For a married guarantor under a separation of property regime: does the share of jointly owned property count towards the disproportion?

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When a person married under a separation of property regime acts as guarantor, the proportionality of their commitment must be assessed in light of their entire estate. This includes not only their personal assets and income, but also the value of their share in assets held jointly with their spouse.

The solution, affirmed by the Court of Cassation, remains fully relevant. However, it must be considered within the context of the reform of security law that came into effect on January 1, 2022, which modified the regime and the penalty for manifestly disproportionate guarantees.

How is the disproportionate nature of a security deposit assessed?

A guarantee is an undertaking by which a person, called a "guarantor", agrees to pay the debt of a debtor if the latter does not execute it himself.

In practice, company directors are frequently asked by banks to personally guarantee loans granted to their businesses. When the company encounters difficulties, the bank can then ask the director acting as guarantor to settle all or part of the guaranteed debt.

However, a natural person acting as guarantor may invoke the manifestly disproportionate nature of their commitment in relation to their assets and income.

To assess this disproportion, it is necessary to take into consideration, in particular, the following factors on the date the guarantee was signed:

• the income from the security deposit;
• his movable and immovable property;
• his savings and investments;
• the net value of his assets, after deduction of outstanding loans;
• its expenses and its debt;
• the other guarantee commitments that it has already entered into;
• her rights in the property she holds jointly.

The situation must therefore be assessed globally and concretely. Simply comparing the amount of the guarantee to the guarantor's annual income is insufficient.

A share of jointly owned property forms part of the guarantor's assets

In a judgment dated January 19, 2022, the first civil chamber of the Court of Cassation ruled on the situation of a person married under the regime of separation of property who had acted as guarantor for several commitments undertaken by a company with a bank.

Following the commencement of insolvency proceedings against the debtor company, the bank called upon the guarantor for payment. The guarantor argued that the guarantor's commitments were manifestly disproportionate.

The question arose in particular as to whether the value of her rights in a property acquired jointly with her spouse should be included in the assessment of her assets.

The Court of Cassation answered in the affirmative: when a guarantor married under the regime of separation of property holds a share in an undivided property, the value of this share must be taken into account to assess the proportionality of their commitment.

In other words, the property is not excluded from the analysis solely because it also belongs to the spouse. The guarantor is personally the owner of a portion of this property. This portion constitutes an element of their estate.

The solution can have a significant impact when the jointly owned property is the family home, the value of which sometimes represents the bulk of the couple's assets.

What value should be used for the undivided share?

Taking into account an undivided asset does not mean that its total value must be included in the guarantor's assets.

Only the value of the rights belonging personally to that spouse should be taken into account. When spouses have acquired a property in equal shares, each generally holds 50% of the undivided rights, subject to the provisions contained in the deed of acquisition.

It is also important to consider the net value of these rights. If the property was financed by a loan that has not been fully repaid, the outstanding principal must be taken into account.

For example, if a property is worth €400,000, with a remaining loan balance of €200,000 and the guarantor owns half of it, the net value of their rights is not necessarily €200,000. Depending on the financing and joint ownership arrangements, it can be estimated at half the property's net value, or approximately €100,000.

Other factors may also influence this assessment: the proportions of acquisition mentioned in the deed, the existence of debts between co-owners, the financing arrangements, or difficulties that may affect the completion of the property.

Undivided property and common property: what's the difference?

Joint ownership and community property should not be confused.

Under the regime of separation of property, each spouse remains the owner of their personal property and remains solely responsible for their debts, in accordance with Article1536 of the Civil Code.

When spouses with separate property regimes buy a building together, it does not become jointly owned property. It remains undivided property in which each spouse holds a share.

The situation is different when the spouses are subject to a community property regime. In this case, Article1415 of the Civil Code provides that a spouse who signs a guarantee or takes out a loan alone is, in principle, only liable with their own assets and income.

Community property can only be used as collateral if the other spouse has expressly consented to the guarantee or loan. Even in this case, the separate property of the spouse who merely gave their consent is not at risk.

Therefore, a clear distinction must be made:

• the undivided property, of which the separate guarantor of property personally owns a share;
• the common property, which belongs to the community and whose exposure to creditor proceedings depends in particular on the application of article 1415 of the Civil Code.

Does taking the share into account allow the bank to seize the property immediately?

Taking into account the undivided share in the assessment of the guarantor's assets does not mean that the bank can freely seize and sell the entire property.

