On March 15, 2007 the Argentine Supreme Court made another important decision ruling the validity of an emergency legislation passed after 2002 as a consequence of the last economic, financial and social crisis1 in the country. Up to this decision, the Supreme Court principally decided on matters related to bank deposits nominated in US Dollars that were compulsorily converted into Pesos under the so called "pesification", upholding the constitutional validity of such measure (cases "Bustos" and "Massa", among others).

The recent decision resolved the pending issue of a type of debt converted into Pesos at a 1:1 rate and refinanced under the "Mortgage Refinancing Program", created by Law 25.798 (the "Program"). This Program was established for small debtors with mortgage secured loans of less than AR$ 100.000 granted for the purchase or improvement of residential properties, and that were defaulted before or during the worst period of the crisis.

Before the Program was created in 2003, all debt nominated in US Dollars incurred before January 06, 2002 was converted into Pesos on a 1:1 basis2, even those defaulted before such date3. The Program entitled eligible debtors to transfer the pesificated debt to a third party trustee designated by the Executive Power4, which surrogated the original debtor in the lending relationship with the creditor. After the debt assignment, the original debtor continued obligated to the trustee, but under better conditions of repayment. The trustee was empowered to issue short and medium term bonds to cancel the assigned debts with lenders. The damages caused to creditors arising from the "pesification" were "compensated" by applying an indexation index (the "Salaries Variation Coefficient") plus a 2,5% interest rate on due amounts.

The Program was strongly rejected by creditors as their credits repayment was significantly postponed, besides the "pesification" issue that was the main core of dispute.

The Court of Appeals reaction was to uphold the validity of the "pesification", but allocating the "damages" of the pesification (i.e. breach between AR$ 1 and the purchase price of USD 1 at the official exchange rate) on the lender and borrower in equal parts, plus a 12% interest rate on due amounts; at the same time they banned the Program declaring it unconstitutional. This fair solution, called "Theory of the Shared Effort", was generally accepted by the lower Courts.

As a consequence of the pressure implemented by the Debtors’ Association, on December, 2006 the Congress passed the Law 26,167, authorizing Judges to apply the Theory of the Shared Effort within the Program, but limiting to 30% the portion of damages that could be allocated on the debtor by all concepts (CVS plus any other compensation), and fixing a 2,5% interest rate on due amounts.

In "Rinaldi v. Guzman" the Supreme Court reconfirmed the constitutionality of the "pesification" established by the Law 25,561 and Decree 214/02 (this time related to debt matters), the Mortgage Refinancing Program created the Law 25.798 and the 30%-70% damages distribution established by the Law 26.167.

Footnotes

  1. In re: "Rinaldi v. Guzman Toledo".

  2. Emergency Law N° 25,561 (01/06/02), Section 11.

  3. Law 25,820.

  4. The bank Banco de la Nacion Argentina was appointed as Trustee of the Program.

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