Term and legal context of “Vulture”
The term “Vulture” (English for “Geier”) is used, particularly in the context of business law, as a short form for “Vulture Fund” (German: “Geierfonds”). It refers colloquially to investors or investment funds that purchase distressed debt securities—often bonds or loans from states, companies, or individuals—at significantly reduced prices, with the intent of subsequently demanding full payment. This practice is relevant in both international financial law and insolvency law and carries numerous legal implications.
Vulture Funds: Legal background and mechanisms
Acquisition of distressed claims
Vulture funds purchase claims—such as bonds, promissory note loans, or other debt securities—that are in default or undergoing restructuring. Acquisition generally occurs at a price far below the nominal value of the claim. Legally, this is a form of claim transfer by assignment (cession), governed, for example, in Germany by §§ 398 ff. BGB or under Anglo-American law as an “Assignment of Claims.”
Rights of the assignee
Through the transfer of the claim, the fund acquires under civil law the full legal position of the original creditor. This includes, in particular, rights to payment of the full nominal amount plus any interest and contractual penalties. However, the actual ability to assert these claims depends on various legal conditions.
Enforcement of claims: Civil and procedural law
Right to sue and jurisdiction
Vulture funds use the rights transferred to them through the purchase of claims to take legal action against debtors—often states with payment difficulties. In the international context, jurisdiction is often determined by the terms of the bond or the nature of the claim.
International bonds are frequently subject to the law and courts of countries with established financial centers, such as New York or London. This allows vulture funds to file lawsuits outside the debtor’s home country.
Enforcement in international legal transactions
The actual enforcement of legally binding judgments is particularly challenging in cross-border contexts. Aspects of international enforcement law must be considered, such as the recognition and enforcement of foreign judgments or the existence of immunity provisions (state immunity).
State immunity and vulture litigation
Principle of immunity
States generally enjoy immunity from the jurisdiction and enforcement of other states (cf. Art. 25 GG; customary international law; State Immunity Act 1978 (UK)). There are exceptions to this principle, for example in commercial transactions.
Breach of immunity
Vulture funds attempt to access assets abroad by specifically challenging immunity and identifying state entities or assets not protected by immunity (e.g., commercially used embassy buildings or state enterprises). The risk of enforcement increases the pressure on debtors to settle out of court.
Restructuring of sovereign debt
Collective Action Clauses (CAC)
To limit the power position of individual investors, many newer bond terms include Collective Action Clauses. These allow a qualified majority of creditors to agree to a debt restructuring, which is then binding even for “vultures.” In the absence of such clauses, a single fund can block a flexible majority decision and insist on full performance.
Pari passu clauses
Another legal instrument is pari passu clauses, which are intended to ensure equal treatment for all creditors. Their interpretation can result in even creditors resistant to restructuring being treated equally, giving vulture funds additional negotiation leverage.
Moral, legal policy, and international criticism
Rights versus common good
The activities of vulture funds often attract legal policy criticism and raise questions about balancing private autonomy (the right to acquire and enforce claims in full) with the public interest in effective debt restructuring.
International legislative initiatives
Some jurisdictions, such as Belgium with the “Anti-Vulture Law” (Law of 12 July 2015), seek to limit the exorbitant profits of vulture funds and restrict enforcement of claims to the actual purchase price paid. International organizations such as the United Nations are also engaged in developing regulatory proposals to benefit future debtor countries.
Summary and legal classification
Vulture funds and the term “vulture” refer to actors who systematically purchase distressed claims and insist on full recovery—often against economically distressed debtors. The practice is based on the transfer of claims in civil law, but is linked to complex issues of international debt, procedural, and enforcement law, as well as public law. The legal assessment depends largely on the specific case, the applicable law, and the respective social and political perspective.
Frequently Asked Questions
What legal framework applies to vulture funds in Germany?
Vulture funds, also known as “locust funds”, operate within the legal framework of German civil and commercial law. In principle, the acquisition of distressed claims (NPLs – Non Performing Loans) is permissible under German law; the transfer is governed primarily by the provisions of §§ 398 ff. BGB (assignment of claims). Restrictions may result from, for example, contractual prohibitions on assignment (“cessio pro solvendo”), data protection regulations, or the German Banking Act (KWG) if the business model exceeds financial supervisory thresholds. Furthermore, vulture funds that operate as financial services institutions fall under BaFin supervision and may require appropriate licenses pursuant to KWG § 32. The enforcement of acquired claims must take place within the context of German enforcement, insolvency, and consumer protection law. There is a reporting obligation to Schufa and comparable credit agencies, as well as compliance with the GDPR when handling personal debtor data.
