Arzingerrepresented its client – a foreign bank, claimant in a mortgage foreclosurecase against a mortgagor that secured the obligations of a borrower(mortgagor’s subsidiary) under a loan agreement. The mortgagor filed acounterclaim to invalidate the mortgage agreement.

Thecase was repeatedly considered by courts. The trial and appellate courtsdismissed the primary claim and allowed the counterclaim in full. The HigherCommercial Court of Ukraine reversed the above judgments and ordered a newtrial in the case. After that, the courts of three instances dismissed the primaryclaim again and allowed the mortgagor’s counterclaim to invalidate the mortgageagreement.

Theonly ground for allowing the above counterclaim was, from the court’sstandpoint, the fact that the agreement in dispute was allegedly concluded bythe mortgagor’s general director with abuse of authority provided for by thecompany’s articles of association, as the supervisory board had no powers todecide on the mortgage of real estate. Of the three representatives of the soleshareholder (mortgagor) present at the meeting of the mortgagor’s supervisoryboard only the general director was entitled to make decisions on behalf of thelegal entity.

Lawyersof Arzinger managed to prove that the decisions of the previous court instanceswere unlawful and obtained a fair judgment in the relevant proceedings at theSupreme Court of Ukraine. In particular, the lawyers proved that the courts ofprevious instances failed to provide a reasonable legal assessment of theconclusive evidence certifying the approval of the disputed mortgage agreement,which included the signing of intermediate acts of mortgage verification,concluding a mortgage insurance agreement, approval of the mortgagor’s annualreports by its sole shareholder – borrower under the mortgage agreement. TheSupreme Court of Ukraine admitted the fact that the courts ignored the factthat the client was not aware of and could not have known about the generaldirector limited powers for concluding a mortgage agreement. Consequently, thementioned limitation, if any, could not have had any legal force.

Aspart of the application for review of the ruling of the Higher Commercial Courtof Ukraine by the Supreme Court of Ukraine Arzinger’s lawyers referred tonumerous cassation court decisions reflecting unequal application ofsubstantial law, in particular of Articles 215 and 241 of the Civil Code ofUkraine, which resulted in dissimilar decisions in similar legal relations.Thus, despite of the negative court decisions of the previous three instancesand scarce practice of the Supreme Court of Ukraine in terms of allowingapplications for review of cassation court decisions based on unequalapplication of substantial law, Arzinger’s client was rendered a positivejudgment in the case.

Legalsupport in the case was provided by Markian Malskyy, Partner at Arzinger andHead of the West Ukrainian Branch; Volodymyr Yaremko, Senior Associate; andAndriy Bogutskiy, Associate.

MarkianMalskyy’s comment on the case: “Given that the borrower and mortgagorlacked property other than the mortgage, the judgments in dispute threatenedthe client with losses amounting to about UAH 7 m. Moreover, the courts’relevant legal stance, including that of the cassation court, could influencethe case as well as the whole banking sector in future. Despite of the unequalcassation court practice in the relevant class of cases, Arzinger’slawyers managed to convince the Supreme Court of Ukraine of boththe mortgagor’s and borrower’s acting in bad faith and the lawfulness of ourclient’s position.”