In case no. 28 2457/2013, the Supreme Court finally ruled in the infamous case of the Zlín attorney, who embezzled approximately quarter of a billion crowns (CZK 250,000,000). Well-known Zlín attorney, JUDr. M.H.received money from clients into escrow, then slowly embezzled the funds. When clients began to demand their money and distraint proceedings commenced to seize the attorney’s assets, he arranged a place of payment for further payments under escrow and loan agreements, as well as payments for the operation of his office with a Zlin colleague, JUDr. B.O. At the time however, JUDr. B.O. was already one of the attorney’s creditors, whose claims was being exacted in distraint proceedings, and therefore, according to JUDr. M.H.’s testimony, she charged a fee for providing the place of payment, by which she sought to amortise her claim against the attorney. It is fitting to add that JUDr. B.O.’s criminal liability is now the subject of criminal proceedings.
JUDr. M.H. designated the place of payment, i.e. his colleague’s account, as the escrow account in escrow agreements, to which his clients sent payments in the belief they were discharging their obligations to JUDr. M.H. When bankruptcy was finally declared on the Zlín attorney’s assets in 2012, creditors found their claims would not be satisfied due to a lack of assets. Quarter of a billion simply disappeared.
We turned to the court on behalf of two creditors seeking the return of unjust enrichment from JUDr. B.O. Section 451 of the Civil Code, valid at the time, stated that anyone who gains unjust enrichment at the expense of another, must return this enrichment. The law considered any payment (performance) received without legal grounds, payment (performance) received on the basis of invalid or lapsed (forfeited) legal grounds or profit gained from dishonest sources as unjust enrichment.
First instance – a different result in each case
The facts in the first case were simpler. In the escrow agreement, attorney, JUDr. B.O.’s account was designated as the escrow account. The creditor transferred money to this account, following which attorney B.O. released the money to JUDr. M.H.
The second case concerned an escrow of money to purchase real estate. The money was deposited on attorney, JUDr. B.O.’s account even before the escrow agreement was signed. The escrow agreement again specified attorney, JUDr. B.O.’s account as the escrow account.
The first instance ruling in both cases could not have been more different. In the first case, the court examined the validity of the agreement between attorney M.H. and the client, and concluded it was invalid on the grounds that it violated the Act on the Legal Profession in the section relating to escrow, that it was contrary to good morals and relatively invalid due to the creditor’s mistake, and ordered attorney B.O. to return the money to the creditor as unjust enrichment. The court held that the legal grounds for payment to attorney B.O. was a contract between other parties, i.e. attorney M.H. and the creditor, and because this was invalid for many reasons, the third party, i.e. attorney JUDr. B.O. had received unjust enrichment.
In almost the identical case, the second court came to the opposite conclusion. It concluded that it was irrelevant whether the contract concluded between the attorney and the creditor was valid or invalid, as it was always grounds for payment to the third party, i.e. attorney B.O. If it was valid, then payment was made by right and to JUDr. M.H., even if it was paid to JUDr. B.O.’s account. If it was invalid, then JUDr. M.H. and the creditor should settle their mutual obligations as parties to the contract according to the restitution obligation laid down by Section 457 of the Civil Code, that is, to return mutually provided payments. Consequently, JUDr. B.O. has no standing, i.e. she cannot be required to return unjust enrichment.
The only thing the ruling of both courts had in common was that neither examined the legal relationship between the creditor and attorney, JUDr. B.O., even though she was the one who received the payment. The court did not examine the legal grounds for payment between the creditor and JUDr. B.O. in either case, even though the money was deposited to her account and she disposed of this money at her will.
The matter in the first case was also heard by the appellate court. It examined the factual findings of the court of first instance, but its ruling in the matter was identical to the court of first instance in the second case, i.e. it concluded there was a restitution obligation between JUDr. M.H. and the creditor, irrespective of the fact the money had actually been received by JUDr. B.O., who had disposed of it at her will.
Assessment of unjust enrichment
The appeal in the first case was heard by the Supreme Court. The decision followed established case law, especially the ruling in case no. 33 Odo 1110/2004 and case no. 30 Odo 1197/2007, which addressed the initial question of a party’s standing to be sued, i.e. who is obliged to surrender unjust enrichment.
The Supreme Court interpreted the provisions of Section 451 of the Civil Code as meaning that the existence of legal grounds for payment must exist outside the legal scope of who was enriched, for example, between the payer and the provider of the place of payment. However, if such a legal relationship is invalid, or did not arise, the legal grounds of the enriched party must be examined.
The only instance, in which the law does not require the enriched party to release payment is in the case of “payment on behalf of another” pursuant to Section 454 – where a claim exists between the enriched party and the debtor, however a third party pays on behalf of the debtor, without a direct legal obligation to pay the enriched party. Unjust enrichment then arises on the part of the debtor, including the obligation to return such unjust enrichment. However, this was not a case of payment on behalf of another, as neither of the creditors paid attorney B.O on behalf of JUDr. M.H. Therefore, if we rule out this possibility, it is clear that we must examine the existence of legal grounds for enrichment in relation to the party that was enriched. Further, the manner in which attorney B.O. subsequently disposed of unjust enrichment does not change her obligation to release such enrichment. The obligation to release unjust enrichment arises at the moment of enrichment, and arises immediately so there is no doubt of the legally envisaged procedure in such a case. If the enriched party released the subject of enrichment to a third party, it has not fulfilled its obligation to release the subject of unjust enrichment to the party at whose expense it was unjustly enriched. This obligation continues and can be enforced.
The Supreme Court further stated that the rule for determining the party obliged to release unjust enrichment in the case of the restitution obligation between the parties to an invalid agreement pursuant to Section 457 of the Civil Code did not apply to the relationship between the creditor and attorney B.O. As it rightly concluded, there was no contractual relationship between the attorney and creditor and thus only JUDr. M.H. and the creditor could have been parties to an invalid agreement, however JUDr. M.H. had not been unjustly enriched at the expense of the creditor, as the money had been received by attorney, JUDr. B.O., who should therefore return it to the creditor.
Conclusion
The analogous features of both cases are (a) the place of payment at a party other than the escrow agent, and (b) the invalidity, or absence of a valid agreement between the escrow agent and the creditor. As the depositor mistakenly sent payment to a different depositary, the existence of an agreement concluded in favour of a third party cannot be inferred, i.e., an agreement authorising the provider of the place of payment to accept payments intended for the escrow agent.
It can therefore be concluded that, in the event of the invalidity of the contract between the debtor and the creditor, the provider of the place of payment would be unjustly enriched as a third party, and would therefore be obliged to return the money received to the party that provided these funds.
The conclusions are also applicable to relationships governed by the new Civil Code, effective from 1 January 2014. It is therefore very important to carefully consider whether the use of a place of payment outside the creditor’s disposition when negotiating contracts will not lead to unjust enrichment.
For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241