Brazil: The Treatment Given To Credits Secured By Fiduciary Assignment In The Judicial Recovery Plan Of A Brazilian Company

Last Updated: 22 February 2013
Article by Walter Stuber

The Fourth Chamber of the Brazilian Superior Court of Justice (Superior Tribunal de Justiça – STJ) ruled that credits secured by fiduciary assignment (cessão fiduciária) of receivables are not subject to the judicial recovery plan of a Brazilian company1. On February 5, 2013, the Judges of STJ unanimously understood that the fiduciary assignment falls in the category of movable property (bem móvel) as defined in item III of article 83 of the Brazilian Civil Code (Law No. 10406, of January 10, 2002), so that it is one of the exceptions provided for in paragraph 3 of article 49 of Law No. 11101, of February 9, 2005 (the Brazilian Corporate Recovery Law). This was the first decision taken by STJ about this matter.

In accordance with article 83 of the Brazilian Civil Code, for legal purposes, "movable property" comprises: (i) the energies that have economic value; (ii) rights in rem over movable objects and corresponding actions; (iii) patrimonial personal rights and their respective actions.

Article 49 of the Brazilian Corporate Recovery Law establishes the general rule - all claims existing on the date of the petition applying for the judicial recovery plan are subject to such plan, even if not yet due. The few exceptions admitted by law are expressly contemplated in paragraph 3 of said article 49, as follows:

"Paragraph 3. - In the case of a creditor holding the position of fiduciary owner of real or personal property, financial lessor, owner or committed seller of real estate whose respective agreements include an irrevocability or irreversibility clause, including under real estate developments, or an owner under a sale agreement with title retention, his claim shall not be subject to the effects of the judicial recovery plan, and the ownership rights over the item and the agreement terms shall prevail, with due regard for the respective law; during the suspension term under article 6, paragraph 4, hereof2, however, it shall not be permitted to sell or remove from the debtor's establishment any capital goods essential to his business."

The judicial recovery plan in Brazil is a court-supervised proceeding aimed at enabling debtors to overcome an economic and financial crisis based on a reorganization plan negotiated with and approved by its creditors.

The fiduciary assignment of rights over movable things (cessão fiduciária de direitos sobre coisas móveis), including credit instruments (títulos de crédito), as a guarantee (collateral) for transactions made in the Brazilian financial and capital markets, is permitted by force of the provisions of paragraph 3 of article 66-B of Law No. 4728 of July 14, 1965, as amended by article 55 of Law No. 10931, of August 2, 2004. In this case, unless otherwise specified by the parties, the direct and indirect ownership of fiduciary property of the goods or instruments evidencing the rights or credits is attributed to the creditor. In the event of default of the secured obligation by the debtor, the creditor can sell to a third party the goods or instruments object of the fiduciary property, regardless of any auction (leilão), public sale (hasta pública) or any other judicial or extrajudicial measure. The funds obtained with the sale of the goods or instruments will be used to pay the total value of the credits and expenses related to the performance of the guarantee, and the balance, if any, will be delivered to the debtor, accompanied by a statement of all the amounts incurred in connection with the transaction. This is a very favorable treatment compared to the other creditors that are subject to the judicial recovery plan.

This mechanism is also known as "wire lock" (trava bancária) because it aims to protect the creditor secured by fiduciary assignment of receivables, which receives a different treatment from the other creditors that are subject to the judiciary recovery plan pursuant to the rules established by the Brazilian Corporate Recovery Law.

In the case at hand, the Special Appeal was filed by a Brazilian financial institution (Banco Bradesco S.A.) against a decision issued by the Court of Appeals of the State of Espírito Santo (Tribunal de Justiça do Espírito Santo – TJ/ES), which concluded that the corresponding values were subject to the judiciary recovery plan, because they were not contained in the list of exceptions set forth by paragraph 3 of article 49 of the Brazilian Corporate Recovery Law. The 2nd Circuit Court of the City of Linhares, in the State of Espírito Santo, previously determined the inclusion in the judicial recovery plan involving a furniture industry company (Indústria de Móveis Movelar Ltda.) of certain banking credits that were secured by fiduciary assignment of trade bills (duplicatas mercantis) for the benefit of the Brazilian debtor and against the creditor.

According to the STJ, the Brazilian Corporate Recovery Law excludes certain cases from the effects of the judiciary recovery plan and among them "the creditor holding the position of fiduciary owner of real or personal property". The Reporting Judge Maria Isabel Gallotti declared that her interpretation of the term "movable property" is based on article 83 of the Brazilian Civil Code, which refers to "patrimonial personal rights and their respective actions".

This is an important court precedent for the banking industry. The Reporting Judge admitted that the legislative option puts the banks in a privileged situation in relation to the other creditors and hinders the judicial recovery plan. However, it would not be possible to ignore the strong expectation of return of capital due to this type of guarantee, which permits funding with lower risk rate, inducing the decrease of the banking spread, and benefits the business activity and the national financial system as a whole.

Following in part the Reporting Judge, Judge Luis Felipe Salomão noted that the rights of the fiduciary owner must be protected, but it is the court in charge of the judicial recovery plan that should evaluate the essentiality of the values necessary for the operation of the company in order to balance the guarantee given to the creditor (the bank) and the needs of the company undergoing a judicial recovery plan. According to Judge Salomão, to protect the debtor (the company), the cash should be judicially deposited and requested by the debtor in accordance with the needs of cash flow to operate the company. He argued further that even in the case of credits secured by fiduciary alienation (alienação fiduciária), the acts that imply in expropriation measures shall be taken by the court in charge of the judicial recovery plan. The other Judges, however, decided not to adopt his conclusions, and repeated the vote of the Reporting Judge. Otherwise the banks would always be adversely affected because for a company undergoing a judicial recovery plan any cash is necessary and would never be released and the perverse consequence would be the increase of the banking spread of the loans.

Therefore, based on this court precedent, any creditor secured by fiduciary assignment of receivables is holding the position of fiduciary owner of personal property and is not subject to effects of the judicial recovery plan of the debtor.


1 Special Appeal (Recurso Especial) No. 1263500, having Banco Bradesco S.A. as Appelant (Recorrente) and Indústria de Móveis Movelar Ltda. as Respondent (Recorrido), and as a Reporting Judge (Ministra Relatora) Maria Isabel Gallotti. The decision has been issued on February 5, 2013 and will be available in due course at the STJ website.

2 Article 6 and its paragraph 4 of the Brazilian Corporate Recovery Law establishes that:

"Article 6. - A decree of bankruptcy or granting of judicial recovery plan processing tolls the course of the statute of limitation and of all actions and executions against the debtor, including those of private creditors of the jointly liable partner.


Paragraph 4. - Under judicial recovery plan, the suspension provided for in the main section of this article shall in no event whatsoever exceed the non-extendable term of one hundred and eighty (180) days as from granting of processing of the recovery plan, the creditors' right to commence or continue their actions and executions being reestablished after the term has elapsed, independently of a judicial pronouncement."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
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