Criminal seizure of real property: what happens to the creditor's mortgage?

A bank grants a property loan, registers a first-ranking mortgage over the financed property, and then learns that the same property is subject to a criminal seizure in the course of a judicial investigation into its client for money laundering or tax fraud. The question then becomes a stark one for the litigation department: does a properly registered mortgage withstand the criminal proceedings and, above all, what becomes of the debt if the property is confiscated and then sold by the State? This question concerns first and foremost registered creditors, banks and credit institutions, whose real security rests on an asset that is now under judicial control. The analysis below examines the fate of the mortgage at each stage, from protective seizure to final confiscation, and then sets out the remedies open to the mortgagee and the rules for distributing the price where the property is sold.

Criminal seizure of real property: a protective measure distinct from civil seizure

A procedure introduced to secure the enforcement of confiscation orders

Criminal seizure of real property was introduced into French law by Law No. 2010-768 of 9 July 2010 intended to facilitate seizure and confiscation in criminal matters. That statute created Articles 706-141 to 706-158 of the French Code of Criminal Procedure and established AGRASC (the Agency for the Management and Recovery of Seized and Confiscated Assets), a public body responsible for managing seized assets and enforcing confiscation decisions.

The legislature's aim is clear: to prevent the person prosecuted from engineering the insolvency of his or her assets before judgment, by anticipating the penalty of confiscation provided for in Article 131-21 of the French Criminal Code. Criminal seizure of real property is therefore a protective measure with a punitive purpose. It is not intended to satisfy a creditor, as ordinary seizure of real property governed by the French Code of Civil Enforcement Procedures does, but to freeze an asset in order to ensure that a future penalty can be given effect.

The seizure order and its registration at the land register

Under Article 706-150 of the French Code of Criminal Procedure, the seizure of a building is ordered by the investigating judge or, on his or her application, by the judge of liberties and detention (juge des libertés et de la détention) where the investigation is conducted by the public prosecutor. The order is notified to the owner and registered at the land registry (service de la publicité foncière), which makes the measure enforceable against third parties.

This registration has an essential effect for the mortgagee: from its date, the owner can no longer validly dispose of the property or grant any new security. However, criminal seizure does not clear earlier registrations. A contractual mortgage registered before the seizure order was registered keeps its rank and its legal existence. The seizure is superimposed on pre-existing rights without erasing them, which clearly distinguishes this protective phase from the confiscation phase.

Coexistence of criminal seizure and the registered mortgage

During the seizure phase, the mortgagee is therefore not dispossessed of its real right. The registration remains on the land register, with the rank conferred by its date of registration under the rules of the French Civil Code on mortgages, as recast by Ordinance No. 2021-1192 of 15 September 2021 reforming the law of security interests (Articles 2385 et seq. of the French Civil Code).

The relationship between criminal seizure of real property and the mortgage nevertheless remains strained. As the property is under judicial control, the mortgagee can no longer exercise the ordinary prerogatives of its security, in particular by starting civil seizure proceedings to have the property sold and to be paid out of the price. The criminal procedure takes precedence and freezes any competing means of enforcement against the building. The creditor is left waiting: its security survives, but its exercise is suspended for as long as the protective measure lasts. The course of ordinary judicial sales of real property, from seizure to auction, is described in our guide to that procedure.

From seizure to confiscation: the point at which the fate of the mortgage is decided

Confiscation, an additional penalty that transfers ownership to the State

Confiscation ordered under Article 131-21 of the French Criminal Code is an additional penalty by which the seized property is definitively transferred to the State. It is at this stage that the question of the fate of the mortgage ceases to be theoretical. As long as the seizure remains protective, the security is dormant but intact. Once confiscation is ordered by a trial court, the question arises whether the transfer of ownership to the State takes place free of all encumbrances, that is, by clearing the mortgage, or whether it respects the right of the registered creditor.

The financial stakes are considerable for a bank. If confiscation clears the mortgage without compensation, the creditor loses its real security and becomes an unsecured creditor (chirographaire), reduced to a personal claim against a debtor who is often insolvent or imprisoned. If, on the contrary, the mortgage right is preserved, the creditor keeps a right of preference over the sale price of the confiscated property.

Protection of the rights of good-faith third parties

Positive law gives the registered creditor protection through the notion of the good-faith third party. Article 131-21 of the French Criminal Code expressly reserves the rights of a good-faith owner where confiscation concerns property that the convicted person does not own, and the case law of the criminal chamber of the Cour de cassation has gradually extended this logic of protection to holders of ancillary real rights, including the mortgagee.

The transposition of Directive 2014/42/EU of the European Parliament and of the Council of 3 April 2014 on the freezing and confiscation of instrumentalities and proceeds of crime in the European Union reinforced this requirement. That instrument requires Member States to ensure that confiscation measures do not prejudice the rights of good-faith third parties and provides for effective remedies.

