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30 April 2010
Under Brazilian law, the legal principle of chattel mortgage is based on Laws 4.418/65 and 9.514/97.
Pursuant to Article 66-B(3) of Law 4.728/65, and the amendments introduced by Law 10.931/04, it is possible to provide the following as security:
When the law restricts the use of any legal business activity in the financial sphere, it is referring to financial institutions authorized to function in Brazil by the Central Bank of Brazil.(2)
On the other hand, Law 9.514/97 establishes the possibility of using movables as security through a chattel mortgage. This option is not limited to the financial sphere; it is available to any national or foreign(3) legal entity or individual (Article 22(1)).
The new Civil Code also refers to fiduciary business activities that use an unfungible or fungible object as security, based on Articles 1.361 and following. This option, as provided in Law 9.514/97, is available not only to financial institutions authorized to function in Brazil by the Central Bank, but also to any national or foreign legal entity or individual.
Cession of rights as security
Besides the fiduciary legal business activities used as security referred to above (which must obey legal regulatory requirements), the Brazilian legal system allows the parties to establish atypical fiduciary legal business activities as security (ie, aside from those mentioned above). This possibility is a result of the private autonomy principle. Therefore, there are further fiduciary legal business activities that are different from those provided for in the legal regulations.
The fiduciary cession of rights as security is an atypical fiduciary legal business activity - that is, one that does not refer to rights over movables and immovables or rights over security bonds, as previously indicated.
Brazilian doctrine accepts validation of the fiduciary cession of rights as security(4) as an atypical legal business activity. Moreira Alves(5) explains as follows:
"Concerning the laws and actions that might include movables, due to article 48 of the Civil Code, they cannot be the object for fiduciary mortgage in guarantee. However they can be the object for the fiduciary cession per se (the one resulting from a truthful fiduciary business)."(6)
This explanation seems to be referring to personal asset rights and corresponding actions that are commonly referred to as 'credit rights'.
The Superior Court of Justice accepts the existence and validity of atypical fiduciary business activities.(7) The fiduciary cession of rights as security may be constituted by any national or foreign individual or legal entity; it is not limited only to legal entities within the Brazilian financial system.
Cession of rights in recoveries and bankruptcies
Article 49(3) of Law 11.101/05 provides that:
"The main debtor, in the position of fiduciary owner of movables and immovables… will not have his credits submitted to the effects of judicial recovery and the property rights will prevail over the contractual provisions, taking into consideration the corresponding regulations, however, not allowing the selling or withdrawal of the debtor's establishment if the capital goods are essential to his commercial activity, during the suspension deadline, according to paragraph 4 of article 6 of the referred Law."
With regard to the scope of the former Bankruptcy Law in case of a bankruptcy, Pontes de Miranda states that:
"if the transmission was made as guarantee, the fiduciary debtor has the right to receive the refund, or separation, of every object while the debt is not paid to him. The trustee of the bankruptcy foreclosure can demand the sale of the asset and return the remaining to the bankruptcy estates. The same thing is applied to the credit cession of guarantee: the credit is not included in the proceeding, due to the fact it does not belong to the fiduciary agent, and the remaining must be returned to the proceeding estates. At times, the assets sale or the credit collection is not even performed by the trustee."(8)
Thus, in a judicial recovery where the fiduciary creditor is in the position of a fiduciary owner of movable assets, its claim, up to the limit of the constituted fiduciary guarantee, will not be submitted to the effects of the judicial recovery. What will abound is a mere unsecured claim. Once the fiduciary debt is paid, any eventual surplus must be returned to the recovering entity.
A similar situation occurs in cases of bankruptcy, due to the fact that the granted assets are no longer part of the bankruptcy estate.
As a rule, a six-month timeframe is given, counting from the judicial recovery appeal filing date, within which to exercise the rights of fiduciary cession of rights as security provided in the contract (Article 6(4) of Law 11.101/05). If the capital goods are essential to the debtor's commercial activity, the judicial recovery does not involve the sale or withdrawal of the debtor's establishment.
Capital goods are used in the productive process (eg, machinery and equipment). Therefore, it is clear that granted claims cannot be classified as 'capital goods'.
Brazilian jurisprudence confirms this understanding, as evidenced in the following judicial precedents:
For further information on this topic please contact Paulo Guilherme de Mendonça Lopes, Charles Isidoro Gruemberg or Ricardo Tosto de Oliveira Carvalho at Leite Tosto E Barros Advogados Associados by telephone (+55 11 3847 3939), fax (+55 11 3847 3800) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
(1) Although the law refers to it as 'fungible', the jurisprudence of the Superior Court of Justice denied the possibility that a fungible movable could be the object of security through a chattel mortgage. However, the doctrine accepts that an unfungible movable becomes fungible, as long as it is specified and individualized.
(2) Waldemar Zveiter, Superior Court of Justice - REsp 2.176-RS - 3rd T - Rel Min - j June 5 1990 - vu (RT 660/211).
(4) Gondim Neto, De Cessão de Créditos, Recife, Imprensa Industrial, 1933, p 75ff; Otto de Souza Lima, op cit, pp 229 - 231, Pontes de Miranda, Tratado de Direito Privado, Sao Paulo, RT, 1983, 4th ed, Tomo III, Section 273, 4, p 123; Christoph Fabian, Fidúcia - Negócios Fiduciários e Relações Externas, Porto Alegre, Sergio Antonio Fabris Editor, 2007, p 40.
(5) Da Alienação Fiduciária em Garantia, Sao Paulo, Saraiva, 1973, pp 112 - 113.
(6) Article 48 referred to by Moreira Alves is in the Civil Code of 1916 (Article 83 of the current Civil Code) and has the same text as the revoked article, stating in Item III that "the personal assets rights and relating actions" are legally considered to be movable.
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Paulo Guilherme De Mendonça Lopes
Charles Isidoro Gruenberg
Ricardo Tosto de Oliveira Carvalho