Secured transaction reforms in Mexico: in pursuit of a uniform system.

• Author: Barry, Julie

1. PROLOGUE II. INTRODUCTION III. HISTORICAL BACKGROUND IV. THE BASICS OF MEXICAN SECURED TRANSACTION LAW A. Guarantee Trust (fideicomiso) B. Industrial Mortgage (hipoteca industrial) C. Pledge (prenda) D. Equipment Credit (credito refaccionario) E. Operating Credit (el credito de habilitacion o avio) F. Warehousing (bono de prenda) G. Accounts Receivable Assignment (cession de creditos) V. EVOLUTION OF APPLICABLE LAWS A. The 2000 Amendments B. The 2003 Amendments C. The 2009 Amendments VI. ANALYSIS OF MEXICO'S SECURED TRANSACTION SYSTEM A. A "Simple" Security System B. Future Collateral and Future Debt C. Purchase Money Security Interests D. Buyers in the "Ordinary Course" E. Registration F. Enforcement Against the Collateral VII. CONCLUSION I. PROLOGUE

   The strength of a country's financial system is critical to its economic stability, and the ability of credit institutions to move capital through the market effectively and efficiently is crucial to the country's political and economic growth and development. In the case of Mexico, the rise and fall of its banking industry during the 1990s has played a crucial role in the availability of credit to Mexico's commercial sector and has led to multiple legislative reforms designed to address the shortcomings of the financial infrastructure. In analyzing the causes for the 1995 crash of its banking industry, followed by the effects of deregulation of foreign bank investment, Mexico has isolated a number of areas requiring reform if it is to foster greater lending and economic growth. One such area has been its secured transaction system and its related registry process. Since 2000, Mexico has enacted several legislative changes, all designed to garner greater creditor confidence and encourage lending.

   On September 23, 2010, Mexico published its newest set of regulations for the establishment of a centralized electronic single registry system for security interests. This system, known as the Registro Unico de Garantias Mobiliarias (the "RUG"), has been designed to add greater transparency to a secured transaction system that has been fraught historically with contradictions, inconsistencies and confusion. The success of the new filing system in achieving its goals remains to be seen. Will Mexico's secured transaction system finally achieve a level of ease, consistency and transparency, or will the shortfalls of its system continue to be swept under the RUG?

2. INTRODUCTION

   In the United States, lawyers and bankers tend to take for granted the ease with which security interests may be created, filed and subsequently monitored. We forget that Article 9 of the Uniform Commercial Code is the product of an evolution that began in this country in the 1950s, a process that involved several different iterations of the first presentation and then several "official" amendments to that model. (1) Even more significantly, Americans seldom recognize the importance of this body of rules to the economic growth and development of our private sector. The ease with which businesses can leverage their assets and creditors can realize upon those assets in the event of default has enabled America's private sector to access credit more readily and at relatively low costs. (2) One has only to look at emerging markets (3) where the concept of collateralizing personal property has been virtually nonexistent to appreciate the value of an "Article 9-type system" to the development of an economy.

   This limitation on the uses of collateral has affected the ability of many businesses and entrepreneurs, in particular small and medium enterprises (referred to as SMEs), in emerging markets to access credit and thereby reach their economic potential. (4) The International Finance Corporation reports that "constrained access to finance remains among the top three limitations on private sector growth in the developing world. More than half of private firms in emerging markets have no access to credit." (5) The IFC's research indicates that credit in these regions is denied not because the collateral is necessarily insufficient, but rather because of the developing market's inability to harness the value of existing forms of collateral. (6) Large caches of assets become what is referred to as "dead capital." (7) Ineffective secured transaction systems often limit the use of such assets as collateral, which in turn leads to higher interest rates and a reduced borrower pool. (8) Ultimately, this translates into inadequate investment and slower economic growth. (9)

   In the context of Mexico, despite the size and developed nature of its economy, access to credit historically has been a challenge. In that regard, its credit market has an evolutionary story that mirrors the political and cultural history of the country. (10) The first section of this paper will review the historical context from which the reforms to Mexico's credit industry arose. The second section of this paper will briefly describe the legal framework of the Mexican secured transaction system and explain the complexities involved in attempting to create a security arrangement. Finally, we will explore the reforms to Mexico's secured transaction legislation that have taken place over the last decade and the technical reasons for those reforms. In the process, the paper attempts to give the U.S. legal practitioner a better understanding of intricacies involved in creating a security interest covering Mexican collateral. It is the premise of this paper that notwithstanding the significant reforms that have been made to Mexico's secured transaction laws, a great deal of confusion and complexity continues to exist.

