The management of jointly owned assets, whether inherited, post-communal or acquired jointly, raises complex issues when creditors are involved. The situation becomes even more complicated when several categories of creditor, with divergent interests, are competing for the same assets. Understanding the hierarchy and rights of each is fundamental to anticipating and resolving conflicts. This technical article sets out in detail the rules governing priorities and the distribution of assets, based on the fundamental principles of seizure and the particularities of joint ownership law. A poor understanding of these mechanisms can have significant financial consequences, both for creditors and for the undivided co-owners themselves. For a general introduction to key concepts of joint ownership and creditors' rightsOur pillar article will give you the basics.
Fundamental distinction between undivided co-ownership creditors and personal creditors of undivided co-owners
To understand the order of payments correctly, it is essential to distinguish between two groups of creditors whose rights and possible actions are radically different. Article 815-17 of the Civil Code draws a clear distinction between those who can act on undivided property and those who cannot.
Definitions and origins of receivables
The law identifies two types of "joint ownership creditors". On the one hand, there are those whose claim arose before the joint ownership itself. In the case of a succession, this would include debts contracted by the deceased during his lifetime. The creditor, whether unsecured or holding a security interest, had a right of pledge over the person's assets before they became an undivided estate. The law also covers creditors whose claims arise from the conservation or management of undivided property. Examples include a contractor who has carried out renovation work on an undivided property, or an undivided co-owner who has advanced funds to pay charges or taxes relating to the property.
At the other end of the spectrum are the personal creditors of the undivided co-owners. Their claim is totally unrelated to the joint ownership. It arises from a personal commitment made by one or more of the co-owners. For example, a consumer loan taken out by one of the heirs or a business debt specific to that heir. In principle, these creditors have no direct link with the undivided estate.
The autonomy of the undivided estate: an exclusive pledge for undivided co-ownership creditors
Although joint ownership does not have legal personality, case law and the law recognise a form of autonomy in terms of property. Jointly owned property forms a separate estate, which is allocated on a priority basis to the payment of joint ownership creditors. This principle, enshrined in the Frécon judgment of 1912 and reiterated in article 815-17 of the Civil Code, means that the undivided assets constitute the quasi-exclusive pledge of these creditors. They can therefore act directly on all of this property, as if joint ownership did not exist for them. They are not obliged to divide their proceedings and can have an undivided asset seized in its entirety, regardless of whether their original debtor (the deceased) or the joint debtors (the joint owners for a conservation debt) are no longer there.
Preference rule for undivided co-ownership creditors: an autonomous estate
The existence of this autonomous undivided estate creates a strict hierarchy of creditors. This priority given to joint creditors is one of the cornerstones of legal certainty in this area.
Payment in preference to creditors of undivided co-owners
The direct consequence of the autonomy of the undivided estate is an absolute preferential right in favour of the creditors of the undivided estate. Article 815-17 of the Civil Code provides that they "shall be paid by deduction from the assets before partition". This means that as long as the joint-ownership arrangement has not been liquidated, the joint-ownership creditors have the right to be paid before the personal creditors of the joint-owners can hope to recover their own claims. This right to levy on undivided assets is an essential protection.
Implications for unsecured and hypothecary creditors of joint ownership
This rule of preference is so strong that the majority of legal writers agree that it applies even when an undivided co-ownership creditor is simply unsecured (without any particular guarantee) and is in competition with a personal creditor of an undivided co-owner who has a mortgage on the undivided rights of his debtor. The joint-ownership creditor, even without security, will be paid first. The reason is simple: the two categories of creditor do not have the same pledge. The first has as its pledge the entire undivided estate, while the second has as its pledge only the theoretical rights of its debtor in that estate, rights the substance of which will only be known after partition and payment of all the undivided estate's debts.
Competition between joint ownership creditors: ranking and payment
When the undivided assets are insufficient to pay off all the joint creditors, a competition is opened between them. The rules for distribution depend on the nature of their respective claims.
Treatment of unsecured creditors (marc le franc rule)
If several unsecured creditors of the undivided co-ownership come forward and the assets are insufficient, they are paid at the market price, i.e. in proportion to the amount of their claim. This is known as the "marc le franc" rule. No unsecured creditor has priority over another because of the seniority of its claim. The net assets of the joint ownership, after payment of the preferential and hypothecary creditors, are divided between them on a pro rata basis. For example, if the net assets are €100,000 and the total unsecured claims are €150,000, each creditor will receive only two-thirds of the amount of his or her claim.
