Argentina - The Framework for Secured Transactions and Access to Credit in Agriculture (Vol. 2 of 2) : The Main Report

Document of THE WORLD BANK CONFIDM Report No. 15456-AR ARGENTINA THE FRAMEWORK FOR SECURED TRANSACTIONS AND ACCESS TO CREDIT IN AGRICULTURE Main Report April 29, 1996 Country Department I Environment, Natural Resources and Rural Poverty Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit - Peso (P) P1.00 = US$1.00 US$1.00 = P1.00 FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS C6D.CIV. C6digo Civil (Civil Code) COD.COM. C6digo de Comercio (Commercial Code) COD.PROC.CIV. Y COM. C6digo Procesal Civil y Comercial de la Naci6n (Code of Civil Procedure) C6D.PROC.PEN. C6digo de Procedimiento en Materia Penal de la Naci6n (Criminal Procedure Code) COD.PEN. C6digo Penal (Penal Code) PL Law 12962 (pledge law) UCC 9 Article 9 of the Uniform Commercial Code ARGENTINA HOW ITS FRAMEWORK FOR SECURED TRANSACTIONS LIMITS ACCESS TO CREDIT IN AGRICULTURE Main Report' TABLE OF CONTENTS Page I. Framework for Secured Transactions and the Collateral Problem: Overview .ie.................................... . 1 II. Problems in Creating Security Interests .................... 5 A. Restrictions on Who Can Be a Secured Creditor ......... 5 B. Limits on What Property May Serve as Collateral ........ 7 C. Limits on the Loans That May Be Secured ........... 10 D. Limits on PledgedAssets ...................... 11 E. Problems in Using Inventory and Accounts Receivable .... 13 1. Floating Security Interests ................. 15 2. Risks in Using Future Goods or Accounts as Collateral forILans..................... 17 3. Lack of Registration of the Transfer of Accounts Receivable .......................... 20 4. Security Interests in Proceeds ............... 22 5. Problems in Future Loan Advances ........... 23 F. Fragmented Legal Framework for Security Interests ...... 25 1. Specific Problems in Leasing and in Accounts Receivable Financing .................... 27 '.The work set out in this paper was undertaken under the supervision of Steven N. Schonberger (LA1ER) and was written by Heywood Fleisig, Economic Advisor to the Private Sector Development Department of the World Bank, and by Nuria A. de la Pefia, attorney and consultant to the Bank. The authors are obliged to Mr. Schonberger and to Jonathan Parker (LA3NR) for their excellent advice on substantive issues, careful mission planning, and close and fruitful liaison with the government. The authors thank Hermant Shah (Peer Reviewer), Alberto Valdes (Peer Reviewer), Jacob Yaron (Peer Reviewer), Rafael Bielsa, Ronald C.C. Cuming, Ulrich Drobnig, Alejandro Garro, Maria Ester Gesino, Lance Girton, Julio Kelly, Boris Kozolchyk, Roberto Laver, Luis Lozano, Graciela Molinelli, Roberto Muguillo, Graciela Rodriguez-Ferrand, Stephen Salant, and J.A. Spanogle for extensive and helpful advice and comment. Many Argentines have generously given their time to explain their perspectives on these problems. The Lead Economist is Danny Leipziger, the Division Chief is Constance Bernard and the Department Director is Gobind T. Nankani. III. Problems in Perfecting Security Interests . . . . . . . . . . . . . . . . . . 28 A. Problems in Perfecting through Possession . . . . . . . . . . . 28 B. Problems in Perfecting by Registering in a Public Registry ................................ 30 1. Problems in Registering Information . . . . . . . . . . . 31 2. Problems in Retrieving Information . . . . . . . . . . . 33 IV. Problems in Enforcing Security Interests .................. 37 A. Problems in Seizing Collateral ................... 37 1. Repossession without Judicial Intervention ........ 40 2. Repossession with Judicial Intervention .......... 43 B. Problems in SellingCollateral ................... 44 C. Creditor's Loss ofPriority ..................... 48 ARGENTINA HOW ITS FRAMEWORK FOR SECURED TRANSACTIONS LIMITS ACCESS TO CREDIT IN AGRICULTURE Main Report I. The Framework for Secured Transactions and the Collateral Problem: Overview 1. In Argentina, a creditor can secure a loan by creating a security interest against a debtor's property. A security interest' is "a right of satisfaction" from the property to which the security interest is attached or the collateral. Without a security interest a creditor only has a general claim against a debtor's property. 2. Several different economic problems arise from the present system of laws that govern security interests in Argentina. These problems combine to limit access to credit. This report discusses the problems in creation, perfection and enforcement of security interests in Argentina. 