3. HISTORICAL BACKGROUND

   Throughout its development, Mexico has been resentful of its own heavy dependence on foreign capital, which is perhaps one reason its 1917 Constitution instituted several restrictions on foreign investment in certain sectors of the economy. (11) "Although the constitution and subsequent foreign investment laws did not set aside banking as a Mexican-only activity, as a practical matter the banking industry in Mexico was concentrated in the hands of a few powerful families." (12)

   Increased nationalism and regulatory reforms, including the establishment of the Central Bank of Mexico, followed the Mexican Revolution. (13) The following decades experienced increased political stability and greater confidence in the banking industry. (14) However, by the 1970s Mexico was experiencing hyperinflation and a tremendous increase in foreign borrowing. (15) This was also a period of many bank mergers, resulting in economic power consolidating under a handful of banks. (16) During the 1980s, as a result of government over-spending and an overly enthusiastic prediction of increased oil prices, the Mexican economy suffered a serious financial crisis. (17) In an effort to deflect blame for the financial debacle, President Jose Lopez Portillo claimed Mexico's economic troubles were the fault of greedy private banks. (18) He nationalized the banking system, stifling foreign investment for the next decade. (19)

   In 1988, new economic and political reforms were ushered in by the newly elected President Carlos Salinas de Gortari. (20) Salinas, who holds a doctorate in economics from Harvard, made luring foreign investment back to Mexico one of the cornerstones of his administration. (21) Most significantly, the Salinas administration realized that in order to attract foreign investors, not only did Mexico need to change its economic policies, but it needed to make legal reforms as well. (22)

   As a result of the political and economic failures of the previous administrations, the Salinas administration found itself in a position of being unable to borrow in the foreign markets and constrained in what it could cut in spending. (23) In short, it needed to find a large source of revenue in a short period of time, which led the administration down the path of re-privatization of state-owned firms, including the Mexican banks. (24)

   For the Salinas administration, the privatization movement was not only a means of garnering much needed revenue but was also a way of building a closer relationship with the United States. (25) Consequently, in the early 1990s Mexico engaged in significant reforms to its foreign investment and banking laws, which paved the way for the adoption of the North American Free Trade Agreement (NAFTA). (26) By 1990, Mexico's inflation rate, which had been 176.8% in 1988, had been reduced to 22.5%, which was further reduced by the adoption of NAFTA. (27) Mexico had been able quickly to reduce its inflation rate and its foreign debt not only from the re-privatization process but also because foreign investors became interested in Mexico once again. (28) While negotiating NAFTA with Mexico, the United States was cognizant of the economic growth potential of its neighbor to the south, and saw Mexico as "under-banked." (29)

   The policies of the Salinas administration appeared to be a success. Financial deregulation, the introduction of NAFTA, and the reduction in inflation resulted in a surge in capital inflows back into Mexico. (30) However, this massive influx in capital led to an unsustainable surge in consumption and investment, which led to the devaluation of the Mexican peso in 1994 and a devaluation of its exchange rate. (31) Thereafter, the Mexican banking system collapsed. (32) Thus, in four short years the privatization of the Mexican banks from 1991 to 1995 made the Mexican banking system insolvent. (33)

   The 1995 banking crisis in Mexico, in many respects, was not unlike the recent crisis experienced in the United States. As one author described it:

   The Mexican banking crisis of 1995 contained many of the same characteristics as other banking crises: as massive expansion of credit in a short period of time, poor bank management, supervisory and regulatory loopholes, and a shock (both domestic and...