Assessing and Reinforcing Litigation in Mexico Part 2: Risks
Contribution by Mr. Romelio Hernández
Romelio Hernández is President at HMH Legal, a professional corporation specialized in credit and collection services in Mexico. He is based in Tijuana, Baja California, México, where he works extensively with foreign exporting companies and collection agencies assisting them with their out-of-court and legal collection efforts throughout Mexico. His litigation experience of sixteen years and exposure to international commercial law has allowed him to provide guidance to foreign companies in mitigating the various risks of selling international. Romelio graduated from Universidad Autónoma de Baja California, and was admitted to practice law in Mexico since 1997. Romelio holds a Masters’ Degree in Comparative Law (LL.M.) from the University of San Diego School of Law (2011).
This is part 2 in a 3 part series. View part 1 on Costs & Rewards here.
Once you have confirmed that you have a case worth considering based on costs and rewards, you have to assess the risks associated with your action to determine the likelihood of success. The bottom line is whether you will be able to seize assets from your debtor, and whether you can win your case. These questions should be analyzed in detail.
A. Will you be able to execute if you win?
If you are to consider legal action, you have to make sure that the debtor has sufficient assets worth seizing to pay your debt, and you have to make sure that you will be able to execute against the debtor. These are two different things, for which you will have to assess the debtor’s legal, financial, and commercial situation to make sure that your action will not present major risks. It is important to address the following issues:
Legal. A debtor that has changed its company name, or is conducting business under a different entity, presents a major challenge. While this may constitute fraud, prosecuting authorities are just not reliable enough to bet on them for legal redress. In addition, piercing the corporate veil in Mexico is extremely difficult, so it will be a risky case when your registered debtor is no longer there and you intend to pursue against a wealthy owner or parent company.
Financial. If the debtor is still there, you want to make sure that he has enough assets to seize and pay your debt. These not only include real estate, but inventory, bank accounts, and other movable assets that you can also seize. While a physical inspection at the debtor’s premises is a good way to start to uncover assets and confirm business operations, an investigation at the public registry of property and commerce is highly recommended to find out about possible liens, lawsuits, loans, etc. If the company is totally encumbered it may mean that you will be at the end of the line of creditors, with nothing left to pay your debt.
Commercial. The debtor may have assets now, as well as a sound business, but what will his situation be in a year or two when you win your case and are ready to execute? This is where you need to consider the debtor’s presence in the market, as well as its history. A debtor with no presence and no history will have no problem turning to fraudulent schemes to change its company name and conceal assets to avoid execution. A debtor with this possibility definitely presents more risk.
Lawsuits. A Google search might provide information about possible lawsuits against the debtor, but it is not always reliable. There are specialized reports that provide reliable information from court systems throughout Mexico. These are highly recommended to uncover additional exposure from the debtor, something that will also add risk to your case.
Collateral. When the debtor’s situation is not good, you can always count on collateral to raise the likelihood of collection. If collateral was provided and your Mexican attorney can confirm that it is enforceable in Mexico, you are reducing unwanted risks. Thus, when all previous factors are unfavorable, collateral may be what saves your case. You will just want to make sure that the collateral has not depreciated to a point where it does not cover your debt.
B. Will you be able to win?
Before you can execute, you have to get a judgment, and you have to get it fast. There are many factors that determine the likelihood of success of any case. To find out about it you have to ask yourself the following questions:
How strong is the case? In order to enforce a contract, you have to prove that you performed on your end of the bargain. In a case of sale of goods, it means proving that you delivered the ordered goods, and that the debtor received them. The Mexican legal system relies heavily on documentary evidence, and the documents that can get the job done are shipper imports from the Mexican customs’ office (“pedimentos de importación”), and bills of lading or signed delivery receipts. If you don’t have these documents, or a written acknowledgment of debt from your debtor, you are in for a tough case. On the other hand, there are certain documents that allow a privileged action that lowers risk, time, and cost. These are promissory notes (“pagarés”) and checks. If you have these you are turning the burden of proof to your debtor, which releases you from proving anything in regards to the sale of goods. In conclusion, with documents that prove performance, your case is strong. With a pagaré, your case is much stronger.
How good are the courts that will hear your case? Mexico has a state and a federal court system, and the performance level between courts vary greatly from state to state. Each jurisdiction has its own set of problems that will be different from the next. While in one you will find social problems that inhibits execution against companies, in another there will be corruption, and in another lack of infrastructure or sufficient staff at the courts, lack of qualified and trained officials, and on and on. There is a survey study from ITAM (Instituto Tecnológico Autónomo de México) and Moody’s Investors Service Mexico that rates the level of performance of courts in Mexico. This would be a reliable source to start by evaluating the performance level of the courts where you will bring suit against your debtor. The next good source will be your local attorney in that jurisdiction, who should be able to disclose other problems that influence the performance of the courts, such as violence. If you are stuck with a jurisdiction that rates poorly or presents other problems, you will have to and should consider it as increased risk.
What is the history of the debtor? A debtor with a history of lawsuits will definitely pose a major threat to the likelihood of collection. These debtors are the ones that will easily deny the debt before a judge (without any worries about perjuring themselves), and that will easily turn to fraudulent schemes to hide their company and protect their assets. These debtors usually have defense attorneys on their payroll, so they just don’t mind when the next lawsuit arrives. Here, the chances of settlement will be slim, so you have to have a strong case and litigate all the way. To avoid any surprises a specialized report on lawsuits is highly recommended.