The mortgagee's good faith is assessed at the time the security was created. A bank that granted an ordinary property loan, registered its mortgage in the form required by law and was unaware of the fraudulent origin of the funds or the criminal purpose of the property will in principle be regarded as a good-faith third party. Conversely, a creditor that took part in the arrangement or turned a blind eye to obvious signs of money laundering would risk having its good faith challenged, with the result that its right would be extinguished on confiscation.

The principle of non-retroactivity and the security of earlier registrations

Article 2 of the French Civil Code provides that statute provides only for the future; it has no retroactive effect. This principle indirectly protects the creditor whose mortgage was properly registered before proceedings were commenced: a security created earlier can be extinguished only on the conditions laid down by the law applicable when it was created, and subject to proof of an absence of good faith.

The chronology of registrations therefore becomes decisive. A creditor whose mortgage predates the registration of the seizure order is in a stronger position than one who tried to register security afterwards, which would not be enforceable against the criminal proceedings.

The mortgagee's remedies against seizure and confiscation

Challenging the seizure before the investigating chamber

The registered creditor first has a remedy against the seizure order itself. Article 706-150 of the French Code of Criminal Procedure allows a third party with rights over the property to refer the seizure decision to the investigating chamber (chambre de l'instruction). The mortgagee, as holder of a real right over the building, falls within that category and may put forward its arguments.

This remedy does not necessarily seek full release of the seizure, which would require showing that the measure is irregular, but often seeks to have the existence of the mortgage right recognised and preserved. The creditor has an interest in coming forward at the seizure phase, without waiting for confiscation, so as to build a file establishing the regularity of its registration and its good faith. Producing the loan agreement, the notarial deed creating the mortgage and the certificate of registration at the land register forms the evidential basis of this step.

Asserting its rights at the confiscation stage

Where the trial court is considering confiscation, the mortgagee may intervene to ask that its security be preserved or that it be paid out of the price of the property. The criminal chamber requires the courts hearing the merits to address the rights of good-faith third parties before ordering confiscation of an encumbered property. A confiscation decision that simply ignored the existence of a registered, good-faith mortgagee would be liable to be quashed.

The creditor must therefore make sure it is informed of the proceedings and intervenes in them. The practical difficulty is that the bank is not a party to the criminal trial and may be unaware that confiscation is being sought against its debtor. Regular consultation of the land register and monitoring of the position of the defaulting debtor become risk management reflexes in their own right for litigation departments.

Applying to AGRASC once confiscation has become final

Once confiscation is final, management of the confiscated property falls to AGRASC. The agency is responsible for disposing of the assets and, in that context, for dealing with the position of creditors holding security. Law No. 2021-1729 of 22 December 2021 for confidence in the judicial institution clarified and reinforced AGRASC's tasks, in particular as regards the satisfaction of creditors and the interplay with the rights of victims.

The good-faith mortgagee may thus submit to AGRASC a request to be paid out of the proceeds of sale of the confiscated property, up to the amount of its secured claim and within the limits of its rank. This administrative route complements the court remedies and is often the practical means by which the bank recovers all or part of its claim.

Distribution of the price where the seized or confiscated property is sold

Sale of seized property before judgment

The French Code of Criminal Procedure authorises, in certain conditions, the sale of seized property even before judgment, where keeping it under judicial control would tend to reduce its value or entail disproportionate conservation costs. AGRASC then realises the property and the sale proceeds are paid into escrow, standing in place of the building in the proceedings. This is the mechanism of real subrogation (subrogation réelle): the mortgage security transfers to the price held in escrow.

For the mortgagee, this subrogation is of major importance. Its right of preference, which attached to the building, moves to the sum of money held in escrow. If the proceedings result in the property being returned to the owner, the price goes to the owner after deduction of the creditors' rights; if they result in confiscation, the question of satisfaction of creditors arises over that same sum.

The order of distribution and respect for mortgage ranking

Distribution of the price in principle follows the order of preferential claims and mortgages laid down by the French Civil Code. The rank of the mortgage, determined by the date of its registration at the land register, governs the order in which creditors are paid out of the price. A first-ranking creditor is thus paid before a second-ranking creditor, up to the amount of the price available. On the position of the registered creditor in a civil seizure of real property, from notification to distribution of the price, see our dedicated analysis.

This hierarchy must, however, be combined with the criminal purpose of confiscation and with the rights of the victims of the offence. Where confiscation is intended to compensate civil parties, a tension arises between the mortgagee's right of preference and the interest of the victims. Case law and recent legislation tend to preserve the security of the good-faith creditor, who cannot be made to bear the consequences of an offence to which it is a stranger, but each situation calls for a concrete analysis of the competing rights.

The relationship between the secured claim and the balance available

In practice, several configurations must be distinguished. If the sale price exceeds the amount of the first-ranking mortgage claim, the creditor is paid in full and the balance goes to the State by way of confiscation or to lower-ranking creditors. If the price is insufficient, the first-ranking creditor absorbs the whole of the price available and keeps, for the shortfall, an unsecured claim with no real security.

