LITHUANIAN QUARTERLY JOURNAL OF ARTS AND SCIENCES
Volume 50, No.1 - Spring 2004
Editor of this issue: Tadas Klimas
Copyright © 2004 LITUANUS Foundation, Inc.
VINDICATION AND THE SECURITY OF ACQUISITIONS
IN LITHUANIAN LAW
Vytautas Magnus University
Tadas Klimas is dean of Vytautas Magnus University School of Law, Kaunas, Lithuania, and an attorney admitted to practice before the courts of Illinois, Ohio, New York, and the Republic of Lithuania. This article is © 2003 Tadas Klimas.
It is intuitive that a person should have the right to regain possession of his property if it is in the unlawful possession of another. So, one is not surprised that this right is accorded by both Anglo-American and Continental law.1 But it may be a surprise to realize that we are speaking here of civil (private) law, which facilitates a party's use of the civil courts to regain his rightful possession, and not talking about a complaint made to a police agency in regard to a theft or the like. Of course, procedures belonging to the criminal law may result in the complainant regaining his property. There are many situations, however, where the holder of the property may not have committed a crime, and the only recourse would be civil court and private law. In some Continental jurisdictions, the process of restitution of property is called vindication.
While the rules in both Western legal systems are similar, they are spoken about in quite differing ways; in the Anglo-American system, the focus is on the type of title, whereas in the Continental this is not usually the case.
The Republic of Lithuania's new civil code went into effect on June 1, 2001*. It is therefore of considerable interest to determine the specifics of its law on vindication, especially in comparison to the laws of other states. Inasmuch as Lithuania established its independence in 1990 - after nearly fifty years of Soviet occupation and a collective, Communist government, in which most property was in government hands— has this legacy influenced its decisions on the law in relation to vindication?2 Can this be seen from an examination of the law itself?
To better our understanding, we will first review the basic principles of the legal institution of vindication in a comparative mode.
A corollary of the rule that a party can regain possession of its property is that a party may not be deprived of its property without its consent. There are two major ways that a party may lose possession of its property without its consent:3
i. by theft
ii. by loss.
Example: Mr. Owner loses his computer. It is found by Mr. Finder. Mr. Owner can recover the computer from Mr. Finder.
In American terminology, in cases such as the above example, it is said that no title to the property vests in the possessor: he has no property rights to the property; his title, it is said, is void. (This is not to be confused with a void or voidable agreement or convention.)
A second corollary is that one can transfer no better interest than one has. This is often called the nemo dat rule: nemo dat qui non habet: He who hath not cannot give. Example: Mr. Owner loses his computer. It is found by Mr. Finder. Mr. Finder sells the computer to an innocent third party. Mr. Owner can recover the computer from the innocent third party. Why? Nemo dat.
In the above example, true in all jurisdictions, the intermediate party's title was void. The outcome will be different in the various jurisdictions that diverge in regard to the application of this rule to two separate categories of cases:
1. Those wherein the intermediate party has voidable title and
2 Those wherein the owner entrusted the property to the intermediate party.
A conflict of policy arises when an owner has entrusted his property to another and this other has transferred the property to an innocent third party in exchange for a valuable consideration. Of course, the owner can recover his damages from the person to whom he had entrusted his goods, but this is often academic, because this person (the bailee or entrustee) may have absconded or may not have enough property to satisfy any judgment that the owner may obtain against him.
Note on Entrusting: The various jurisdictions have divergent rules on entrusting. For instance, in many Continental jurisdictions, a lessor will be considered to have entrusted his goods to the lessee, in part because no title passes in such a case.
Therefore, the owner will often seek to recover property from a third party. In determining who should prevail, the law must choose which policy to favor. Both the owner and the third party are innocent, and both have socially protectable interests: for one, the security of his property; for the other, the security of acquisitions. The law in the various jurisdictions reflects the inherent difficulties in these policy choices, since it varies from jurisdiction to jurisdiction.
The rule, generally true in all jurisdictions,4 is as follows:
If a bailee (a person holding property by virtue of an
entrusting) transfers the property to an innocent third party, and if this
transfer is not gratuitous, then the owner cannot recover the property from the
third party: the interests of the third party prevail over the original owner.5
This third party is called a Bona Fide Purchaser (BFP); in French, a BFP is an
acquéreur de bonne foi et à litre onéreux.
