In this article, the author analyzes the intricate process of separating assets that have been transferred to a guarantee trust by a settlor who later faces insolvency. Toward that end, the author delves into the judicial decision rendered by the Second Collegiate Court in Civil Matters of the Seventh Circuit, as it pertains to the resolution of the Amparo Directo 188/2021 case. According to the author, this decision, in direct contradiction to fundamental legal principles, inaccurately negates the validity of the separation of assets transferred to a guarantee trust. Significantly, the author adds, this decision is marked by substantial deficiencies in its reasoning and a lack of theft foundation and justification. The author concludes that, consequently, it not only breaches established legal norms but also significantly influences doctrine and legal practice.

I. INTRODUCTION

In Mexico, the trust has emerged as an indispensable legal tool, playing a pivotal role in reshaping the nation's financial terrain and enhancing access to financing. This transformation is in large part a response to the ripple effects of globalization, which has reconfigured the global market economy, especially within the financial and capital markets sectors. Such shifts have fostered capital movement across borders, leading to the normalization of financing patterns. Consequently, a plethora of methods for obtaining credit and investment has emerged, each tailored to the unique requirements of creditors and debtors. This ebb and flow of financing supply and demand is largely dictated by the risk and profitability associated with the assets in play. A pivotal aspect to consider here is the "country risk," which bears directly on profitability. This risk is intertwined with the solidity of a nation's legal framework and its institutional integrity.

In this global backdrop, legal constructs that aid investors in mitigating debtor insolvency risks have gained significant traction. The trust serves as a testament to this trend. Operating on the "bankruptcy remoteness" principle, this mechanism aims to segregate a debtor's assets, ensuring their accessibility during insolvency and shielding them from potential claims by other creditors. Employing trusts in credit transactions brings forth benefits such as risk dispersion and optimized asset management. Furthermore, they bolster investor confidence by guaranteeing investment safety, thereby ushering in attractive financial terms and heightened operational structure flexibility. Cumulatively, this tactic not only safeguards investors but also propels credit accessibility and invigorates the broader economy.

In the quest to lure investments, numerous countries are striving to create a legally certain structure, preserving financial stability, and implementing regulatory reforms. By integrating itself into global financial markets to augment capital inflow, Mexico has underscored its dedication to bolstering legal security and buttressing commercial and financial entities. This dedication is epitomized by the financial reform of 2014. Yet, it is imperative to emphasize that the consistent and precise interpretation and enforcement of laws are foundational to the efficacy of such endeavors.

Judicial missteps can profoundly reverberate within both financial and legal spheres. The ruling by the Second Collegiate Court in Civil Matters of the Seventh Circuit is illustrative of this. This ruling has sparked discussions on the validity of the trust's property separation actions concerning assets related to the bankruptcy estate. A parallel can be drawn to the judgment passed by the Third Collegiate Court in Civil Matters of the First Circuit on May 28, 2015. While that decision explores the trust's legal implications and the protection it affords in financial and business endeavors, its nuances will not be addressed here. The emphasis of the resolution moves away from property separation, instead probing the implications of the insolvency declaration (Concurso) and the use of interim measures (medidas cautelares) within the Concurso process – topics that fall outside the scope of this paper.

Therefore, this article focuses on the decision rendered by the Second Collegiate Court in Civil Matters of the Seventh Circuit (hereinafter, the Court) concerning the direct amparo trial 188/2021.1 It is important to note that although this verdict is not binding (as it does not form jurisprudencia),2 it presents several deficiencies that have the potential to undermine Mexico's financial structures. Such vulnerabilities could, in turn, erode investor confidence and elevate credit costs in Mexico by increasing default risks and intensifying the expense of securing credit.

II. BANKRUPTCY ESTATE AND SEPARATION RIGHT

Article 4, Section V of the Mexican Insolvency Law (Ley de Concursos Mercantiles, hereinafter, the Bankruptcy Law) provides a definition of the "bankruptcy estate". It characterizes this estate as "the aggregate of the insolvent debtor's assets and rights, excluding specific assets outlined in this Law, upon which recognized creditors and other valid claimants may enforce their claims."

However, it is worth noting that the classification of assets and rights exempted from the bankruptcy estate is not solely confined to those "expressly excluded" as per the Bankruptcy Law. As an illustration, Article 71 of the Bankruptcy Law permits the exclusion of assets from the bankruptcy estate if they align with circumstances akin to those explicitly laid out in that article (analyzed below). Additionally, according to Antonio Brunetti, Joaquin Rodriguez y Rodriguez, and Jorge Barrera Graf, the bankruptcy estate also excludes the following:3

  1. Assets Excluded by their Inherent Character: This category includes assets such as:
    1. Personal rights.
    2. Rights over assets owned by third parties.
    3. Assets lacking an exchange value.
    4. Proprietary rights intrinsic to the debtor that arise due to their personal status.
  2. Assets Excluded because of its Stipulated Function: This group encompasses assets rendered inalienable due to their legal purpose, such as family assets (patrimonio de familia).4
  3. Assets Excluded for Public Interest Reasons: Here, we find assets that the law designates as unattachable, examples being alimony, wages, salaries, and pensions.
  4. Assets Excluded Due to Possessory Privilege: These are assets owned by the bankrupt debtor but have been designated as collateral for credit – either in the form of a pledge (prenda) or a retention right (derecho de retención).

