Legal Issue: Title retention clauses for cross-border transactions.
The following case study is applicable to exporters, sellers, manufacturers, equipment leasing companies, asset-based lenders, credit insurance companies, export development banks, and key leaders and professionals at those firms such as credit managers, credit analysts, underwriters, collection specialists, special risk managers, etc.
€1,250,000 Secured Transaction & Debt Collection Case Study
01 | Situation
03 | Intervention
Intervention
02 | Problem
04 | Lesson
01 | Situation
Our client, a credit insurance company, placed two claims for collection with HMH Legal against a debtor company in Mexico. The debt amounted to almost €1’250,000.00 in total. The debt derived from export trade credit out of international manufacturers who had sold high-end machinery to the debtor. The debt was “supposedly” secured. There were promissory notes signed but they didn’t meet Mexican law requirements to allow enforcing the claims through an executory action. There were purchase orders and sales confirmations signed. One seller had relied on the terms of sale under his company’s website. Both terms provided for a reservation or title-retention clause, which could potentially allow the client to repossess the machines, which held significant value.
02 | Problem
The debtor company was in severe financial and legal distress, at the brink of bankruptcy. It had ceased operations and laid off workers. The company had “apparently” been taken over by the labor union, which is a huge concern. (Labor unions are commonly used by distressed debtors to secure assets from possible execution by creditors. Labor claims have priority and defeat any secured creditor, including those with mortgage or pledge (security interest). Effective title-retention clauses cannot be defeated by labor claims, as property does not belong to the buyer. The clauses from our client were only partially effective in Mexico. They did not meet requirements under Mexican law. They were not filed at a public registry in Mexico (to put third parties on notice that the machines did not belong to the debtor). Further, only one manufacturer had a signed contract; the other one relied on their website’s terms of sale.
03 | Intervention
Given the debtor’s critical situation, our only avenue for recovery was through the machines. We knew that the debtor wanted desperately to keep them, to start another business. We played poker with the debtor. We pursued strong actions to hint an immediate lawsuit to repossess the machines, based on title-retention. We made a formal demand through a Notary, where we demanded turning over the machines immediately. We warned the debtor of potential criminal liability if the machines were transferred or encumbered. We made filings at the public registry (“RUG”) to warn third parties of “our” title-retention. All of this while keeping negotiations and close communication with the debtor. Our efforts paid off. The debtor’s lawyers never questioned (or reviewed) the validity of the tittle-retention clauses, which could have been defeated in court. Yes, we granted the debtor a considerable cut from the principal. But our client walked away with a substantial part of his debt paid, whereas all other creditors left empty-handed.
04 | Lesson
Reservation or title-retention clauses will be treated differently across borders. A valid clause or contract in the UK may not be enforceable in Mexico. Each country has its own set of rules, giving different meaning, validity and treatment to contracts and remedies. When selling to companies in Mexico have your terms of sale reviewed by legal counsel in Mexico to make sure that, if things go wrong with the buyer, you can enforce your claim efficiently and effectively. Title-retention clauses are a great tool to secure creditors. These, however, have shortcomings as they do not afford a privileged action for enforcement, as pagarés do. But there are effective options to offset the negatives. Make sure that you consult will local legal counsel to review your title-retention clause, to implement further clauses to create an agreed [special] proceeding for enforcement, and to file at the public registry for validity and effectiveness against third parties.
“Their knowledge of Mexican and USA culture is solid and not superfluous. I deal with a lot of people and vendors in Mexico, and they only see things their way. Instead, lawyers at HMH Legal put themselves in our shoes and in the shoes of our debtors and customers, adapting to the necessities of both parties, in the best way.”
Services
Our services in Secured Transactions and Debt Collection early on of the sales process or upon serious default by a debtor are key to prevent or properly address a problem situation, as the one pointed out.
