Reducing Risks on Credit Sales into Mexico - 3

Originally published: Mar-26-2007

Part 3: Legal Remedies Available in Mexico

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by Romelio Hernandez, HMH Legal

Parts 1 and 2 of this series dealt with credit applications for Mexican buyers and three important documents that can help you win collection lawsuits in Mexico. Part 3 covers the various legal remedies available in Mexico that are most creditor-friendly, and the pros and cons of arbitration or legal action in Mexico.

As explained in previous articles, your game plan for selling into Mexico should include a strategy that anticipates the possibility of litigation. Using appropriate documentation, you want to set the stage to assure a positive outcome in the courts.

By understanding the types of legal proceedings in Mexico, and the advantages/disadvantages of each for the creditor, you'll be able to decide on the best course of action. Should you file suit directly in Mexico? Or turn to arbitration or litigation in your own country?

Mexican Court Proceedings

Commercial Executive Proceeding

This is the proceeding of choice for sales where there is no possibility of creating a security interest on the debtor’s property (by mortgage or pledge). It is a summary proceeding in which evidence admission and proposals are limited to the initial states through complaint and answer briefs. The final resolution, therefore, is generally reached in less time than other proceedings.

The special title document utilized in this proceeding – the título ejecutivo – creates a presumption that the claim exists and that it is legally valid; thereby placing the burden of proof on the defendant to provide evidence of his payment. This title also allows an immediate ex parte prejudgment attachment order without the necessity of the plaintiff placing a bond.

Requirements: A título ejecutivo, which can be a promissory note, check, or bill of exchange.

Timeframe: Approximately 1 to 2 years to receive a judgment in a contested lawsuit, depending upon the venue and the amount of money involved.

Commercial Special Proceeding

This proceeding allows a creditor to execute (or foreclose) on a movable asset or real property placed as collateral to secure a debt through a non-possessory pledge (prenda) or guaranty trust. It is a relatively new addition to the Mexican commercial court. Since the creditor is allowed to repossess the collateral immediately after filing the complaint, it has an enormous impact on the speed at which he can secure relief.

Other creditor advantages of this proceeding include:

1. If no objection is made by the debtor to account statements provided by the creditor, the court will presume that the debt exists and that it is legally valid.
2. Payments made by the debtor waive any defense based on the validity of the contract.
3. Debtors are allowed only specific, limited defenses based on documentary evidence.

Requirements: A non-possessory pledge agreement or a guaranty trust executed in writing before a Mexican Notary

Timeframe: Should be 1 year or less to receive judgment.

Commercial Ordinary Proceeding

Unfortunately, most disputed international commercial transactions end up in ordinary proceedings, because most creditors have not had the foresight to obtain a título ejecutivo or prende. In this type of proceeding, the entire burden of proof is upon the plaintiff.

Requirements: There are no specific documentary requirements other than a statement of the facts. However, it is helpful if the creditor has a credit application, purchase orders, invoices, and delivery receipts.

Timeframe: Usually 2 to 4 years, depending upon the venue, amount involved, nature of the claim, availability of acceptable supporting documentation, etc.

Civil Summary Proceeding

This is the mandatory proceeding to begin foreclosure on any real property held under a mortgage. An outcome in the creditor’s favor is strongly assured as long as the mortgage documents have been well executed and the mortgage has priority over other encumbrances, if any.

Requirements: A mortgage agreement executed in writing before a Mexican Notary and filed at the Mexican Public Registry.

Timeframe: Approximately 1 to 2 years to begin foreclosure (in a contested lawsuit), dependent upon the amount involved and the Mexican State in which the case is filed.

Other Legal Options

Before electing to commence proceedings against a Mexican debtor, there are two other options that should be considered:

1. Arbitration in your country and enforcement of the ensuing arbitral award in Mexico.
2. Litigating in your country and enforcing the foreign judgment in Mexico.

Many factors will impact your decision whether to pursue legal action directly in Mexico or to litigate or arbitrate at home, including:

• reliability of the specific Mexican State Court that will hear the case – are the judges knowledgeable in international commercial disputes, corruption-free, etc.;
• comparative costs of filing the suit, obtaining judgment, and executing judgment upon the debtor;
• anticipated timeframe in the various venues to complete litigation and actually obtain payment;
• and, of course, the type of Mexican proceeding your case will be decided in (as described above).

If you have real property or other collateral as security for your debt, suing outside Mexico should be immediately dismissed as an option. It will always be much faster, more secure (due to the available interim relief measures), and less expensive to file suit directly in Mexico through a special or summary proceeding. If you have no collateral to qualify for a special proceeding, and no promissory notes to allow an executive proceeding, you should definitely consider arbitration or litigation in your own locale.

Unfortunately, in the case of the Mexican executive proceeding the choice is not quite so clear. Ideally, this option should point to a firm decision to sue in Mexico. However, if your sales to the buyer will exceed US $100,000, you should take a close look at the State in which your debtor is located and the reliability of the judgments of the Courts in that jurisdiction.

In April 2002, the National Banker’s Association of Mexico published a study that ranked the judicial authorities in all 31 Mexican States and Mexico City on (1) professionalism, (2) quick outcomes, (3) staffing resources, and (4) quality of enforcement actions. The Banker’s Association gave only four states its highest marks. Seven states were ranked “below average” and seven received the lowest grade possible.

Conclusion

The Mexican legal system offers a number of legal remedies that are advantageous to creditors. However, in order to take advantage of them, you have to have planned ahead. Otherwise, your claim may be bogged down for years in the Mexican courts with no guarantee of a favorable outcome.

Part 4: If you do decide to sue or arbitrate in your own country, you will eventually face the hurdle of getting your foreign judgment or arbitral award enforced in Mexico. The final article in this series will address this important topic.

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None of the information or materials contained in this presentation may be considered legal advice. All suggestions contained herein should be carefully considered with the advice of competent legal counsel.

Romelio Hernández is president and director of litigation for HMH Legal. Based in Tijuana, Baja California, Romelio works extensively with foreign exporting companies and collection agencies, assisting with their out-of-court and legal collection efforts throughout Mexico. He provides guidance and general counsel to foreign companies in mitigating the various risks of selling internationally. Romelio is a member of the CLLA, the International Bar Association, the OtayMesa Chamber of Commerce, and Rotary. He is a graduate of Universidad Autonómade Baja California, and was admitted to practice law in Mexico in 1997.