Secured Transactions in Mexico:Strategies for Trade Creditors

June 13, 2018

8:30 to 10:00 am

Session 27060

Romelio Hernandez

The good old days

• Financing agreement with USA Co.

• Promissory notes for $1.9M and $3M.

• Security agreement over inventory

• Guarantee agreement by Mx Co.

“Cross-border transactions merit attention. Failure to secure them properly based on sound strategy can result in a serious loss.”

Our program

1. Secured transactions

2. Enhancing security devices

3. Problems with cross-border

1. When you get collateral

2. When you put in place contracts that create strong obligations from debtor or third party that are efficiently enforced.

Secured Transactions

Privileged actions

• Promissory note Executive proceeding

• Pledge Special proceeding

• Mortgage Summary proceeding

• Invoices Ordinary proceeding

• Bankruptcy

• Taxes

• Employees

• Creditors

• Debtor

Challengers

Security Devices

Personal Guarantee

1. Financial condition of guarantor is key

2. No privileged action available

3. Debtor is not joint obligor, unless…

Someone else responding for the debt of your debtor

Title retention

1. Good for machinery or equipment

2. Defeats all creditors in bankruptcy

3. No privileged action available

You are still the owner until you get paid in full

Pagaré

1. Immediate attachment order

2. Presumption of debt favors creditor

3. Bankruptcy stay on proceedings

An enforceable unconditional promise to pay

Bond

1. You will collect as long as you win

2. No execution over assets needed

3. Voluntary payment not guaranteed

A bank responding for the debt of your debtor

BondTimeline of full case to enforce a bond

Classic pledge

1. Bailment creates criminal liability

2. Not ideal for inventory or receivables

3. Not effective in bankruptcy unless…

Security interest over “tangible” movable assets

Non-possessory pledge

1. Intangibles allowed (proceeds)

2. Purchase money security interest

3. Special enforcement proceeding

UCC Article 9 security interest in movable assets

Mortgage

1. Real estate will preserve value

2. No need for deficiency claim

3. Vulnerable to labor and tax claims

A security interest in real estate property

Guaranty Trust

1. Debtor conveys title to trustee

2. Trustee is always a bank

3. Private enforcement (self-help)

Debtor entrusts assets to trustee as guarantee

1. Implementation

2. Enforcement

3. Security

Assessing security

Implementation

0

1

2

3

4

5

6

7

Personal Guarantee Pagare Bond Trust

Implementation Enforcement Security

Assessing security

• Rights and obligations

• Right incentives

• Preferred agreed proceeding

• Jurisdiction and venue

Enhancing Security

Right IncentivesTimeline of full case to enforce a bond

• Think “fast-track” arbitration

• We could improve:

– Experts

–Personal notices

– Limits on evidence and appeals

– Execution process (auction)

Preferred agreed proceeding

*Infographic published by El Financiero newspaper on July 21, 2015

Jurisdiction and venue

• Assuming that law is “law”

• Legal concepts may have no meaning across the border

• Remedies lacking recognition or privileged action

Cross-border risk

• Consignment

• Lease or commodatum

• Warehousing or bailment

• Joint ventures

Additional risk

• Financing agreement with USA Co.

• Promissory notes for $1.9M and $3M.

• Security agreement over inventory

• Guarantee agreement by Mx Co.

What to Do?

45,780 66,339 74,136

226,783

992,925

756,197

1,220,512

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7

Total RUG Filings: 3'387,474 (to Sep-2017)

RUG Filings

www.rug.gob.mx

Due Diligence!!!

CONCLUSIONS

1. Cross-border transactions merit special attention.

2. Failure to secure them properly based on sound strategy can result in a serious loss.

3. To secure properly based on strategy you need ask at least the following questions:

Question-checklist

1. Did local attorney review the security device?

2. Are agreed remedies enforceable in court?

3. Is venue the best forum for creditor?

4. Is security device afforded a privileged action?

5. Have creditor’s rights been further enhanced?

For additional information please visit us at www.hmhlegal.com

HAPPY SALES!