This rule is the law of France; it was also the law of the Russian SFSR code, as well as of the codes of the occupied Baltic States and the republics of the Soviet Union.6
Note: It is sufficient for a bona fide purchaser to prevail if the property is received by the BFP with the consent of the holder-bailee.7 The owner has relinquished possession by an expression of his will, and therefore it is irrelevant whether the contract between the owner (bailor) and the person to whom the property was entrusted (the bailee) prohibits the bailee from transferring the property to a third party.
Example: John leaves his watch to be repaired at the watchmakers shop. The watchmaker sells it in the ordinary course of business to a Bona Fide Purchaser. John sues the BFP to regain his watch. The court will hold in favor of the BFP. Note that the watch did not pass from the possession of the watchmaker against his will.
Example: Company O rents a computer to Company R to use in its accounting business. Company R sells all of the computers it has on its property to Company 3, including the computer it is renting from Company O. Company 3 is an innocent party which purchases the computers for its own use. Can Company O recover its computer from Company 3? No. Company 3 is a bona fide purchaser for value without notice. Note that it is irrelevant whether Company 3 has actually paid Company R as promised, or whether Company 3 still owes the purchase price. Note also that this sale of course was effected without the consent of Company O.
A second set of rules obtains when the question pertains to voidable title. Here the approaches of the various jurisdictions diverge greatly.
When the owner transfers property on the basis of a voidable contract, the transferee's title to the property is said in American jurisdictions to be voidable. Voidable contracts are those which suffer from a vice of consent,8 that is, the aggrieved party can have them declared invalid because of mistake, fraud, or duress. It is noteworthy that unless he does so, the contract is valid.
Under French law and in systems influenced by France, including Lithuania and Russia, upon a voidable contract being declared to be invalid, the contract is considered to have become invalid from the moment of its ostensible but failed formation. This is not quite the case in American law, which results in a different regime.
Voidable Title and Nemo Dat
As evidenced by §2-403 of the UCC, in American law a party with voidable title can pass good title. In other words, the BFP will prevail. The idea here is that until a court declares that a voidable contract is invalid, it is indeed valid, and thus it is reasonable to suppose that a party with voidable title can pass good title to a BFP, which is indeed the law. This is true for both real and for personal property.
Note that the definition of what is theft, and thereby the definition of what is a void contract, as opposed to a voidable contract, differs across jurisdictions. For example, under the UCC, even if personal property was sold because of "fraud punishable as larcenous under the criminal law," the BFP will prevail.
Under French law in regard to immoveables (real property) there is no exception to the nemo dat rule. Registration of the deed is irrelevant. Thus, when a court declares a voidable contract invalid, it will be considered to have been invalid all along. Therefore it is illogical to suppose that someone who has no title to property could transfer good title. (As noted above, this is quite different from the American position on this question.)
Example: Owner transfers Blackacre9 to Purchaser. Purchaser transfers Blackacre to a BFP. A court declares the contract between Owner and Purchaser to be invalid because of a mistake (erreur). Owner sues to regain Blackacre from the BFP. The Owner will prevail.
If, however, the property in question is personal property, then there is indeed an exception to the nemo dat rule: the law will protect the interest of the bona fide purchaser. Thus, in the example above, if instead of Blackacre the contract called for the sale of a computer, First Party would not be able to regain his property. Thus, in regard to personal property, the result is the same as in Anglo-American law: a party with voidable title can (in effect) pass good title to a BFP.
Soviet law did not discriminate between real and personal property in regard to vindication. Theoretically the policy of principle was applied, that is, that a voidable contract once declared invalid is invalid ab initio, and thus the BFP would lose to the owner. See Russian SFSR10 code §151, 152; of course, nearly identical provisions existed in the codes of the occupied Baltic States and in all of the Soviet republics; e.g., §143-145 of the 1964 Lithuanian code. Lawyers operating under the then-prevalent folklore would have found it practically impossible to prove mistake or fraud since it was thought that oral testimony would not be admissible in such cases to disprove a written contract,11 and that matters concerning fraud were the exclusive territory of the prosecutor's office. Thus with the advent of the free market in these regions, the question appeared almost de novo.
Post Soviet Law
In a rather amazing parallel development, both Lithuanian and Russian law have considered a certain problem and have come up with similar solutions. It is, however, my contention that, in the case of Russia, a proper understanding of the subject matter, in particular, an understanding of the regime of entrusting, would have obviated the perceived difficulty. Indeed, it would not be an exaggeration to suggest that because the law on vindication was not understood, it resulted in such injustice that the Russian constitutional court had to intervene on constitutional grounds.
