Pledge-Priority Right -Wegagen Bank -v.- Ethiopian Revenues and Customs Authority Cassation File No. 81215

Pledge-Priority Right -Wegagen Bank -v.- Ethiopian Revenues and Customs Authority Cassation File No. 81215

Federal Supreme Court Cassation File No. 81215 (January 11, 2013)

Holding of the Court:

The bank with which a vehicle is pledged shall have priority right to recover the loan from its pledge where the debtor, after having pledged the vehicle with the bank commits customs offence which led to a judicial decision for the confiscation of the vehicle.

Civil Code, Articles 2628, 2857(1), 3059

Art. 3, Property Mortgaged or Pledged with Banks Proclamation No.

97/1998

Criminal Code, Article 98(1)

Customs Proclamation No. 622/2009, Article 91(2)

Cassation File No. 81215 Tir 3, 2005 E.C. (January 11, 2013)

Federal Supreme Court Cassation Division

Justices: Teshager Gebreselassie, Almaw Wolie, Ali Mohammed,

Reta Tolosa, Adane Negussie

Petitioner: Wegagen Bank

Respondent: Ethiopian Revenues and Customs Authority

The court has rendered the following judgment after having examined the case.

Judgment

The legal issue in this case is whether priority right is accorded to a bank with which a vehicle is pledged for loan, or whether the confiscation of the pledged vehicle as a result of customs offence committed by the debtor (while using the pledged vehicle) should be implemented irrespective of the pledge.

The case started at Mekele City Central Court on Miazia 01, 2002 E.C. (April 9, 2010). The petitioner (plaintiff in the lower court) stated that the Isuzu truck Plate No. 3-29644, owned by Berhe H. A. is pledged with the bank

for a loan of Birr 90,000 (ninety thousand). As the debtor is in default of paying Birr 2,905 per month, the petitioner is entitled to recover the loan from the sale of the vehicle by virtue of the Foreclosure Law. However, the respondent (defendant in the lower court) claimed to have confiscated the vehicle due to the customs offence of contraband. The petitioner (pledgee) thus requested the lower court that it should have priority of debt recovery from the pledge.

The Federal Supreme Court Cassation Division had previously decided that the vehicle shall be confiscated, and the respondent argued that the petitioner does not have any right over it. The respondent contended that the petitioner cannot invoke claims because final judgment is given over the issue of confiscation.

During the litigation at Mekele City Central Court, the petitioner contested the respondent’s arguments on the ground that its priority right on the pledge should be respected as it is a different from the theme of the judgment of the Federal Supreme Court with regard to confiscation.

Mekele City Central Court dismissed the petitioner’s claim by invoking Articles 32(2) and 244(2)(b)&(d) of the Civil Procedure Code, and it stated that there is final decision of confiscation rendered by the Federal Supreme Court Cassation Division. The petitioner’s appeal to Tigray Regional State Supreme Court was not accepted.

This petition is submitted against these decisions. The petitioner states that the vehicle is pledged property and it cannot be subject to confiscation as a result of a criminal offence committed after the pledge. The petitioner contended that the application of res judicata without the fulfilment of the requirements thereof and the failure to apply the relevant provisions of the law that apply to pledge constitute fundamental error of law.

This Cassation Division has examined whether it was appropriate to reject the priority claim of the petitioner due to the judgment of confiscation of the vehicle.

The respondent argued that the issue of priority claims apply only in civil cases and shall not be applicable to criminal cases, and it stated that the petitioner resorted to this claim after its initial attempt to institute a suit at Maichew High Court was rejected in accordance with Article 418 of the Civil Procedure Code.

The Federal Supreme Court Cassation Division has observed that Berhe pledged his vehicle, Plate No. 3-29644 with the petitioner for the loan of Birr 90,000 based on a contract dated Meskerem 02, 1997 E.C. (September 12, 2004). This court has also noted that the pledge is registered at Addis Ababa Transport Authority. Thereafter, Berhe used the vehicle for contraband on

Yekatit 24, 2001 E.C. (March 3, 2009) as a result of which the Prosecutor instituted a criminal charge at the Tigray Regional Southern Zone. The litigation continued until a decision was rendered by the Federal Supreme Court Cassation Division on Ginbot 05, 2003 E.C. (May13, 2011) in File No. 48628 which affirmed the sentence of three years of simple imprisonment and fine of Birr 5,000. Moreover, the court varied the lower court’s decision and gave final decree regarding the confiscation of the vehicle.

While the litigation of the criminal case was underway at the Federal Supreme Court Cassation Division, the petitioner had, on Tikimt 16, 2002 E.C. (October 26, 2009), requested to intervene in the litigation. The core argument of the petitioner was that the vehicle in question was pledged property before the commission of the offence. The respondent, on the other hand, argued against the petitioner’s claim on procedural grounds, without, however, denying that the vehicle is pledged property.

