Banking & Finance Legal Considerations: Securities in Mexico - Guaranty Trust

Any kind of assets, movable or otherwise, as well as any type of property, real or personal may be subject to a guaranty trust. Guaranty trusts are not limited, as a mortgage is, to certain assets; as a result of such flexibility, guaranty trusts have become increasingly popular in recent years, in particular with respect to real estate project and their structured finance. Guaranty trust agreements may only be executed with certain institutions which are authorized under the General Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito) (“LGTOC”) to act as trustees.

Under a guaranty trust, the settlor (borrower), transfers title of certain rights, properties, and/or other type of assets to a trustee who will hold title thereof until the underlying obligations are paid in full or a default there under occurs, including the assignment of lease and insurance claims. Given the flexibility of the guaranty trust, the trustee may be authorized under the trust agreement, to create certain guaranties, such as mortgages or pledges over the trust assets.

The purpose of the guaranty trust is to secure the obligations of the borrower. In this respect, the trustee would follow the foreclosure procedure agreed by the parties in the guaranty trust in case of any breach. Likewise, the trustee, among other things, may: (i) act as lock box of the borrower, receiving all payments and applying them in accordance with the relevant “waterfall” provisions set forth in the guaranty trust, (ii) exercise any and all corporate and economic rights of the shares, if any, in accordance with the terms of the guaranty trust, and (iii) exercise any and all rights in accordance with the terms of the guaranty trust.

In the event of default under the secured obligation, there are certain rules concerning the foreclosure and type of foreclosure as described below:

Out-of-court Foreclosure

Pursuant to the LGTOC, the parties to a guaranty trust may agree upon an out- of-court foreclosure procedure on the trust property (i.e. the assets given as collateral to secure payment of an obligation), provided that the sale of the trust property must be carried out precisely by the trustee and the parties shall have agreed on the appointment of, or the procedure to appoint, a third party appraiser who shall appraise the collateral.

Court Foreclosure

Should the borrower oppose at any stage of the out-of-court foreclosure procedure or should the parties fail to agree upon an out-of-court foreclosure procedure, appraisal of, and foreclosure on, the trust property, the foreclosure procedure shall be conducted pursuant to the rules of the Commerce Code (Código de Comercio) before a competent court, as follows:

(i) the creditor shall file a suit before the competent court, which shall issue a decree notifying the borrower of the suit and demanding payment from it;

(ii) once payment has been formally demanded, the borrower may contest the claim;

(iii) the court shall review the merits of the borrower’s brief and shall deny all motions;

(iv) the parties may only provide evidence, which shall only be admitted by the court if it has a direct relationship with the facts;

(v) the court shall decide on the admission of evidence in the decree that admits the brief of the borrower. Such decree shall grant the credit or the ability to contest the defenses opposed by the borrower; and

(vi) after expiration of the above mentioned period, the court shall hold a hearing to review the evidence, hear the oral arguments of both parties and convene for judgment.