In both countries, almost all of the land and buildings were owned by the state under the previous, Soviet, regime. The land and buildings were not directly administered by the state, however, but held by various institutions in a form of quasi-trust. For instance, a university's buildings would have been owned by the state, but held by the university and administered for the university's own use and purposes. Title would be held by the institution in a quasi-trust.12
Title began to be passed from these institutions to private individuals and companies, very often fraudulently, but perhaps even more often in innocent contradiction to various new laws and procedures. This was a mass phenomenon. Understandably, conflicts arose between BFPs and the state.
Here the treatment diverged between the two countries, although the applicable codal provisions were substantially identical. The Lithuanian supreme court recognized early on that the applicable rule is the one relating to entrustment,13 wherein the BFP prevails, whereas (in my opinion) the Russian courts applied the wrong rule, not seeming to recognize that an entrustment had occurred, with the result that in Russia the BFP would lose. This of course was greatly troublesome to the real estate market, not to mention to the bona fide purchasers concerned. This resulted in such a problem for the security of acquisitions that eventually the constitutional court had to decide upon the matter:
On April 21, the RF Constitutional Court announced the results of its investigation of the consistency of Article 167 of the RF Civil Code with the RF Constitution and other effective Russian laws. This Article obligates each of the parties to a real estate transaction to return to the other everything received under the transaction if this transaction is recognized invalid. Up till now, in most cases, when at least one component of a chain of real estate transactions was recognized to be in conflict with the law, civil courts practiced to demand return of real property to its primary owner. As a consequence of such practice, a bona fide purchaser of real property lost both his money and property. This was a major barrier for successful development of the housing market in Russia, since it exposed all parties of a transaction to serious risks. The Constitutional Court recognized such practice as unfair and inimicai to bona fide purchasers' interests. Now, under the Constitutional Court verdict, "a mala fide seller will not be able to dispute a real estate transaction in court if he/she concludes it in breach of law."14
Thus, it is evident (and the opinion of the constitutional court supports this conclusion) the constitutional court did not perceive the misapplication of the rules regarding vindication in an entrustment situation: indeed, it did not recognize that, generally, the problem stemmed from an entrustment, but it did hold that this situation was unconstitutional as violative of the rights of the BFP, so that from then on, "a mala fide seller [!!] will not be able to dispute a real estate transaction in court if he/she concludes it in breach of law."15
New Lithuanian Rules
In 2001, Lithuania adopted a new civil code containing provisions marking a
significant departure from the old rules.
First, in regard to moveables, the Lithuanian rules are in accord with the general rules presented above: The bona fide purchaser will prevail over the owner, and this is the rule both in cases of entrustment and of voidable title. There is little new here.
The innovation is in regard to immoveables. Here the Lithuanian code greatly strengthens the stability of acquisitions by adopting a rule nearly the reverse of that of the French. As stated in §4-95.2, "Immoveable things cannot be recovered from a bona fide purchaser except for those cases where the owner was deprived of possession of this thing because of the crime of another person." Thus, in regard to immoveables, it is irrelevant whether the property was passed in an entrustment situation or whether under voidable title. In every case the BFP will prevail, with one exception—in the case of a crime.
Example: Owner transfers LithAcre to Purchaser. Purchaser transfers LithAcre to a BFP. A court declares the contract between Owner and Purchaser to be invalid because of a mistake (erreur). Owner sues to regain LithAcre from the BFP. The BFP will prevail.
Example: Owner transfers Blackacre to Purchaser. Purchaser transfers Blackacre to a BFP. A court declares the contract between Owner and Purchaser to be invalid because of fraud. Owner sues to regain Blackacre from the BFP. The BFP will or will not prevail according to whether the fraud involved was (punishable as) a crime.
It must be remembered that, in general terms, while a contract may be voidable for fraud, the fraud may not be punishable as a crime. For instance, a false representation about even a nonessential quality of a thing being exchanged for the property in question would be enough to render the contract voidable, even if the exchange otherwise represented fair market value. In such a case, the acts of the transferee did not necessarily constitute a crime. The same can be said for duress: for instance, if the purchaser in the French case of Vigneron v. Dme. Glaugetas16 had sold Mr. Duvoisin's farm to an innocent third party, he would not have been able to regain it. The duress consisted of a threat by tenant farmers to cease taking care of Mr. Duvoisin, who was old, sick, bedridden, and abandoned by his family. While such duress was sufficient for the court to avoid the contract, it is doubtful whether this threat could be considered a violation of criminal law.
