Recent Improvements In Mexican Secured Transaction Laws

In the last few years, a series of changes in the Mexican laws governing secured transactions have made lending against personal property...
Mexico Finance and Banking
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Introduction

In the last few years, a series of changes in the Mexican laws governing secured transactions have made lending against personal property such as equipment, inventory and accounts receivable more attractive to lenders to Mexican companies. The changes have involved amendments to the substantive law of secured transactions, including the introduction of new concepts such as non-possessory pledges and guaranty trusts and the introduction of a central national registry for recording or registering secured transactions. Early this year, as part of the Mexican government's "financial reform" package of laws, the laws governing civil procedure and the enforcement of security interests granted by debtors against personal property were amended. The latest changes became effective in January 2014. While it is too soon to measure their effects, according to the legislative history the changes are intended to "modify the commercial legal framework for the purpose of making procedures more efficient, provide incentives for the general population to have access to credit, and to benefit the development of business in our country."

More recently, June 2014 amendments to the Mexican Commercial Code promise to make the central national registry a more reliable mechanism for recording secured transactions and alerting creditors to previously filed security interests.

I. Changes to the Substantive Law of Secured Transactions Before 2014

Unlike the United States where all states adopted the Uniform Commercial Code (UCC), Mexico does not have a single comprehensive law covering secured transactions. Instead, several laws cover various types of transactions involving personal or movable property (bienes muebles). Thus, there is no single concept of a "security interest" in personal property but a variety of mechanisms set out in the Commercial Code, the General Law of Credit Instruments and Transactions (the Ley General de Títulos y Operaciones de Crédito or LGTOC), the Civil Codes of the various States of Mexico and the Credit Institutions Law. The concepts include pledges under the Commercial Code (the commercial pledge) and the Civil Codes (the civil pledge), the industrial mortgage, pledges of warehouse certificates (bonos de prenda), assignments of accounts receivable (cesiones de créditos), conditional transfers of negotiable instruments (reportos), the securities pledge (prenda bursátil), special security interests involved in the equipment credit called the crédito refaccionario and the operating credit called the crédito de habilitación o avío. Each of these models has limitations making it difficult for a creditor to determine which is the most appropriate for a particular lending transaction.1

In 2000, through amendments to the Commercial Code and LGTOC, "guaranty trusts" (fideicomisos de garantía) were introduced, further expanding the types of security interests available to creditors. Perhaps most significantly, "non-possessory pledges" (prendas sin transmisión de posesión), allowing creation of "blanket liens" or "floating liens" on equipment, inventory, receivables and other revolving property also became available in 2000. This amendment may have been the single most important step in bringing Mexican secured transactions laws closer to those embodied in the UCC. Previously, security interests in many of the key categories of personal property could only be created (or released) by identifying each specific item of collateral— listing separate items of equipment or specific accounts receivable for example. Under the 2000 amendments, property not yet in existence or owned by the debtor could be pledged as security, something that was previously impossible. The non-possessory pledge was now available to secure subsequently acquired property and property not in existence at the time the pledge was granted.

Unfortunately, the 2000 amendments did not permit creditors to sue for a deficiency if the value of the property securing the loan was less than the amount of the debt. Additionally, creditors could not foreclose upon their security interests except through judicial proceedings—unless the debtor did not contest the amount of the debt or whether it was due and payable. These limitations caused concerns among creditors about the effectiveness of the new types of security interests. These concerns, along with the Organization of American States' (OAS) 2002 adoption of the Model Inter-American Law on Secured Transactions (the Model Law), led Mexican legislators to adopt further amendments to the LGTOC in 2003, eliminating the "anti-deficiency" limitation and providing for extrajudicial foreclosure—although only to a limited extent and only in the context of guaranty trusts.