Two questions need to be distinguished.

The first concerns the assessment of the disproportionate nature of the guarantee. For this assessment, the asset value of the guarantor's undivided rights must be taken into account.

The second concerns the enforcement measures that the creditor can take to obtain payment of their debt. However, the rights of a personal creditor of a co-owner are governed byArticle 815-17 of the Civil Code.

A personal creditor of a co-owner cannot, in principle, directly seize their debtor's share of the jointly owned property. However, they can initiate partition proceedings on the debtor's behalf or intervene in a partition already underway.

Thus, an asset may be taken into consideration to determine whether the guarantee was proportionate, even though its realization by the creditor remains subject to the particular rules of joint ownership.

What rules apply to guarantees concluded before January 1, 2022?

For guarantees taken out before January 1, 2022, the disproportion remains governed by the former article L. 332-1 of the Consumer Code.

This text stipulated that a professional creditor could not rely on a guarantee entered into by a natural person when this commitment was, at the time of its conclusion, manifestly disproportionate to his assets and income.

The creditor could, however, regain the right to pursue the guarantor if, at the time the guarantor was called upon to pay, their assets ultimately allowed them to meet their obligation. This was the mechanism commonly referred to as "return to better fortune.".

The French Court of Cassation's ruling of January 19, 2022, was issued under this legal regime. Its solution regarding the consideration of undivided rights nevertheless remains relevant for identifying and assessing the guarantor's assets.

What are the rules for guarantees concluded since January 1, 2022?

Since January 1, 2022, the disproportion of the guarantee is governed by article2300 of the Civil Code.

This text provides that when a guarantee given by a natural person to a professional creditor was, at the time of its conclusion, manifestly disproportionate to his income and assets, the commitment is reduced to the amount up to which the guarantor could commit at that date.

The reform therefore changed the penalty.

A manifestly disproportionate guarantee is no longer necessarily rendered ineffective. The judge must determine the amount the guarantor was actually able to guarantee at the time of signing the commitment and reduce the guarantee accordingly.

Furthermore, the mechanism for reinstating the guarantee upon improvement in financial circumstances has been removed from the new text. Therefore, the guarantor's subsequent financial situation no longer allows the creditor to reinstate the guarantee to its original amount.

The date of signature of the deed is therefore crucial in identifying the applicable regime.

What elements should be checked when a deposit is called upon for payment?

Disproportionality is an important defense, but it is not the only point to consider when a bank is suing a guarantor.

In particular, it is important to check:

• the date and conditions of signing the deed;
• the identity of the debtor and the debt actually secured;
• the maximum amount and duration of the guarantee;
• the income and assets of the guarantor at the date of their commitment;
• the net value of his rights in the undivided property;
• loans and guarantees already taken out;
• the content of the asset statement submitted to the banking institution;
• the existence of any apparent anomalies in asset declarations;
• compliance with the formalities applicable to suretyship;
• compliance with the guarantor's information obligations;
• the possible existence of a failure by the bank to fulfill its duty to warn;
• the exact amount of the debt claimed.

The lending institution may, under certain conditions, rely on the information contained in the asset declaration completed and signed by the guarantor. It is therefore essential to carefully verify the declarations made when the guarantee was signed and the accompanying documents.

The creditor's disclosure obligations must also be examined. These may apply, in particular, when a person has provided both a personal guarantee and a security interest. The law firm ARST Avocats has dedicated another publication to the interplay between personal guarantees, mortgage guarantees, and the annual disclosure of information to the guarantor.

Key takeaways

A person married under a separation of property regime cannot exclude from their assets the share they hold in property acquired jointly with their spouse.

This share must be taken into account when assessing whether his guarantee was manifestly disproportionate, even if the creditor cannot immediately seize the entire undivided property.

The analysis should, however, focus on the actual and net value of the guarantor's rights, and not on the total value of the asset.

Finally, the consequences of the disproportion depend on the date of the guarantee:

• for commitments prior to January 1, 2022, the former article L. 332-1 of the Consumer Code remains applicable;
• For commitments made since that date, Article 2300 of the Civil Code provides for a reduction of the guarantee to the amount that the guarantor could actually bear at the time of its conclusion.

Given the technical nature of these rules and the importance of factual and financial elements, each guarantee commitment must be subject to individual analysis.

Fanny Hurreau,
Partner Attorney – ARST Avocats