Featured Developments:

Featured Developments:

By Javier Troncoso

As of June 13, 2003, the Mexican Credit Instrument law was amended relating to the trust agreement "fideicomiso" section, but mainly regarding the trust agreement to guarantee debts. The trust agreement to guarantee debts "fideicomiso en garantía" may be utilized when a debtor guarantees a debt to a creditor by transferring one or more properties (whether personal property or real property) or rights, as collateral, to a trustee in order that the latter follows the precise instructions agreed by the parties including foreclosing procedure in case of breach of contract.

The amendments of June 13, 2003 , reinforced the complete chapter of the trust agreement to guarantee debts whereby the creditor has sufficient legal certainty that the collateral will be protected. Furthermore, if the debtor defaults the creditor can foreclose and take possession of the collateral pursuant to a short and simple procedure without the Mexican courts intervention in which the trustee acts as arbitrator.

Trust agreements to guarantee debts may guarantee different obligations on a simultaneously or successive basis with the same or different creditors. Furthermore, a trust agreement to guarantee debts may be constituted by one or more debtors in favor of one or more creditors.

The Credit Instrument law establishes that the following entities may act as trustees in trust agreements to guarantee compliance of an obligation assumed by a debtor and the creditor's first lien payment preference against the collateral.

•  Credit institutions (banks);
•  Insurance institutions;
•  Bonding institutions;
•  Stock exchange houses;
•  Financial entities with limited purposes;
•  General warehouse deposit.

Except for credit institutions (banks), the above-mentioned entities may not act as trustees for standard trust agreements "fideicomisos" .

Additionally, the parties may agree that the collateral held in a trust agreement to guarantee debts may be under the possession of the debtor or any third party appointed by the parties. Furthermore, such debtor or third party that has possession of the collateral bears the risk of any loss or damage to the value of the goods and must allow the other parties to inspect such goods to verify its conservation.

The parties may agree that if the value of the collateral diminish in such way that it is not enough to guarantee the debt; the debtor must contribute additional collateral to replace the original value. Otherwise, the credit will be due in advance allowing the creditor to enforce the debt by notifying it to the debtor. If the depository of the collateral denies delivering to the trustee such collateral then, the enforceability of such possession delivery will take place in a summary and expedite court procedure established by the Mexican commerce code.

The trustee may proceed to transfer (foreclose) the collateral held in guarantee without the Mexican courts intervention provided that the following rules are established in the trust agreement to guarantee debts .

•  The trustee must receive from the creditors a precise written communication requesting foreclosure on the collateral specifying the breach of the guaranteed obligation(s).
•  The trustee must notify the debtor in writing to the domicile established in the trust agreement or in any further document, of the above-mentioned request together with a copy of such request. The debtor may only oppose the foreclosure if it proves that the outstanding debt has been paid or that the obligations established in the trust agreement have been previously complied or that an obligation has been modified ( i.e. payment extension ).
•  If the debtor does not prove compliance with one or more of the obligations as established in the above-mentioned paragraph, the trustee will proceed to foreclose on the collateral without the intervention of the Mexican courts.
•  The contents of the trust agreement must contain the terms to carry out the foreclosing procedure.

The creditor will be paid with the proceeds of the transfer (foreclosure) of the collateral held in the trust agreement to guarantee debts or may adjudicate such collateral when such debt is equal or higher than the value of the collateral. The creditor may pursue additional legal action against the debtor for the balance that was not covered with the collateral.

Finally, the credit instrument law imposes a criminal sanction to the persons that have possession of the collateral held in guarantee when transferring, imposing liens or affecting their ownership or possession, in terms not authorized by the law and when the value of such collateral have been intentionally diminished or have been used over the normal wear and tear.

In conclusion, there is a solid legal vehicle to secure transactions relating to real or personal properties by using the trust agreement to guarantee debts. This legal instrument may be used to finance real properties transactions between private parties with the certainty that the intervention of the courts will not be necessary in case of foreclosing real properties.

For more information please contact:

Javier Troncoso
Esq. Bufete Troncoso
Condominios Miramar
Paseo San Jose S/N
Edificio 2-A Los Cabos,
Baja California Sur
Mexico 23400