Priority of undivided co-ownership mortgagees
If there are creditors holding a mortgage on an undivided property (either by the deceased or by all the undivided co-owners), they have a preferential right and a right of pursuit on the property. They will therefore be paid in priority from the sale price of the mortgaged property, according to the rank of their registration. If there are several mortgagees, they are paid in the order of their registration. Unsecured creditors of the undivided co-ownership may only be paid from the balance of the sale price, if any, or from the other assets of the undivided co-ownership.
Competition between personal creditors of undivided co-owners: after partition
The personal creditors of an undivided co-owner are in a waiting position. Their right to sue is frozen for as long as the indivision lasts. They cannot seize an undivided asset, or even the abstract share of their debtor. Their only prerogative is to initiate partition on behalf of their debtor by means of an action oblique. It is only after liquidation that their rights can be fully exercised.
The principle of dividing proceedings after partition
Once partition has taken place, indivision ceases. The property of which it was composed is divided up and allocated on a private basis to the former joint owners. A personal creditor may then take legal action against the assets that have been specifically allocated to his debtor. The right to take legal action is said to be "divided", as it can no longer relate to the entire estate, but only to the lot of the undivided co-owner concerned. It is at this stage that any conflicts between several personal creditors of the same undivided co-owner are settled, by applying the classic rules of sales price distributionwhere preferential and hypothecary creditors take precedence over unsecured creditors.
Impact of the privilege of separation of assets
In the specific context of joint inheritance, the deceased's creditors have a formidable weapon at their disposal: the privilege of separation of assets, governed by articles 878 et seq. of the Civil Code. By registering this privilege, they create a watertight partition between the deceased's assets and those of the heir. The advantage is twofold. Before partition, this privilege gives them a right of resale, which protects them if an undivided asset is sold. After partition, and this is its main strength, they are not subject to the competition of the heir's personal creditors on the assets resulting from the succession. In practical terms, even if the heir is insolvent and saddled with personal debts, the deceased's creditors who have registered their lien will be paid with absolute priority from the estate assets allocated to them.
Specific issues: mortgagees and insolvency proceedings
The opening of collective proceedings (safeguard, receivership or compulsory liquidation) against an undivided co-owner adds a further level of complexity, modifying the rights and actions of each party.
Impact of the collective proceedings of an undivided co-owner on the rights of undivided co-ownership creditors
If the joint ownership existed before the collective proceedings were opened, the principle is clear: the joint ownership creditors are not affected by these proceedings. They are considered to be "outside the proceedings". The stay on individual lawsuits that applies to the debtor's personal creditors in collective proceedings does not apply to them. They retain their right to seize undivided assets and to obtain payment before any division. They are not even required to declare their claim as a liability of the joint owner's collective proceedings. This solution protects the undivided estate, which continues to function as an autonomous asset allocated to its own debts.
Situation of undivided co-owners' personal creditors in the event of insolvency proceedings
The situation is different for personal creditors. The opening of collective proceedings against their undivided debtor has the effect of grouping them together in the estate represented by the court-appointed agent or liquidator. It is the liquidator who will exercise the rights of the personal creditors. In accordance with the rules governing joint ownership, the liquidator cannot seize joint assets directly. The liquidator's only option is to bring an action oblique and bring about partition in the name of the undivided debtor, and then seize the share due to him or her and distribute it among the personal creditors. The link between seizure-attribution and insolvency proceedings is a good illustration of this interaction, where insolvency law provides a framework for traditional enforcement methods.
The hierarchy of creditors in the case of joint ownership is designed to protect different assets. The complexity of the rules and the many special cases require a detailed analysis of each situation. In the event of a dispute, the assistance of a lawyer who is an expert in enforcement procedures is decisive in safeguarding your rights and implementing the most appropriate recovery strategy.
Sources
- Civil Code, in particular articles 815-17, 878 et seq (relating to the privilege of separation of assets).
- Commercial Code, in particular articles L. 622-21 et seq. (relating to the effects of collective proceedings on creditors).
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