Sale of collateral outside auction and the duty of due care: Czech Supreme Court ruling

A creditor sold a pledged flat outside a public auction for a fraction of its market price. The debtor sued for a declaration that he was still the owner — and won at two instances. The Czech Supreme Court, however, reversed the outcome on the sale of collateral outside auction: the creditor's failure to exercise due care is serious, but does not in itself invalidate the purchase contract. The debtor is entitled to damages, not to the return of the flat. Judgment file no. 21 Cdo 3155/2025 of 4 August 2026 shifts existing practice and changes what an aggrieved debtor should fight for.

The facts are instructive in themselves. In April 2020, the pledgor concluded a loan agreement and a related pledge agreement over a flat in Prague; the secured claim was CZK 2.5 million. The pledge agreement allowed a direct sale outside auction, permitted the use of an older expert valuation (from January 2016) and provided that the creditor could sell the flat for at least 60% of the price under that valuation. In May 2021, the flat ended up in the hands of a third party at a price which, according to the debtor, was a fraction of its market value. He sought a declaration of ownership; the district and municipal courts found in his favour, holding that the pledge agreement was invalid, the creditor had not acted with due care and the buyer could not have been in good faith. The buyer of the flat filed an appeal on points of law, and the Supreme Court essentially agreed with her.

The case carries all the more weight because it concerns a situation encountered in many business loans secured by real estate — typically non-bank financing, where a direct sale outside public auction is a standard agreed method of enforcement. Until now, there was considerable legal uncertainty in this area: lower courts did not hesitate to strike down entire transactions as contrary to law, and buyers found themselves having to review steps by the creditor into which they had no insight. The Supreme Court removed this uncertainty on two fundamental levels. Both have a direct impact on what disputes over the enforcement of pledges look like today — and on how businesses should set up their own processes if they accept or provide collateral.

Sale of collateral outside auction and due care: what the court actually said

Under Section 1365(1) of the Czech Civil Code, when selling collateral other than at public auction, the pledgee must act with professional care in its own interest and in the interest of the pledgor so as to sell the collateral at the usual price. Any creditor in this position knows that this duty is not merely ethical — the courts read it as a full legal obligation whose breach has real consequences. The question was which consequences exactly.

The lower courts concluded that if the creditor fails to exercise due care, the entire sale is invalid under Section 580(1) of the Civil Code as contrary to law. The Supreme Court rejected this view. The purchase contract between the pledgee and the buyer is not in itself contrary to law — a contract for the transfer of real estate is not unlawful merely because the seller, before concluding it, failed to comply with duties imposed on it by another provision. The breach of due care occurs outside the content of the purchase contract, in the pre-sale phase (valuation, approaching interested parties, transparency of the competition). In terms of content and subject matter, the purchase contract is an entirely standard title of transfer; a defect in the process that led to it does not penetrate the contract itself so as to make it unlawful.

This has a concrete consequence: a pledgor whose flat was sold below value cannot seek a declaration that he is still the owner. The creditor had the right to realise the collateral, the purchase contract was validly concluded and ownership passed to the buyer. What remains to the debtor is a different claim — in tort. If the creditor culpably breaches the duty to act with due care and thereby interferes with the debtor's ownership (typically by selling below the usual price), it incurs non-contractual liability to compensate the harm. The sanction is not the unwinding of the transfer but monetary compensation for the difference between the usual price and the price achieved, and possibly other damage.

In other words, the impact of the interference with ownership moves from the property-law level (the flat is still mine) to the level of obligations (the flat is no longer mine, but I have a claim against the creditor corresponding to what I lost). For the debtor, this is a fundamentally different position — he must bear the burden of quantifying the harm and proving fault; on the other hand, he does not depend on whether the entire chain of transfers can be unravelled. The creditor's liability is direct where the statutory conditions are met and does not depend on whether the buyer behaved properly or not.

For a firm handling litigation and arbitration, this is a significant procedural shift. An action for a declaration of ownership is a dead end in such cases. The aggrieved debtor must bring a damages action against the creditor, prove the usual price on the date of sale, prove the creditor's fault in breaching due care and quantify the damage. He will only succeed with careful preparation of evidence: an expert valuation of the usual price, a reconstruction of how interested parties were approached, communication records and proof that the offer was published. Without this, the claim is very difficult to enforce.

The buyer's good faith: what it actually relates to

The second part of the decision is equally important and distinctly reassuring for buyers of collateral. The Supreme Court clarified what good faith under the second sentence of Section 1365(1) of the Civil Code relates to. Not to whether the creditor exercised due care — but to whether the creditor was entitled to sell the collateral outside public auction at all.

The logic is as follows. Where the law imposes on a transferor certain duties before the transfer whose fulfilment or non-fulfilment does not affect its entitlement to transfer the right, the buyer's good faith cannot relate to how those duties were fulfilled. Due care in the sale does not affect the creditor's entitlement to sell the collateral. The creditor was entitled to realise the collateral even if it erred in doing so. The buyer therefore does not have to examine whether the creditor approached enough interested parties, used a current expert valuation or achieved the usual price — it only needs to verify that the creditor has the right to sell at all.