3. A security interest gives the secured creditor priority over the general creditor. When a loan is in default and collateral is sold or exchanged, the security interest of the secured creditor will be satisfied (paid) ahead of the general claims of unsecured creditors. Moreover, the security interest of a secured creditor will be satisfied in the order of its priority among the other secured creditors that have a security interest against that same collateral. Therefore, a secured creditor with a security interest in a designated property typically also has priority over junior secured creditors. Finally, if the secured creditor's security interest is not satisfied by the sale of the collateral, that secured creditor also retains a general, unsecured claim against the debtor's other property for the deficiency. 4. Argentine law follows this general structure of the law. It gives secured 2 The term security interest should not be confused with the term securities. Securities are instruments that represent a general claim against all the non-exempt assets and income of the issuing agent or corporation - such as stocks, bonds, commercial paper, certificates of deposit, or bank deposits. In Argentina, a secured transaction is based in a security agreement sanctioned by law giving a creditor a right of satisfaction from collateral; for example, a mortgage in real estate is a type of secured transaction in immovable property. The concept is narrower than that of some common law systems, in which a secured transaction is any transaction, regardless of its form, intended to create a security interest. In Argentina it must conform to any of the typified security agreements sanctioned in the law; a conditional sale in Argentina is not a secured transaction, but it may be so in the United States. -2- creditors a rank of priority to satisfy their interests against collateral.3 5. Argentine law sets out four types of security interests, ruled by corresponding security agreements.' Each security interest may be created to secure specifically identified obligations against a specific movable property.s 6. These security interests include the mortgage in aircraft and ships over 10 tons and the pledge (prenda) in all movable property except aircraft and ships over 10 tons.' Also two types of pledges may exist: possessory pledges, in which the creditor or a bailee takes possession of the collateral; and non-possessory pledges, in which the debtor retains possession of the collateral. 7. Possessory pledges are further divided into two categories: the commercial pledge and the civil pledge. Broadly, the commercial pledge is used for loans made by businesses and with the intent of making a profit; the civil pledge is used for loans made by natural persons (as opposed to businesses) or not made for profit. The exact lines of demarcation are controversial. Under either pledge, the creditor generally keeps the collateral until the debt is paid. The creditor need not register the security agreement in a public registry. For example, a pawnshop makes loans using a civil pledge as a 3 Broadly speaking, under Argentinean law, borrowers can give lenders two guarantees: a real guarantee or a personal guarantee. Under a real guarantee, the creditor has a security interest in a specific asset of the debtor, such as a mortgage on the debtor's house or a pledge on the debtor's equipment. The lender is then a secured creditor who holds a position in the line of priority to recover the amount that he is owed from the proceeds of the eventual sale of that specific piece of property. Under a personal guarantee, the lender is an unsecured creditor because the borrower will respond with any and all of his property, giving the creditor no specific interest, priority, or security interest against any specific property. In such a situation, the lender-creditor will be unsecured until a court orders an attachment or a judgment lien that is recorded in the appropriate registry. When the creditor records such a court order, the creditor creates a specific lien on a specific asset of the debtor. The lender then becomes a lien creditor with respect to that specific asset and will remain an unsecured creditor for any deficiency judgment. The creditor will have a personal guarantee against any of debtor's assets until the total balance due is paid. The parties need not stipulate in their contracts the debtor's personal guarantee: a personal guarantee of the debtor always exists under the law, without the need to specifically provide for it. The civil pledge(C6D.CIV. art. 3204) that includes the warrant; the commercial pledge(C6D.COM. art. 583); and the registered pledge (Law 12962)-hereafter pledge law (PL)-that include the fixed and the floating pledge. s See PL, art. 1; and C6D.CIV. art. 3109. 6 Argentine law defines two types of mortgages: the mortgage in aircraft (Law 14307) similar to a mortgage in real estate, filed in the aircraft registry (Registro Nacional de Aeronaves), (DL 6817/63), and the mortgage in ships of more than 10 tons (Navigation Law, arts.499-514). This paper will focus on secured transactions in movable property, tangible and intangible, and fixtures. The analysis does not include the mortgage in aircraft or ships over 10 tons weight, which are ruled by special provisions that follow applicable international conventions. That distinctive legal framework makes them less subject to the restrictions discussed here. -3- security interest. 