Cour de cassation Commercial chamber, November 25, 2008 - Decision N°07-16689 (Crédit agricole de Savoie v. Bouw)

Article 2134 of the civil code provides that “A surety is discharged if the subrogation to the rights, mortgages and prior charges of the creditor, may no longer take place in favor of the surety, by the act of that creditor”.

The Cour de cassation held that article 2134 couldn't be applicable if both the creditor and the surety had the possibility of preventing the loss of this other security.

A Bank had secured her credit on a company by a surety against the company's director.

The company had been liquidated and the bank sued the surety to claim the payment of the loan which hadn't been reimbursed.

The surety challenged the bank' claim by stating the bank had a mortgage on the company' business. The bank could have formed an opposition to the price of the sale when the business had been sold in the liquidation procedure.

The cour d'appel de Chambery, 24 April 2007, held that if the bank had made opposition to the distribution of the price within 10 days, the distribution would have been stopped and the bank would have obtained the complete payment of its credit.

The court of appeal found that the bank had, by her sole inaction, lost her pledge on the debtor's business.

The Cour de cassation overruled this decision. She held the Court of appeal should have verified whether the surety could have also prevented the sale price's distribution.

If the surety has also means to stop the sale price's distribution, article 2037 of the French civil code cannot apply and the surety cannot be released from her engagement.

The surety logically cannot benefit from a creditor's mistake if the surety could have also ensured the efficiency of a security and therefore also made the same mistake.

Article written by Olivier Vibert, Attorney or Lawyer in Paris, France