In conjunction with Section 7 of the Civil Code, the court inferred a presumption of the buyer's good faith that the creditor is entitled to sell the collateral outside auction. Whoever claims otherwise bears the burden of proof — and that is the pledgor, not the buyer. This significantly changes litigation tactics: the buyer need not prove the purity of its considerations about the usual price; the debtor must prove specific circumstances rebutting good faith (e.g. links to the creditor, knowledge of defects in the process, etc.).

This shift is also crucial for purchasing investors. Until now, there was speculation about how far their duty to investigate extended — whether they had to commission their own valuation, check how many other interested parties had been approached or assess whether the price matched the market. The Supreme Court made it clear that such a scope of checking cannot be required of the buyer. The buyer has the right to rely on the presumption that the creditor acts within the limits of its entitlement and has no duty to police the quality of its procedure. This is a marked change: it shifts the burden of proof and risk onto the debtor — to whom it logically belongs, since he knows the circumstances of the pledge relationship and has the best access to information about the creditor.

When is an agreement on direct sale still permissible?

The third line of reasoning concerns what may be agreed in a pledge agreement as an "other method" of satisfying the creditor under Section 1315(2)(b) of the Civil Code. The law prohibits an agreement that would allow the creditor to realise the collateral in any way it chooses — and the dispute was whether the specific pledge agreement contained such a prohibited arrangement.

The Supreme Court set a clear criterion. The other method of satisfaction must be agreed so that it does not depend solely on the creditor's will and enables the creditor to fulfil its duty to act with due care and sell the collateral at the usual price. Where the agreement allows the creditor to use an older expert valuation but at the same time enables it to commission a new valuation and sell at a price above the agreed minimum (in the case at hand, 60% of the valuation), such an arrangement is not prohibited. The creditor has room for a proper procedure — if it does not use it, it breaches due care, but the arrangement itself is not invalid.

This explains why the Supreme Court quashed the decisions that struck down the pledge agreement as a whole. In substance, therefore: the possibility of using an older valuation does not in itself make the arrangement an "arbitrary method" of realisation. What matters is whether the creditor can (and must) choose a procedure leading to the usual price. The criterion is thus not formal (does the contract contain a minimum price?) but functional (does the contract give the creditor a real tool to achieve the usual price?). Pledge agreements that set a minimum percentage threshold, leave room for the creditor's own initiative and allow the use of a current valuation will pass this test. Pledge agreements that, on the contrary, leave all parameters to the creditor's unilateral will and give it no tool to achieve the usual price are likely to fail.

What this means for creditors, debtors and buyers

The decision fundamentally changes the allocation of risks in three positions. For creditors — typically providers of loans secured by real estate — it brings a combination of good and bad news. The good news: even a careless sale outside auction no longer automatically means that the collateral returns to the debtor and the buyer sues for the return of the purchase price. The bad news: the creditor remains directly liable for damages. If it sells below the usual price, it faces an action for compensation for the difference and possibly other harm. And because fault is assessed, the creditor must be able to show that it actually followed a procedure with due care — a reasonably current expert valuation, a transparent competition, documentation of the parties approached, and reasons for choosing the best offer. The absence of such documentation practically reverses the evidential position in the dispute against the creditor.

For pledgors — often small business owners who pledge operating real estate — the very aim of the defence changes. Recovering ownership of a flat or a hall will generally no longer be possible if the creditor had the right to sell the collateral at all and the buyer was in good faith as to that right. What remains is the route of financial compensation. This means quickly securing an expert valuation as at the date of sale, documenting the circumstances of the enforcement of the pledge and preparing a damages action. Delay hurts here — over time, evidence of the usual price and of how the creditor actually ran the competition is lost. We advise clients to enter such a dispute with realistic expectations: the aim is a monetary settlement, not the return of the property.

For buyers of collateral sold outside auction, the decision reads as a significant strengthening of their position. They do not have to second-guess the creditor's considerations, verify usual market prices or validate expert valuations. They must make sure that the creditor really has the right to sell outside auction — i.e. that there is a valid pledge agreement with the relevant clause on the method of realisation and that the secured claim has fallen due. Everything else is covered by the statutory presumption of good faith, with the burden of proof on the debtor. Even so, caution pays where circumstances distinguish the offer from the standard — an extraordinarily low price, personal links to the creditor, a non-transparent competition. These are situations in which the buyer's good faith may subsequently become the subject of a dispute.

The practical impact in one sentence: the decision creates a clearer but harsher architecture of liability. The sale stands; the creditor pays for its errors in money. Anyone who accepts collateral as security without its own compliance regime for enforcing the pledge — updating valuations, documenting the competition, criteria for selecting offers — exposes itself to a financial risk that, after this decision, will be considerably easier to enforce than before.

Source: Judgment of the Supreme Court of the Czech Republic file no. 21 Cdo 3155/2025 of 4 August 2026, ECLI:CZ:NS:2026:21.CDO.3155.2025.3 (via profipravo.cz).