8. The non-possessory pledge is the registered pledge (prenda con registro), and is ruled by a special law.' The contract for the registered pledge must be registered in the Registry of pledges. Non-possessory pledges are divided into the fixed pledge and the floating pledge. 9. However, to be economically useful, a system for security interests should fulfill certain minimum requirements: 1. Creating an enforceable security interest should be inexpensive. 2. Enforcing the security interest should be inexpensive. 3. The security interest should produce real commercial value for the lender when enforced. 4. The lender should be able to determine before the loan is made, with certainty and at little cost, whether any other lender has a superior claim to the collateral. 5. The secured lender should be protected from claims of third parties, including secured and unsecured creditors, a trustee in bankruptcy, or some purchasers of the collateral.' 10. The Argentine secured transactions system does not meet these tests: it is expensive to create and enforce a security interest, it is expensive for creditors to determine their level of priority in the collateral, and it is difficult for creditors to secure their priority in the event of the debtor's bankruptcy. Moreover, Argentine law restricts the types of property that may be used to create a security interest (particularly movable property and intangibles) and the transactions that may be secured. Often, these restrictions have no obvious justification in public policy. Even where they do have such justification, the means of achieving the public policy objective (debtor protection) carries 7 The civil pledge(C6D.CIV. arts. 3204-338) is a contract in which the debtor gives to the creditor a movable property or a credit to secure a debt. The debt to be secured may be an obligation certain or conditional, present or future. The commercial pledge(C6D.COM. arts. 580-588) is a contract in which the debtor, or a third party under his name, gives to the creditor a movable property to secure performance of a commercial transaction. The warrant (Law 9643 enacted on 9.30.14; promulgated on 10.15.14: B.O., 11.20.14) is a type of commercial pledge attached to a document of title to goods deposited in a bonded warehouse. Law 12962 (Ley de Prenda con Registro). John A. Spanogle, TProposed Polish Charges Act" (Processed, The Washington Law Center, The George Washington University, 1991). -4- with it a high cost in reducing access to credit. 11. This report discusses the three main aspects of the issue: * Creation: the process by which the creditor establishes a security interest in a specific property (the collateral). * Perfection: the process by which the lender establishes and publicizes the priority of his security interest. * Enforcement: the process by which, upon the debtor's default, the creditor will seize and sell the collateral to satisfy his claim. -5- II. Problems in Creating Security Interests 12. In Argentina, as in many countries, secured transactions are consensual -- parties must agree to create a security interest. However, they may only create a security interest that is validated by law. Contracting parties who lend or borrow outside these parameters will either commit illegal acts or lose their security interests in the collateral.o However, Argentine law does not provide for many types of collateral, lenders, and borrowers. Consequently, certain lenders cannot make certain secured loans because the law does not provide them with a valid security interest. Private parties will be unable to contract outside those limitations. If they attempt to, the law will not recognize those contracts. This section discusses these restrictions. A. Restrictions on Who Can Be a Secured Creditor 13. In Argentina, five types of creditors may take a security interest in movable goodsu under the non-possessory pledge: * The state, banks, financial entities authorized by the Central Bank, and foreign financial entities. * Cooperatives. * Grain elevator operators. * Foreign and domestic merchants and industrial businesses registered in the Commercial Registry. * Private lenders registered in the internal revenue service.12 14. This may seem like a complete list. However, the pledge law requires the strict qualification of a creditor under these categories. Consequently, this list has some major omissions. For example, an individual cannot use a registered pledge to secure a loan; this limits the private placement of such security interests. Nor can a farmer, typically an individual proprietor, secure a loan to another farmer. This means, for 10 Parties may not enter into other *secured transactions" (a real security under civil law) than those sanctioned by law (C6D.CIV. art. 2501 and C6D.CIV. art. 2503). If parties enter into such transactions, they are valid only as personal obligations (C6D.CIV. note to art. 2503). "1 Although the pledge law refers to movable property (PL, art. 10), as a practical matter the law is used only to finance movable goods, and not intangibles. For example, no one interviewed mentioned registering afixed orfloating pledge in receivables; instead, they would transfer receivables under the rules for the assignment of rights or those for the endorsement of negotiable instruments. 