Despite the advances that had been made since 2000 to modernize Mexican laws governing secured transactions, by the time the 2014 "financial reform" package was adopted, many creditors still had concerns about whether they could rely on collateral security they might require of debtors in Mexico. Creditors were concerns included:

  1. Uncertainty about the most effective type of collateral to choose for a transaction. This uncertainty was caused by the multiple types of collateral available for transactions, in spite of the fact that the non-possessory pledge and the guaranty trust now seemed to be the broadest and most flexible types of collateral security.
  2. The extremely limited availability of extrajudicial foreclosure. Extrajudicial foreclosure was not available for enforcement of any of the security types unless: the debtor did not contest the amount of the debt or whether it was due and payable (an uncertain proposition); the transaction used a guaranty trust (a somewhat expensive process, given the fees that likely to be charged by the trustee, required to be a licensed Mexican credit institution); or the debtor was notified of the foreclosure through a fedatario público (a public notary or corredor público), a time-consuming solution in some circumstances.
  3. Doubts regarding the effect of a purchase money security interest. The effect of a purchase money security interest (PMSI) on an existing non-possessory pledge was not always clear, because the validity of the PMSI could depend on all of the personal property of the debtor having been previously pledged, or on the extent to which such property was used in the "preponderant activity" of the debtor. In addition, a PMSI could be adversely affected to the extent the debtor's property was subject to title retention mechanisms. On the other hand, since the PMSI creditor did not have to give notice to a pre-existing secured creditor, the existing creditor might make advances on collateral that could be subordinate to the superior lien of a later-created PMSI.2
  4. The "good faith purchaser" risk. Purchasers of personal property were subject to certain risks. If a debtor, in its ordinary course of business, sold property, that property could be subject to a pre-existing security interest if the purchase was outside of the debtor's "preponderant activity," an ill-defined term.
  5. Roadblocks to enforcement of a non-possessory pledge or a guaranty trust. Enforcement through a non-judicial proceeding or "self-help" could only occur if both debtor and creditor had contractually agreed to the use of the self-help remedy and there was no dispute between the parties over whether the amount or status of a debt at the time of default. The process also required that a fedatario (either a notary or a corredor público) send formal notice to the debtor to turn over the collateral and be present when the creditor took possession of the collateral to prepare an inventory of the transferred collateral. If at any time during this process the debtor raised a challenge, the process had to cease.
  6. The delays inherent in judicial proceedings. If self-help were not available for any reason, enforcement required a judicial proceeding. These actions could take as long as two years or more to complete, because of possible delays resulting from various challenges that the debtor could institute, including the right to challenge any court decision by bringing a federal amparo proceeding questioning the constitutionality of the decision. Even when self-help is available via notification by fedatario, substantial delays could result from difficulties in locating and notifying the debtor.
  7. Delays caused by the availability of appeals and amparo challenges. An accelerated enforcement procedure for the non-possessory pledge could potentially shorten the enforcement time to as little as a month, but the debtor could still raise time-consuming appeals or amparo challenges, meaning the value of the collateral could erode by the time the creditor eventually obtained possession.
  8. The uncertainty as to the amount a creditor could expect to receive from the sale of collateral. The value of collateral subject to a foreclosed security interest was not determined by its market value in a public or private sale conducted in a commercially reasonable manner, as in the US under the UCC. Instead, the security agreement had to specify the method by which the value of the collateral was determined and/or designate an appraiser who would determine the value prior to sale. If the collateral did not sell at the initial appraised value, the permissible offer price was reduced by ten percent per week until the collateral could be successfully sold or adjudicated in favor of the creditor.
  9. The difficulties of locating certain security interests in public registries. Some types of security interests, such as the guaranty trust, provide the potential advantage of being treated as outright transfers of title that would remove them from the bankruptcy estate of the debtor. This provided a distinct advantage to the creditor receiving any such transfer; but since these transfers generally did not need to be recorded or filed with any registry in order to be perfected, other creditors of the debtor could not determine the existence of these interests through any search in the public registries.

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*  John E. Rogers is a member of the New York bar and is Of Counsel to Strasburger & Price in Mexico City and New York. Francisco J. Pérez Ortega is a member of the Mexican bar and is a partner of Struck Palafox y Pérez Ortega, S.C., part of the joint venture Strasburger & SPPO, S.C. in Mexico City. Carlos A. Villegas Guillot is a member of the Mexican bar with offices in Mexico City and San Miguel de Allende, Mexico. 

Footnotes

1 Instead of relying on collateral security, some lenders to Mexican borrowers obtain a promissory note or pagaré from the borrower. The pagaré qualifies as a negotiable instrument under Mexican law because it can be enforced through executory or accelerated proceedings permitting the lender to obtain pre-judgment attachment of the borrower's assets. This approach is certainly simpler to document than obtaining collateral security, but does not give the creditor secured status. 

2 See LGTOC Art. 358. 

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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