Legal Issue: Bonds (“fianza”) to secure loans, debt, and trade credit.
The following case study is applicable to exporters, sellers, debt collection agencies, manufacturers, distributors, companies in the agro-food industry, and key leaders and professionals at those firms such as credit managers, credit analysts, lawyers, underwriters, collection specialists, special risk managers, etc.
A $900k Outstanding Debt Collection and Litigation Case Study
01 | Situation
Our client had been selling products to the Mexican market, offering trade credit. One of his customers had built around $900,000.00 US Dollars of debt, so the client cut supply and demanded full payment. The customer needed our client’s product, so they negotiated. They came to an agreement where the customer acknowledged the debt and agreed to pay the balance in 18 months, through monthly installments. He would pay 50% of all subsequent orders by “cash-in-advance”, and the remaining 50% of those orders within 30 days. The customer agreed to obtain a “performance bond”, to cover the payment agreement, as well as ongoing sales and future obligations. The customer would arrange for and purchase the bond from a bonding company or financial institution in Mexico, to the client’s satisfaction, which he did.
03 | Intervention
HMH Legal was retained to assist with legal action against the bonding company. After a fierce battle through State court, an appeal process, and three “rounds” of amparo, we got confirmation of a final favorable judgment from a Federal Circuit Court. The court confirmed that: 1) the bond did guarantee the agreement (which was the same and only one agreement), 2) the bond did cover the past debt, and 3) all required collections attempts were in fact made. The bonding company was ordered to pay the client the entire principal owed (as claimed), in the amount of $630,000 and late fees (as penalties) pertaining to the denied bond claim in the amount of $178,000. The court did not grant other relief sought, including court costs and attorneys’ fees, and late fees applicable to the payment agreement installments and the current sales orders. The bonding company paid immediately after confirmation that the judgment was final. (Under Mexican law, bonding companies, which are financial entities under tight regulation, face harsh punishment if they fail to comply with a court’s order after litigation has ended.)
Intervention
02 | Problem
After some time, the customer defaulted, leaving an outstanding balance of around $650,000.00 US Dollars. Around $500,000 of the balance was past debt, and the remainder was from subsequent sales orders. Based on the bond policy, our client submitted a valid claim with the bonding company, who after a period of review, and to the shock of our client, denied payment. The bonding company argued three causes of denial. 1) They said that the payment agreement, which the bond guaranteed, and which included the actual signatures of the parties, showed a different date, so it was a different agreement. This, despite both documents containing exactly the same content. 2) They argued that bonding companies were prevented by regulation to guarantee past debt and, thus, the bond was invalid. Further, they said that it was their intention to guarantee only ongoing sales and future obligations. This, despite the bond policy being issued for the exact amount of the balance from the payment agreement, and besides issuing the bond based on a copy of the agreement. 3) Finally, they argued that our client did not prove to them with sufficient evidence that they made collection attempts on the debtor.
04 | Lesson
Performance bonds are a reliable security device. It is an effective tool to guarantee payment of the debt. Nonetheless, bonding companies (much like many insurance companies) will look for any kind of excuse to deny a valid claim. Bond policies are key. A creditor receiving a [performance] bond policy to secure a debt, a loan, or trade credit should review such policy with local counsel in Mexico to make sure that all obligations are expressly provided under the bond policy and contract. The process of submitting a claim with a bonding company is also key, as it can make or break subsequent legal action through the court. It is critical that any claim to be submitted with a bonding—or insurance—company is reviewed and directed by an experienced local counsel to avoid future problems during litigation.
01 | Situation
Our client had been selling products to the Mexican market, offering trade credit. One of his customers had built around $900,000.00 US Dollars of debt, so the client cut supply and demanded full payment. The customer needed our client’s product, so they negotiated. They came to an agreement where the customer acknowledged the debt and agreed to pay the balance in 18 months, through monthly installments. He would pay 50% of all subsequent orders by “cash-in-advance”, and the remaining 50% of those orders within 30 days. The customer agreed to obtain a “performance bond”, to cover the payment agreement, as well as ongoing sales and future obligations. The customer would arrange for and purchase the bond from a bonding company or financial institution in Mexico, to the client’s satisfaction, which he did.