12 See PL, art. 5. -6- example, that a farmer who rents land to other farmers cannot mortgage the rented land and onlend the funds to the renting farmer secured by the crop or the cattle thereon. The same restrictions apply to sole proprietors such as ranchers and breeders. They also apply to grain dealers, merchants, middlemen, or merchants who are not formally registered in the Commercial Registry. To take a security interest, moreover, a manufacturer of equipment can only be a secured creditor when he takes a security interest in something he sells on credit; therefore, for example, a farm machinery manufacturer could not take a security interest in and finance the inventory of used equipment held by the manufacturer's dealers." These restrictions also apply to creditors taking the pledge by endorsement." 15. These restrictions limit the expansion of lending beyond the circle of those whose word is enough to secure a loan. For the larger group of potential borrowers, whose word may not be enough to secure a loan, the private lender cannot write a formal contract to bolster the value of the oral guarantee. Relatively wealthy rural individuals, such as more established and older farmers or retired rural residents, who might provide such credit, have no legal means to do so. Rather, they must deposit their money in banks or other formal sector institutions -- the very institutions that are not equipped to lend in rural areas. These restrictions are not accidental. 16. In congressional hearings, where the enactment of the pledge law was discussed, legislators indicated that the purpose of the law was to facilitate the development of credit in favor of certain creditors." Since courts have strictly enforced these qualification requirements.16 When creditors have not qualified under 13 Quebec law used to contain a similar commercial law statute. An American scholar noted: "Presumably in response to at least part of the needs in this area, the Civil Code was amended in 1962 to permit the creation of a commercial pledge - Quebec's nearest equivalent to the chattel mortgage. This permits 'a person carrying on a commercial business' to secure a loan 'which he contracts' by way of a non-possessory pledge of his 'machinery and equipment,' which will preserve the lender's rights against third parties. Registration is required. Unfortunately the device is far too inflexible to satisfy several major needs for a valid non-possessory pledge. Its use is limited to 'a person carrying on a business' so that personal loans are excluded; it may not be used to secure other than loans 'which he contracts' - suretyship transactions would be excluded; and since the collateral is restricted to 'machinery and equipment' with no mention of 'present or future goods,' inventory financing would be out of the question.' Dellas W. Lee, "International Secured Transactions," 17 Buff. L. Rev. 85, 120 (1967). 14 The requirements provided under Article 5 of the pledge law apply also to an endorsee of the pledge certificate. See CN Com, A, October 14, 1970, ED 35:334. See also Direcci6n Nacional de Crditos de la Propiedad Automotor y de Cr6ditos Prendarios, regulation No. 593, 7/10/81. is Socialist party's report on the draft law, at the Congressional House of Representatives, Diario de Sesiones, 1932: 3287. 16 La Ley, CNCom, Sala C, 10/26/61m KKm 107-990, 8235-S and ED, 34-640, sum. 68-69; C3a. CivCom Rosario, 10/11/55, Juris: 8-141. -7- the pledge law, courts have held the security agreement null and void; they have denied these creditors their right to seize and sell the collateral to satisfy their claim. 17. The public policy concerns that led to limiting the types of creditors who may enter into secured transactions arose from a fear that creditors would abuse debtors when disposing of collateral. 