The legal issue that needs to be resolved is the manner in which the creditor of loan secured by pledged property can enforce its right where final court decision is rendered regarding the confiscation of the vehicle due to an offence committed after the pledge.

As stipulated under Articles 2828, 2857(1) and 3059, a pledgee or mortgagee has priority in loan recovery. Article 3 of Proclamation No. 97/1998 further allows banks to foreclose any property pledged or mortgaged as security to loan by giving a notice 30 days before the foreclosure. Moreover, Article 2857(1) of the Civil Code entitles the pledgee to be paid out of the proceeds from the sale of the pledge before all other creditors. These provisions thus show that the petitioner has priority in recovering its claims from pledged property.

On the other hand, Article 98 of the Criminal Code does not deal with the situation in which the property that is subject to confiscation was, prior to the commission of the offence, pledged as security. Nor does the law that is used as a special legislation regarding customs offences, i.e. Proclamation No. 622/2009 (or other proclamations enacted prior to it) deal with this issue. As long as the laws that are directly relevant to the issue are not clear, principles of statutory interpretation require reference to other laws with a view to examining how they deal with the issue.

With regard to labour relations, Article 167 of Proclamation No. 377/2003 provides that “Any claim of payment of a worker arising from employment relationship shall have priority over other payments or debts”. Workers shall thus have priority over both secure creditors (that are in a similar position as the petitioner) or ordinary creditors. The legislature has clearly given due priority to the claims of workers for whom such payments are crucial for the

fulfillment of basic needs. Another area of the law that can inform our analysis on priority claims relates to Article 80 of the Income Tax Proclamation No. 286/2002 which entitles the Tax Authority to have priority to other debts other than the priority claims from secured creditors.

Even if the issue of priority in claims is not expressly articulated in the Criminal Code, it becomes necessary to resolve the issue under consideration by interpreting the objective of the Criminal Code in conjunction with Article 91(2) of Proclamation No. 622/2009 and the rationale of the laws applicable to pledged property.

The purpose of a contract of pledge is to secure business transactions and criminal law aims at securing the peace and security of the public. These rights extend to legal persons including banks. The function of the Ethiopian Revenues and Customs Authority is generally to put in place appropriate tax collection systems and this can be observed from the content and spirit of the Ethiopian Revenues and Customs Authority Establishment Proclamation No. 587/2008 and other tax laws.

As Article 80 of Proclamation No. 286/2002 provides that secured creditors shall be paid prior to the Tax Authority, this principle should not be altered where the Authority obtains judgment that enables the state to collect the proceeds of confiscated property due to tax and customs offences. In other words, secured creditors should not lose their priority merely because the revenue emanates from confiscation of property in accordance with the law. The petitioner is thus entitled to priority claims because the status of the vehicle as pledged property has not been contested and the pledge was made before the commission of the offence. The lower courts should have resolved the issue from this perspective and they have erred in rejecting the claim of the petitioner by citing legal provisions that do not have relevance to the issue under consideration.

The other issue that should be considered is the manner in which the respondent’s rights can be addressed. The law envisages that the vehicle used by the offender during the commission of contraband offences shall be subject to confiscation. After the debt owed to the pledgee is paid, any remaining amount from the proceeds of the sale of the vehicle shall thus be paid to the respondent. In case, however, all the proceeds from the sale of the pledge are paid to the pledgee, the respondent should have recourse to other property owned by the debtor worth the value of the vehicle that was subject to confiscation. This is because the offender should not benefit from his criminal act.

Therefore it is found that the balance from the sale of the vehicle after payment is made to the petitioner should be considered as the proceeds of

confiscation. In the event that no proceeds are left after the debt owed to the pledgee is paid, the execution of judgment for the confiscation shall apply to other property of the offender to the extent of the value of the vehicle that shall be determined based on its price on the date of the confiscation judgment.

The pledgee, i.e. the petitioner, shall have priority to be paid from the sale of the vehicle, and the rejection of this claim by the lower courts contains fundamental error of law.

Decree

1. The decisions of the lower courts are reversed in accordance with Article 348(1) of the Civil Procedure Code.

2. The Isuzu truck Plate No. 3-29644 owned by Berhe H. was a pledge prior to the commission of the offence by its owner, and the debt owed to the pledgee shall have priority in payment. If this amount is less than the proceeds to be obtained from the sale of the truck, the remaining amount shall be confiscated, and if there is no remaining amount from the sale, this decision of confiscation shall be executed on the offender’s private property the amount of which shall be determined based on the price of the vehicle that existed on the date of the confiscation decree.

Signature of five justices