As delineated above, the bankruptcy estate encompasses all debtor's assets, save for those specifically exempted due to their inherent character, stipulated function, or for reasons rooted in the public interest. This inclusion persists regardless of the asset's geographical location – whether within national borders or abroad – and irrespective of the debtor's possession or control over them at the commencement of bankruptcy proceedings.

The assets under discussion include both tangible and intangible forms. It is imperative to underscore that the bankruptcy estate is not exclusively constituted by assets within the debtor's immediate control. Similarly, not every asset under the debtor's control is automatically deemed part of the bankruptcy estate. The Bankruptcy Law provides clear provisions to:

  1. Incorporate assets that intrinsically pertain to the bankruptcy estate (integrative measures).
  2. Isolate or exclude assets that should remain untouched by the bankruptcy proceedings (disintegrative measures).

Integrative measures encompass those related to the fulfillment of outstanding obligations in favor of the debtor, the exercise of third-party ownership rights, claims by the bankruptcy estate, and, significantly, the set of actions classified as revocation actions. The latter aim to restore assets or rights to the debtor's estate that were previously transferred out, by rendering the transfer act unenforceable against the bankruptcy estate.5

Regarding revocation or annulment actions, these are detailed in Title III, Chapter VI of the Bankruptcy Law, which addresses acts of creditor fraud. They are designed to counteract detrimental actions undertaken by the debtor prior to the initiation of the bankruptcy process. Such actions might involve concealing assets, orchestrating sham transactions, unduly favoring specific creditors, or diminishing the value of the debtor's assets. The objective of these provisions is to ensure fairness among creditors and to maximize the assets available for distribution, in alignment with the credit priorities and hierarchy set forth in the law.6

According to Article 70 of the Bankruptcy Law, assets in the debtor's custody that are distinguishable and haven't been transferred pursuant to a final and irrevocable legal title can be reclaimed by their rightful titleholders. Hence, the criteria essential for the validity of separatory action can be enumerated as follows:

  • The assets must be under the debtor's control at the point when Concurso is declared.7
  • The assets in question need to be individually identified.
  • No transfer of these assets to the debtor should have occurred pursuant to a final and irrevocable legal title.
  • The claimant must validate their rightful ownership of these assets or rights. In the absence of such proof, ownership is assumed to lie with the debtor.8

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Footnotes

1. The "amparo process" in Mexican law is a constitutional check that assesses acts of authority and court decisions for potential violations of rights in the Constitution. It can challenge final decisions, especially if rights are violated during their proceedings or within the decision itself. The amparo against judgments in civil or commercial cases (amparo directo) is filed before Collegiate Courts, initiated only by the aggrieved party. Generally, all standard appeals must be exhausted before resorting to an amparo, which starts with an initial claim brief. Following this, the authority has a period to respond, then evidence is presented, closing arguments made, and a final hearing concludes with the issuance of a judgment.

2. In Mexico, "jurisprudencia" or binding court precedents are established through three primary mechanisms:
(i) Court Precedent by Confirmation or Reiteration, established when the collegiate circuit courts unanimously uphold the same criteria in five consecutive decisions without any contrary ruling in between;
(ii) Court Precedent by Contradiction, aiming to resolve and unify contradictory court opinions, necessitating the report of such contradictions and confirmation of substantive differences in interpretations; and
(iii) Mandatory Court Precedent, which are the rationales underpinning decisions made by the Supreme Court of Justice, especially when such decisions are determined by a majority of at least eight votes.

3. Barrera Graf, J. (1998). El Desapoderamiento en la Quiebra (1a ed.). Ediciones Mar, pp. 127-152.

4. Article 723 of the Federal Civil Code: The following are considered as family assets:
I. The family residence;
II. In certain instances, a cultivable plot of land.

5. Rodriguez and Rodriguez, J. (1951). La Separación de Bienes en la Quiebra (1a ed.). Universidad Nacional Autónoma de México, p. 16.

6. Bankruptcy Law on fraudulent conveyance is focused on overturning past transactions to which the insolvent debtor was a party or which involved the debtor's assets whose consummation is found to be prejudicial to the debtor (i.e., a reduction to the net value of its property). The retroactive period is the period that begins 270 days prior to the Concurso declaration. Such a period may be extended to an earlier date by the judge, at the request of the conciliator (conciliador), the receiver (síndico), the conservators (interventores) or any creditor, provided that (i) the facts invoked by the abovementioned persons fall within any of the circumstances set forth in Articles 114 to 117 of the Bankruptcy Law (providing the relevant documentation); (ii) the requested extension date does not exceed three years prior to the bankruptcy declaration; and (iii) the request is filed before the issuance of the debt recognition, priority, and ranking ruling (sentencia de reconocimiento, graduación y prelación de créditos).

7. Article 790 of the Federal Civil Code defines possession as the de facto power over a certain asset, and includes not only assets over which the debtor has physical possession, but also assets over which the debtor has primary possession (e.g., the debtor shall be deemed to be in possession of an asset even if the debtor has leased it out to a third person). See Rodriguez and Rodriguez, op. cit., p. 61.

8. Art. 798 of the Federal Civil Code.

Originally published by Pratt's Journal of Bankruptcy Law, Lexis Nexis.

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