18. However, the law can address the problem of creditor abuse in the disposition of collateral in ways that do not restrict access to credit by restricting the type of agents who can enter into secured transactions. Moreover, as the law now stands, it mainly attempts to address creditor abuse of the non-possessory pledge. There is no reason to believe that creditor abuse under the non-possessory pledge would be greater than under the possessory pledge. Yet the same law that requires the transfer of the collateral into the possession of the creditor also permits the creditor to sell the collateral without court intervention. Options for Solution 19. Expanding access to credit requires the repeal of these restrictions: maximizing access to credit requires that any creditor should be permitted to obtain a non-possessory security interest. Those interviewed unanimously supported such a change in the pledge law." 20. The government recently passed a decree that allows any creditor to enter into pledge agreements. However, since a decree may not amend a legal statute, it is unclear whether the courts would uphold the decree's validity." Unfortunately, the economic usefulness of the law depends on lenders perceiving that the contract carries no risk of extensive litigation. Therefore, a solution involving a change in the law would have larger and more far-reaching economic impact. B. Limits on What Property May Serve as Collateral 21. In many legal systems, most movable property and fixtures can serve as collateral, including goods, rights, instruments, general intangibles, chattel paper, and accounts. In Argentina, however, many items of property cannot serve as collateral. 17 Many scholarly meetings have proposed and approved removing the restrictions on the pledge, especially in the Province of Buenos Aires (XI and XVIII Encuentros del Instituto de Derecho Comercial de la Provincia de Buenos Aires in Bahia Blanca 1988 and Necochea 1993) and in the Province of San Juan. The conferences proposed the derogation of Article 5 of the pledge law. is See Decree No. 896 published on December 18, 1995. -8- 22. As in most legal systems, Argentine law characterizes property as tangible or intangible, subject to the following definitions:19 * Property (bienes) consists of intangible property and tangible property or things.2 * Intangible property21 (derechos) is non-material property that has economic value. * Things (cosas) refer to material objects susceptible to private appropriation;' for example, the sun has immense economic value but may not be appropriated and hence is not a thing under Argentine law.' Things may be movable or immovable. * Movable things, also called movable goods, can be moved from one place to another,' either by themselves (semovientes) or by the exertion of an external force. For example, cars, bonds, and promissory notes are movable things. The Civil Code further defines various types of movable things, such as fingible,l consumables,' divisibles,' and semovientes. * Immovable things' are "by nature" immobile, incorporated in the earth in an organic way, or existing beneath the surface of the earth without the act of man.2 Movable things may become immovable "by affixation:" any movable goods that are immobilized by physical adhesion to the earth, as long as such adhesion has the character of perpetuity;" also those things that are intentionally affixed to an immovable by its owner.31 For example, an elevator affixed to a building is an immovable thing. In this report, movable property denotes tangible and intangible property, whereas movable goods, unless otherwise indicated, denotes only tangible goods. C6D.CIV. art. 2312. 21 C6D.CIV. art. 2312. C6D.CIV. note to art. 2311. C6D.Civ. art. 2310. C6D.CIV. art. 2318. C6D.CIV. art. 2324. C6D.CIV. art. 2325. c6D.CIV. art. 2326. COD.CIV. arts. 2314-2317. C6D.CIV. art. 2324. COD.CIV. art. 2315. C6D.CIV. arts. 2314-2316. -9- Fixtures are things attached to an immovable; the fixtures may be movable or immovable things depending on the applicable code rules." These rules consider the type of fixture, the intention of the parties, and the way it were affixed to the land. For example, a store counter could be an immovable if it is permanently affixed to the real estate with the intention that it remain part of the real estate; or it could be a movable thing if it were a trade fixture that is intended to be removed. 23. Even though the definition of property under the law is broad, the use of property as collateral is limited in various ways; for example: 24. The possessory pledge -- used when the creditor possesses the collateral -- allows the borrower to offer as collateral any movable property that may be identified individually or generically." However, the non-possessory pledge-- used when the debtor retains possession of the collateral -- allows the debtor to offer as collateral only specific items of tangible property,' the goodwill of a company, and fixtures classified as immovable. 25. If the debtor wishes to offer as collateral a security interest in a shifting mass of generally described property -- for example, a non-possessory pledge in inventory or floating security interest -- he may offer only goods and raw materials possessed by a commercial or industrial establishment.' 