification order on the debtor. In addition, the Court will require the Land Registry to issue a valid certificate of ownership, charges and encumbrances. Within the scope of the foreclosure procedure the possibilities for the debtor to oppose the foreclosure are very limited. Actually the causes of opposition that may be alleged by the debtor are (i) redemption of the mortgage or of the obligation guaranteed by it, or (ii) error in the calculation of the enforceable sum.