Thus the question arises, does the Lithuanian provision in question require the party to have been convicted of a crime in order for the owner to prevail? The answer should be in the negative. A relevant section of the UCC may be useful in drawing an analogy:
It is, however, unfortunate that the word "punishable" was left out of the Lithuanian code, because it will be the tendency for the lower courts, as well as for attorneys, to understand the section as requiring that, in order for the plaintiff-owner to succeed, the person through whose crime he lost possession of the immoveable property actually had been convicted of this crime. This, most emphatically, is not the intent of the provision in question.
The following two subsections describe ancillary matters important to an understanding of this subject area.
1. For Value
In order for a person to defeat the claim of the owner, he must have obtained the property for value, which is to say he must either have paid (or promised to pay) for it or have given or promised to give some other thing or service of value in exchange for it. In French law, the matter is described in these terms: the BFP must have taken the property under onerous title, meaning that in effect he must have exchanged something for it.
Example: John exchanges his personal computer for Bob's television. Bob gives the computer to Larry as a birthday present. John obtains a court judgment rendering the contract under which he exchanged his computer for Bob's television null because of fraud. Can John recover from Larry? Yes— Larry is not a good-faith purchaser.
2. Successive Transfers
Nemo dat qui non habet. The general rule is that a purchaser acquires only the title which his transferor had. There is an exception: as we have noted, a party who has voidable title can indeed pass good title to a BFP.
Example: John exchanges his personal computer for Bob's television. Bob gives the computer to Larry as a birthday present. John obtains a court judgment rendering the contract under which he exchanged his computer for Bob's television null because of a mistake. Can John recover from Larry? Yes: Larry is not a BFP: while presumably innocent, he did not purchase the computer for value.
Note that in French law there is no BFP exception in the case of immoveables.
Example: John sells Frenchacre to Bob. Bob gives Frenchacre to Larry as a birthday present. Larry sells Frenchacre to Peter, an innocent party. A court declares John's sale to Bob invalid because of a mistake. Under French law, John can indeed regain his land from Peter, even though Peter is a BFP. In French law, in the case of immoveables, a party with voidable title cannot pass good title to a BFP. The same result would obtain even if Larry had also been a BFP.
Lithuanian law, in relation to the institution of vindication is not and has not been an uncritical or slavish copy of the law of any particular jurisdiction. The statutory base was greatly altered with the new civil code, which went into effect on June 1, 2001. Unsurprisingly, Lithuanian law is dissimilar in some respects from Anglo-American law, but perhaps more interestingly, it also diverges significantly from French law. While, in regard to immoveables, under French law even a bona fide purchaser will never prevail against the real owner, under Lithuanian law the bona fide purchaser will prevail in every case, save when the property passed from the original owner due to crime. As remarked previously, it is unclear as to whether the meaning is that the alienator must have been convicted of a crime, or whether the meaning is to be understood as requiring merely that the act be punishable as a crime. At any rate, the Lithuanian code strengthens the security of acquisitions.
It is hard to believe that this result was achieved accidentally. I believe it was the result of a direct and conscious decision to strengthen the security of acquisitions. Real property had to pass from the government and government agencies to parties who were, in some sense of the word, developers, and from these to the public, a public who were particularly incapable of determining adequacy of title.
I believe also that the decision was influenced, at least subconsciously, by the fact that the courts were, and to a significant extent remain, unfamiliar with the institutions of fraud, duress, and mistake (erreur) in terms of the invalidity of obligations. Therefore they could not, perhaps, be "trusted" to come up with equitable results.
To choose otherwise would have resulted in strengthening the security of the government or government agencies in their property. This is especially evident in contrast with the situation in Russia, where property rights in immoveable property are much less stable. The concerns were, I believe, well-founded. Immoveable property had to pass en mass into the hands of private parties, and the passing was regulated by a welter of conflicting laws, which gave fertile ground for parties arguing subsequently that the passage was unlawful and therefore null, with the result that the bona fide purchasers down the line would lose their property.17 I also believe that a debt is owed to the supreme court of Lithuania which early-on properly understood and correctly applied the law on vindication (especially in regard to entrustment situations), which cannot be said for all neighboring jurisdictions.
Lithuanian Civil Code
[The cited parts of the civil code were translated by the author. Civilinio kodekso patvirtinimo, ásigaliojimo ir ágyvendinimo ástatymas VII-1864; Valstybës þinios 2000, Nr. 74-2262/. The new civil code went into effect on July 1, 2001.]