The mortgagee therefore has every interest in having the ratio between the amount of its claim, in principal, interest and ancillary sums secured by the registration, and the market value of the building assessed precisely. This assessment determines its real margin of recovery and guides its procedural strategy, whether it is to challenge the seizure, intervene in the criminal trial or apply to AGRASC. The question of the lender's ranking and the scope of the lender-of-money preferential claim (privilège de prêteur de deniers) on a forced sale is examined in our article on that subject.

Operational recommendations for registered creditors and banks

Faced with a criminal seizure of a mortgaged property, passivity is the worst strategy. French law protects the good-faith mortgagee, but that protection is never automatic: it requires active, documented action at each stage of the proceedings.

The creditor must first monitor the land register and the position of its defaulting debtors so as to detect as early as possible the registration of a seizure order. It must then build without delay an evidential file establishing the priority and regularity of its registration and its good faith when the security was created. Finally, it must choose the right procedural route according to the stage reached: an application to the investigating chamber against the seizure, intervention in the criminal trial at the confiscation stage, then a request for satisfaction from AGRASC once confiscation is final.

Conclusion

Criminal seizure of real property does not make the registered creditor's mortgage disappear: it puts it into abeyance. As long as the measure remains protective, the security keeps its existence and its rank. It is confiscation, the definitive transfer of ownership to the State, that puts the security to the test. Positive law, under the influence of Directive 2014/42/EU and of successive reforms, notably by the Law of 22 December 2021, protects the good-faith mortgagee, whose right of preference transfers to the price of the property sold and who may be paid by AGRASC within the limits of its rank.

The creditor's position is nevertheless solid only if it acts. Good faith must be demonstrated, the priority of the registration proved, and the intervention made at the right point in the proceedings. Above all, any institution faced with the criminal seizure of a property it finances should have the exact date of its registration, relative to the registration of the seizure order, checked without delay by an adviser versed in the interplay of criminal law and the law of security interests: it is this chronology that determines most of its prospects of recovery.

Frequently asked questions

Does criminal seizure of real property erase a mortgage registered before the measure?

No. Criminal seizure, governed by Articles 706-141 et seq. of the French Code of Criminal Procedure, is a protective measure that does not clear earlier registrations. A contractual mortgage registered before the seizure order was registered keeps its existence and its rank. However, the creditor can no longer enforce its security by civil seizure of real property for as long as the criminal proceedings continue, since the criminal measure freezes any competing means of enforcement against the property.

What happens to the mortgage when the property is confiscated by the State?

Confiscation ordered under Article 131-21 of the French Criminal Code transfers ownership of the property to the State. French law reserves the rights of good-faith third parties, a category to which a mortgagee that properly registered its security and was unaware of the criminal origin or purpose of the property in principle belongs. That creditor may have its right of preference preserved and be paid out of the proceeds of sale, up to the amount of its claim and within the limits of its rank.

How can the mortgagee challenge a criminal seizure?

Article 706-150 of the French Code of Criminal Procedure allows a third party with rights over the property to refer the seizure order to the investigating chamber. The mortgagee, as holder of a real right, falls within that category. It has an interest in coming forward at that stage to have the regularity of its registration and its good faith recognised, by producing the loan agreement, the deed creating the mortgage and the certificate of registration at the land register.

What is AGRASC's role in relation to the registered creditor?

AGRASC (the Agency for the Management and Recovery of Seized and Confiscated Assets), created by Law No. 2010-768 of 9 July 2010, manages seized assets and enforces confiscation orders. Among other things, it sells confiscated property. Law No. 2021-1729 of 22 December 2021 reinforced its tasks of satisfying creditors. The good-faith mortgagee may submit to it a request to be paid out of the proceeds of sale, up to the amount of its secured claim and according to its rank.

In what order is the sale price of confiscated property distributed?

Distribution in principle follows the order of preferential claims and mortgages under the French Civil Code, rank being determined by the date of registration at the land register. A first-ranking creditor is paid before a lower-ranking creditor, up to the amount of the price available. This hierarchy is combined with the criminal purpose of confiscation and the possible rights of civil parties, but the good-faith creditor should not bear the consequences of an offence to which it is a stranger.

Is the price of the property sold always enough to repay the bank?

Not necessarily. If the price exceeds the first-ranking mortgage claim, the creditor is paid in full and the balance goes to the State or to lower-ranking creditors. If the price is insufficient, the creditor absorbs the whole of the price available and keeps, for the shortfall, a mere unsecured claim with no real security. Hence the importance of assessing the ratio between the secured amount, including interest and ancillary sums, and the market value of the building.

If the property is sold before judgment, is the mortgage lost?

No. Where AGRASC sells seized property before judgment, the proceeds are held in escrow and stand in place of the building through real subrogation. The mortgagee's right of preference then moves to the sum held in escrow. Depending on whether the proceedings end in return of the property or in confiscation, the question of satisfaction of creditors arises over this price held in escrow, with the rank of the security respected.