26. Crucially, this excludes most farm products: under the law, farmers are neither commercial nor industrial establishments .3 However, a floating security interest is essential to farmers, since there are few specifically identifiable items of property they can offer as collateral. 27. When the pledge laws were enacted at the beginning of the 20th century, the government viewed the pledge restrictively: as a limited device to finance some movable goods. In Argentina today, however, expanding access to credit requires that farmers 2 C6D.CIV. arts. 2314-16 and 2319-2322. 33 C6D.CIV. art. 3211 (ivii pledge), C6D.COM. art. 583 (commercial pledge), Law 6943, art. 1 (warrant). 34 PL, art. 1. 35 PL, art. 10(d). 36 C6D.CIV. art. 2316. 37 PL, art. 14. 3 This has been clearly confirmed by the instructions given by the Direcci6n de Registros de Crditos Prendarios to the pledge registries. For example, a pledge registry will deny filing afloating pledge against cattle or grain of different classes. It would accept it when it lies in homogeneous goods (bienes tangibles) of a business operation. -10- and other businesses be allowed to use all forms of property as collateral for loans. Options for Solution * repeal all restrictions that lack a clear public policy justification and pass a law that permits all property, tangible and intangible, to serve as collateral for all forms of debt, regardless of the nature of the property or the type of transaction. C. Limits on the Loans That May Be Secured 28. Argentine law limits the types of loans that may be secured by a non- possessory security interest. The law specifies the loans that may be so secured. Where the law does not identify the loan, it may not be secured by a security interest: * Borrowers may not secure an existing loan with a floating pledge. A floating pledge, typical for financing inventory, could secure only a current loan or a loan that would become due in the future; and even the loan can have a maturity of no more than 180 days." * Grain elevator operators may lend only for farm transactions.' * Merchants and industrial businesses may secure their lending with a registered pledge in movable property only to finance the sales of their products."' This limits inter-company lending. For example, a dealer may not create a pledge in machinery to secure a loan he has given to another dealer. * Merchants and industrial businesses financing credit sales may take only the item sold as collateral; other property of the debtor cannot serve as collateral.42 * Registered private lenders may take movable property as collateral only when the interest rate on the loan is not higher than 2 points 39 The Pledge Law requires that a floating security interest secure loans of up to 180 days maturity. This requirement has been interpreted to also mean that thefloating pledge could secure a current loan or a loan that would become due in the future, but could not secure an existing loan. For example, afloating pledge can not be created to increase the collateral of an existing loan. See PL, art. 14. See also Muguillo, Prenda con Registro: 94. 40 PL, art. 5(c). 41 PL, art. 5 (e). 42 PL, art. 5 (e). - 11 - above the current interest rate of the Banco Naci6n.' 29. Courts have uniformly held that violation of any of these requirements renders the entire security agreement null and void. These decisions effectively deny creditors in these transactions any right to enforce their security interest against the collateral. Such security interests either cannot be created or cannot be enforced. " While the public policy justification for these legal provisions is far from apparent, the economic cost is great. Options for Solution 30. Argentina could repeal these restrictions and, instead, clearly permit all creditors to secure, without limitation, all obligations against any type of collateral for any purpose; and to allow any party to use any asset in any transaction as collateral for any obligation. D. Limits on Pledged Assets 31. The possessory pledge, is acceptable for pawnshops, banks, and warehouses. In other applications, it can be a socially costly method of providing collateral. Society gains when debtors can physically use pledged property or offer it for sale. The non-possessory pledge, therefore, is a legal innovation with important economic consequences. It permits, for example, the farmer to use equipment while paying for it. However, the benefits of the non-possessory pledge may not be realized when the law limits the management, disposition, or assignment.of the pledged asset. Such legal restrictions can impose economic costs without any obvious offsetting economic or public policy gain. For example, the debtor may want to offer several levels of security interest in the same piece of property several times (to maximize leverage); or, the debtor may want to sell collateral (possibly substituting other collateral, or paying off the debt); or the debtor may want to rent the collateral and receive revenues while the loan is pending. 