• Securing Debt in Mexico
  • May 7, 2003 | Author: Luis G. Resendiz
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • Recovering a loan through a court proceeding in Mexico may take several years, and remedies against debtors who become insolvent to avoid paying their debts are very difficult to enforce. Creditors must obtain legal advice before they grant any credit in Mexico. This article discusses some of the most common issues with loan transactions in Mexico.

    Relevant Laws

    Several different Mexican laws impact lending issues. The Civil Code provides default rules for questions not addressed in the loan agreement itself. The Commercial Code contains general rules applicable to commercial loans. The General Law of Commercial Paper and Credit Transactions sets forth the requirements that must be met to consider a document commercial paper (including promissory notes and checks). This law also provides rules that apply to various types of loans. The Monetary Law determines what currency or exchange rate is used when repaying loans in foreign currency. Finally, the Credit Institution's Law contains the rules that apply to financial institutions.

    Credit Instruments

    Four common credit instruments in Mexico are: promissory notes, checks, letters of credit, and credits for production activities. Promissory Note Requirements: Article 170 of the General Law of Commercial Paper and Credit Transactions mandates that a promissory note contain:

    • the word Pagar? (promissory note).

    • an unconditional promise to pay a specific amount of money. The interest rate may vary, but the principal must be a fixed amount. It is possible to stipulate the amount of the debt in foreign currency, but Mexican law allows a debtor to always pay in pesos, regardless of the currency agreed to in the credit agreement. The exchange rate used to calculate the amount due would be that in force at the time of payment, if the debtor received foreign currency when executing the promissory note, or at the time the promissory note was executed in the event that the debtor received Mexican pesos.

    • the person to whom payment shall be made ("payable to bearer" is not acceptable).

    • the place and time of payment (if the place of payment is missing, the law presumes the note is payable on demand at the maker's domicile). If the date of payment is missing or the note has several payment dates, it will be considered payable on demand.

    • the place at which and date on which the note is executed.

    • the maker's signature.

    The absence of any of the aforementioned requirements (with the exception of the place and time of payment) invalidates the promissory note.

    Check Requirements: Checks in Mexico can only be drawn against a bank and must contain the word "cheque" (check) - many instruments drawn against foreign banks do not comply with this requirement. Additionally, a check must include the place where and the date on which it is drawn, an unconditional order to pay a specific amount of money, the name of the bank against which it is being drawn, and the place of payment. Absence of any of the aforementioned requirements invalidates the check.

    Letters of Credit: A letter of credit must be issued to a particular person. An issuer may revoke it at anytime by notifying the person to whom it was issued and the beneficiary of the letter, unless the person to whom the letter of credit was issued had already deposited the amount of the letter with the issuer. A letter of credit is valid for six months from the date of issue, unless otherwise agreed upon.

    Credits for Production Activities: The recipient of this type of loan must invest the proceeds in activities or assets necessary to the business (i.e., materials, salaries, machinery, or other instruments used in the business in which he or she is engaged). If the parties agree, some of the proceeds may also be used to pay taxes due or other preexisting indebtedness.

    These credits are secured by the assets they are used to acquire, and may also be secured by land, buildings, machinery, instruments, and the present and future products of the business. The credit agreement must state its purpose, term, and form, and be executed in three counterparts before two witnesses and ratified before the director of the Recorder's Office. The creditor must ensure that the funds are used precisely for the purpose for which they were granted. The debtor usually retains possession of the assets securing the credit, but is considered a judiciary custodian. The production loan grantor receives special protections and payment preferences.

    Securing Credits

    Mortgages: Typically, mortgages must be granted through public documents executed before a public notary. The mortgage must be recorded before the Recorder of Property having jurisdiction over the place the real estate being mortgaged is located. Any agreement restricting a debtor's freedom to further mortgage the property will be void. The creditor's preference is established by virtue of who files earliest; the first to file has priority.

    Security Interests: Assets over which a security interest is granted must be specifically described in a security agreement. By law, the creditor should retain possession of the assets given as security; however, it is usually the debtor who retains possession. Security interests customarily are recorded before the Recorder of Property having jurisdiction over the debtor.

    Guarantees: Guarantees are not widely used because of otherwise convenient legal figures such as the "aval" (anyone signing a document meeting the requirements of commercial paper who is not the maker and is obligated to pay in full the obligation of the maker) and the "obligado solidario" (co-debtor or joint-debtor who has the same obligations as a debtor).

    Other General Considerations

    • The annual interest rate provided by law for commercial loans is 6%, and is applicable in the event the parties do not stipulate one themselves.

    • The validity of commercial paper issued outside of Mexico is governed by the laws of the country where it was issued. However, when commercial paper is payable in Mexico, it must comply with Mexican law.

    • Commercial paper secured by a mortgage on land located in Mexico is governed by Mexican law.

    Enforcing Credit Documents in Mexico

    The real importance of how a credit is documented comes when it is time to enforce it before a Mexican Court. The law provides "special" trials for different types of actions, as long as certain requirements are met. The most important of these are the foreclosure trial, summary mercantile trial, and ordinary mercantile trial.

    The summary mercantile trial, which is the quickest trial available, allows the plaintiff to place liens on and garnish assets of the defendant at the outset of the litigation. The lawsuit must be based on a public document or commercial paper. The defendant has limited defenses and, if she fails to answer the complaint within five days after service of process, the court will enter judgment for the plaintiff. The party obtaining a continued on favorable verdict recovers attorney's fees; very few appeals suspend the trial.

    The ordinary mercantile trial is a default proceeding for controversies arising out of business deals or between business people. Such trials usually take a very long time to reach resolution. The plaintiff has to obtain a favorable judgment not subject to further appeals before she may place liens on the defendant's property; the defendant may raise all defenses she deems appropriate. Many appeals and other actions suspend the trial. The plaintiff has the burden of proving her rights even if the defendant does not answer the complaint, and the prevailing party does not always get attorney's fees.

    The purpose of a foreclosure action is to foreclose on a mortgage. The plaintiff must attach to its complaint a valid mortgage (usually, the so called "first testimony" of the public document executed before the Notary). This is a very useful action if the value of the land mortgaged is enough to cover the debt or the debtor has no other assets.

    Because the likelihood of success in recovering a debt in Mexico depends on how the transaction is documented, creditors desiring to grant credit in Mexico must secure legal counsel at the outset to make sure that the credit is secured and documented in a manner that provides for the maximum enforceability under Mexican law.