§4.95. The Owner's Right to Recover His
Property from the
Unlawful Possession of Another.
§4.96. Recovery of Property from a Bona
§6.307 Sale of a Thing Not Belonging to
1. The two legal systems are similar in that they are products of Western civilization, yet there are also fundamental differences between them. The Anglo-American legal system is also commonly referred to as the common law system, and the Continental legal system is also known as the civil law system.
2. Usually this subject is considered under the heading of property-law. Our principal interest here, however, is the interplay between the rights of the third party and the validity of the contract between the parties.
3. A third, a cash sale for which cash was not paid, would not be recognized as creating a void title in Continental jurisdictions, but this effect would be mitigated because the exceptions to the nemo dat rule are different than those in an American jurisdiction.
4. With the exception of Russia: see infra.
5. This rule is set out in §4.96.1 of the Lithuanian Civil Code.
6. The importance of this will be seen in the section on voidable title. Both the old Russian code and the new, whose provisions on the matter are identical to that of the old code, clearly provide for this outcome: in order for the owner to prevail in an entrusting situation, possession must have passed to the BFP against the will of both the owner and the bailee (entrustee); if therefore it passed from the hands of the entrustee-bailee willingly, the BFP will prevail. See Civil Code of the Russian Federated Soviet Socialist Republic §151, 152; §143 of the Civil Code of the Lithuanian Soviet Socialist Republic (in effect from January 1,1965 until June 1, 2001); §§301-306, Civil Code of the Russian Federation (in effect from January 1,1995).
7. The reason for two terms, "holder" and "bailee," to describe the same party is a divergence in terminology between Continental and Anglo-American law.
8. Such as those induced by fraud and duress or vitiated by a mistake.
9. "Blackacre" is a widely-used term in American law books. It is used to denote certain real property that is being transferred by contract.
10. Whitmore Gray and Raymond Stults, translators, Civil Code of the Russian Soviet Federated Socialist Republic (Ann Arbor: University of Michigan Law School, 1965).
11. I base this statement on various sources, including that of a Lithuanian lawyer discussing a case he was handling for a financial institution in which fraud had been committed against the bank by its officers. Contracts of deposit were entered into on behalf of the bank and a deposit receipt was issued even though no money had been deposited. This action was repeated on several occasions and other transactions were faked in order to make it less apparent. All of the lawyers involved were of the opinion that although testimony was now available (around 1996), it would be inadmissible to prove fraud, since the contracts of deposit were, of course, in written form.
12. E.g., 1965 Civil Code of the Lithuanian SSR §99. [paragraph 1] "Property of the state and of the municipalities is controlled, used, and disposed of by, respectively, the highest state and governing authorities of the Lithuanian republic and by local state and governing institutions, according to the law and regulations of the Lithuanian republic, (paragraph 2] Companies of the state and municipalities, offices and organizations control, use, and dispose of the respective state or municipal property by right of trust, as provided for in their bylaws (internal regulations)." Translated by the author. It is evident that this kind of "trust" has little in common with the Anglo-American concept, yet it does separate beneficial and legal ownership, at least to some degree.
13. See Republic of Lithuania v. Stankevièius, Civ. Nr. 3K-58/98 (1998),
14. Institute for Urban Economics website: http://www. urbaneconomics.ru/eng/news.php?folder_id=l§page.id=69, visited by the author on 2003-11-18.
15. April 21, 2003 opinion of the Constitutional Court of the Russian Federation. It is probable but unclear to what extent the problem affecting the real estate market arose in relation to another possible cause: misapplication of the doctrine of nemo dat to preclude title arising in a BFP as the result of loss of possession due to a crime; a mere unlawful transfer, it always being unlawful in some sense to transfer property one does not own or have the right to transfer, should not result in a void title. See discussion above in relation to theft.
16. Cass. req. 27.1.1919. "Whereas the decision under challenge declares that Antoine Duvoisin, an old man, paralyzed, weakened by illness, bedridden, abandoned by members of his family, was at the mercy of the Vignerons, his tenant farmers, and that the threat uttered by them to cease to look after him if he did not agree to donate his goods was of a nature to evoke in him a fear that made it impossible to resist them." Translated from the French by John S. Bell, used by permission.
17. As I have pointed out, in Lithuania, most such cases would fail, as evidenced by the upholding of the supreme court in Stankevièius. The Lithuanian courts and the new code have strengthened and enforced the security of acquisitions, much to their credit.