The relevant section of the Civil Code are the following:
2726. A legal hypothec in favour of the persons having taken part in the construction or renovation of an immovable may not charge any other immovable. It exists only in favour of the architect, engineer, supplier of materials, workman and contractor or sub-contractor in proportion to the work requested by the owner of the immovable or to the materials or services supplied or prepared by them for the work. It is not necessary to publish a legal hypothec for it to exist.
2728. The hypothec secures the increase in value added to the immovable by the work, materials or services supplied or prepared for the work. However, where those in favour of whom it exists did not themselves enter into a contract with the owner, the hypothec is limited to the work, materials or services supplied after written declaration of the contract to the owner. A workman is not bound to declare his contract.
2952. Legal hypothecs in favour of persons having taken part in the construction or renovation of an immovable are ranked before any other published hypothec, for the increase in value added to the immovable; such hypothecs rank concurrently among themselves, in proportion to the value of each claim.The problem given, which I simplify for the purpose of the present argument, is the following.
Andrew owns a house, valued 100K, on which he does renovations. He has a 75K contract with Bob for the work. Bob sub-contracts with Charles, for work and materials worth 20K. Charles denounces his contract to Andrew. By the end of the works, Andrew still owes 30K to Bob. Charles has not been paid yet. Andrew doesn't pay, so Bob and Charles register a hypothec against Andrew's immovable. Bank ABC also has a 70K hypothec on the same immovable. After the works, the building is worth 150K. The building is sold by judicial authority for 100K. Determine who gets what.So the hypothecs on the building, according to the prof, are as follows:
- Legal Hypothec (construction) - Bob: 30K
- Legal Hypothec (construction) - Charles: 20K
- Normal Hypothec - ABC Bank: 70K
Legal Hypothecs of constructors are being paid first. However, the owners of the hypothec can only secure the value added to the immovable after the works. The value added corresponds to a percentage of the value of the immovable.
So, the value added was 50K on 150K, which is 33.333%.
This means that the constructors can only secure 33.3% of the proceeds resulting from the sale of the immovable, so 33.333% on 100K, or $33 333.
(1/3 of the value of the building resulted from the works.)
Of the $33 333, 60% goes to Bob, and 40% to Charles. So Bob gets 20K, and Charles gets $13 333.
The rest goes to the Bank.
Now, here's my problem. Both Bob and Charles have a hypothec on the building. However, Charles is a sub-contractor, and the money owed to him is by Bob. This means that of the 30K Bob is owed, 20K was destined to pay Charles. B's "profit" should only have been 10K. However in this case, he gets 20K, which is more than what he's owed! Assuming that C manages to get the ~ 7K he's owed from B, B is still left with ~13K, which is still more than the "profit" he should've earned!
Moreover, A, who only really owes 30K to B, will end up paying >33K!
If you take another situation where the value of the building is high enough that all the creditors will be paid in full. It means that B could get paid 30K, and C would get 20K. So C would have been paid in full, while B, who should have paid 20 of his 30K to C, would be left with an extra 20K.
This does NOT make sense!
Of course, I asked the prof about it, and she replied that it was an "economical question", which somehow should mean that the law has nothing to do with it. She also said that such situations wouldn't matter in practice, because the value of the building wouldn't be enough to pay everybody anyway, and if the building was worth enough, the owner would just sell it himself and pay his creditors.
Very well, So what does it mean? That the legislator writes laws thinking that "Oh, it's OK, there won't be enough money to go around anyway"??
Somehow, I very much doubt that...