To what extent are vulture funds subject to banking supervision or other regulatory controls?
Vulture funds that merely acquire claims and do not conduct banking or custody business in the narrower sense are, according to current case law and administrative practice, not considered credit institutions within the meaning of the KWG and do not require banking supervision authorization. However, if they exceed certain thresholds—for example, if they acquire claims on a large scale and themselves grant loans or trade in loans—they may become subject to a licensing requirement under the KWG. Fund structures must also be assessed under the Capital Investment Code (KAGB); if they constitute investment assets, additional requirements apply. BaFin may order audits and sometimes require compliance documentation, particularly to prevent money laundering under the Money Laundering Act (GwG). For international activities, notification and licensing requirements in the home or target country must also be observed.
What consumer protection regulations apply to the acquisition of claims by vulture funds?
Extensive consumer protection regulations must be observed when acquiring claims. According to § 404 BGB, debtors can assert all objections they would have had against the original creditor also against the new creditor, i.e., the vulture fund. In addition, §§ 355, 491a BGB apply to consumer credit agreements, including possible rights of withdrawal and various information obligations. In the case of distressed mortgage loans, special residential termination protection laws (e.g., § 573 BGB) must be observed. Further laws apply to the sale of real estate or consumer loans (§§ 491 to 505e BGB). The data protection provisions of the GDPR and the Federal Data Protection Act (BDSG) must also be strictly observed, particularly with regard to the information obligation under Art. 14 GDPR upon data transfer.
How is the legal position of the debtor affected after the transfer of their claim to a vulture fund?
The debtor’s legal position is generally not worsened by the transfer of the claim. All defenses and objections according to §§ 404 ff. BGB remain, such as limitation or rights of avoidance. However, vulture funds often act with increased enforcement interests and use the full legal arsenal of dunning procedures, litigation, enforcement, and insolvency proceedings. The debtor’s remedies remain unaffected. When defending against unjustified claims, all legal remedies should be used: objection in the dunning procedure, defense in contentious litigation, defenses in insolvency proceedings, etc. The prohibition on abuse of rights (§ 242 BGB) limits vulture funds if they act immorally or vexatiously.
What obligations do vulture funds have when communicating with debtors?
Vulture funds are obliged to clearly inform debtors about the acquisition of the claim and the identity of the new creditor (§ 409 BGB). If such notification is omitted, the debtor has a right to refuse performance to the previous creditor. For debtor communication, the provisions of the Legal Services Act (RDG) also apply, to avoid unauthorized legal advice. The obligations to inform also cover data protection information pursuant to Art. 13/14 GDPR and, if applicable, further consumer protection information under the BGB. Misleading or aggressive communication can lead to warnings, fines, and injunctive relief under the UWG and consumer protection legislation.
Are vulture funds permitted to take unrestricted enforcement action against debtors?
As creditors, vulture funds can generally use the entire range of statutory enforcement measures under §§ 704 ff. ZPO. They must be able to present an enforceable title (e.g., a judgment or enforcement order). Nevertheless, all protective provisions of enforcement and insolvency law continue to apply: exemptions from seizure, enforcement protection under §§ 850 ff. ZPO, protected assets in insolvency proceedings, etc. In cases of impending homelessness or social hardship, additional restrictions must be observed, and social authorities involved if necessary. If vulture funds abuse legal enforcement or exceed legal limits, liability for damages, enforcement defense actions, and potentially criminal consequences (e.g., coercion, § 240 StGB) may be incurred.
What restrictions apply to the resale of claims by vulture funds?
Vulture funds are also permitted to resell claims, provided there are no statutory or contractual prohibitions on assignment. The parties can agree to assignment prohibitions in the original contract (§ 399 BGB); these bind all buyers. In the case of claims against consumers, the right of resale may also be limited by consumer protection clauses or trust models. Personal data may also only be disclosed to third parties under the GDPR with an adequate legal basis or the consent of the data subject. Each resale requires new information obligations and compliance with data protection regulations, as well as notification requirements to BaFin in the case of large-scale trading of claims.
Are vulture funds subject to special tax regulations?
Vulture funds regularly operate under German tax law as corporations or investment funds. Of particular tax relevance is the treatment of income from debt collection, increases in value, and any gains from disposals. Such income is generally treated as business or investment income (§§ 15, 20 EStG). In an international context, double taxation agreements may also apply. Anti-abuse provisions (e.g., § 42 AO) must be observed in particularly aggressive arrangements. Real estate engagements are subject to real estate transfer tax and, if applicable, VAT regulations, especially within the scope of a business transfer as a whole (§ 1 para. 1a GrEStG, § 9 UStG).