02 | Problem
After some time, the customer defaulted, leaving an outstanding balance of around $650,000.00 US Dollars. Around $500,000 of the balance was past debt, and the remainder was from subsequent sales orders. Based on the bond policy, our client submitted a valid claim with the bonding company, who after a period of review, and to the shock of our client, denied payment. The bonding company argued three causes of denial. 1) They said that the payment agreement, which the bond guaranteed, and which included the actual signatures of the parties, showed a different date, so it was a different agreement. This, despite both documents containing exactly the same content. 2) They argued that bonding companies were prevented by regulation to guarantee past debt and, thus, the bond was invalid. Further, they said that it was their intention to guarantee only ongoing sales and future obligations. This, despite the bond policy being issued for the exact amount of the balance from the payment agreement, and besides issuing the bond based on a copy of the agreement. 3) Finally, they argued that our client did not prove to them with sufficient evidence that they made collection attempts on the debtor.
03 | Intervention
HMH Legal was retained to assist with legal action against the bonding company. After a fierce battle through State court, an appeal process, and three “rounds” of amparo, we got confirmation of a final favorable judgment from a Federal Circuit Court. The court confirmed that: 1) the bond did guarantee the agreement (which was the same and only one agreement), 2) the bond did cover the past debt, and 3) all required collections attempts were in fact made. The bonding company was ordered to pay the client the entire principal owed (as claimed), in the amount of $630,000 and late fees (as penalties) pertaining to the denied bond claim in the amount of $178,000. The court did not grant other relief sought, including court costs and attorneys’ fees, and late fees applicable to the payment agreement installments and the current sales orders. The bonding company paid immediately after confirmation that the judgment was final. (Under Mexican law, bonding companies, which are financial entities under tight regulation, face harsh punishment if they fail to comply with a court’s order after litigation has ended.)
Intervention
04 | Lesson
Performance bonds are a reliable security device. It is an effective tool to guarantee payment of the debt. Nonetheless, bonding companies (much like many insurance companies) will look for any kind of excuse to deny a valid claim. Bond policies are key. A creditor receiving a [performance] bond policy to secure a debt, a loan, or trade credit should review such policy with local counsel in Mexico to make sure that all obligations are expressly provided under the bond policy and contract. The process of submitting a claim with a bonding company is also key, as it can make or break subsequent legal action through the court. It is critical that any claim to be submitted with a bonding—or insurance—company is reviewed and directed by an experienced local counsel to avoid future problems during litigation.
"Full Recovery of $1'841,842 USD through litigation."
“Dear Romelio. Finally, we have received the last payment from x-Debtor. It has been a really good effort from you in helping us retrieve this amount from them. We do appreciate it so much. Your work has been extremely good, you have been patient, watchful and careful, gentle but firm and your strategy was excellent, giving out whenever needed and holding on when the situation warranted. You could bring the pressure and sustain it over the years on x-Debtor and did a crucial job during the final stages to take it to a good conclusion, which helped both parties. You have been true to your word and faithful and sincere to your job, for which we can vouch for anyone. Thank you so much Romelio for your excellent work. The Board congratulates and sends its appreciation.”
“Dear Romelio. Finally, we have received the last payment from x-Debtor. It has been a really good effort from you in helping us retrieve this amount from them. We do appreciate it so much. Your work has been extremely good, you have been patient, watchful and careful, gentle but firm and your strategy was excellent, giving out whenever needed and holding on when the situation warranted. You could bring the pressure and sustain it over the years on x-Debtor and did a crucial job during the final stages to take it to a good conclusion, which helped both parties. You have been true to your word and faithful and sincere to your job, for which we can vouch for anyone. Thank you so much Romelio for your excellent work. The Board congratulates and sends its appreciation.”
Mani Varghese, Owner
Synthite Industries Ltd.
Services
Our services in Debt Collection and Litigation early on upon serious default by a debtor, or upon consideration of legal action against insurance or bonding companies are key reduce risk and prevent or properly address a problem situation, as the one pointed out.
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