32. These transactions are not legally possible in Argentina. The law limits a debtor's ability to utilize pledged assets. If the debtor retains possession of the collateral, the law prohibits him from using it as collateral for another loan; it also seems PL, art. 5(f). 44 See, CN Com, Sala C, April 10, 1970, ED 33-177 and LL 141-78; CN Com, B, December 17, 1971, LL, 153-404, 30824-S; CN Com, B, April 23, 1969, LL, 136-626; ST La Rioja, July 29, 1971, JR, 972-22-20; Capel. CC Rosario, IV, February 23, 1970, LL, 143-539, 26459-S; CN Corn., A, May 15, 1966, 124-1146, 14475-S; CN Com, B, May 24, 1967, LL, 88-474; CN Com, B, August 7, 1964, DJ, February 31, 1964. - 12 - to prohibit renting it to other parties.4s This is a great disadvantage for owners of harvesting machines and similar types of farm equipment who usually rent these machines. Moreover, in order to assure that the creditor will be able to foreclose against the original collateral, the law penalizes debtors who dispose of collateral in violation of any of these restrictions.6 33. These limitations rest simultaneously on fears that creditors will defraud debtors and that debtors will cheat creditors. Yet if these modes of protection were efficient, some secured lending should take place. In fact, it does not. These "protections", therefore, preserve the rights of creditors and debtors at the expense of the rights of lenders and borrowers. Options for Solution 34. Argentine pledge law attempts to balance the gain to society from allowing the debtor to manage, dispose of, or assign rights in the collateral, against the gain from maximizing the ability of the creditor to seize and sell if the debtor defaults. The competing policy interests pose a complicated problem. Society should address the prevailing standards of fairness for both creditors and debtors in a way that maximizes the economic value that creditors and debtors can together extract from property that could serve as collateral. 35. Argentine pledge law grants some rights to creditors and some to debtors. Fearing that creditors might misuse provisions that would allow private collection of debts, the law requires court-administered collection procedures. These procedures restrict immediate action, delay collection, and increase its cost. This raises the risk to the creditor and reduces his willingness to make a loan -- it is always easier for a debtor in default to hide his truck in two weeks than in five hours. Argentine law attempts to address this risk by limiting what the debtor can do with the collateral while the loan is outstanding and by imposing criminal penalties on a debtor who violates those 45 Although some scholars believe this is permitted (Muguillo, p. 88-89 and Cimara, Prenda con Registro, p. 320), others strongly believe that the law intended that only the debtor or a third party specified in the security agreement, not a lessee, can have possession to the collateral (Zavala Rodriguez, C6D.COM. 1:290, no. 296 and Fernandez, Prenda con Registro: 281, no. 281 bis). Curiously, the law does not include this restriction for possessory type of pledges, like the civil pledge. See C6D.CIV. art. 3210 and PL, art. 2 (fixed andfloating pledge). 46 The law gives to the creditor the right to consider the loan in default and the right to seize the collateral immediately. Alternatively, the courts may void any transaction of the debtor disposing of the collateral. Courts have uniformly held that, if a creditor creates a second pledge against the same collateral, the second pledge is null and void. PL, art. 39. - 13 - restrictions.' 36. However, the Argentine approach has not succeeded. It has not solved the creditors' problem, since they often have difficulty finding the collateral when they finally obtain a court order for its seizure. At the same time, this approach severely limits what debtors can do with their collateral and, consequently, hinders the efficient use of their property. 37. The following should be considered: * Repealing the legal restrictions on debtors' use of collateral while a loan is outstanding, leaving this to the free agreement of the parties. * Providing better protection to creditors by expanding their collection rights. * Providing adequate, comprehensive safeguards to protect debtors through civil (and, if found to be actually necessary, criminal) penalties for wrongful seizure and other creditor abuses. E. Problems in Using Inventory and Accounts Receivable as Collateral for Loans 38. Inventory comprises a substantial part of the capital stock and investment of any country. Its financing can make a large difference in the cost of doing business and the speed with which profitable businesses can expand. Accounts receivable, similarly, represent a substantial fraction of the assets of most companies. How they can serve as collateral plays a key role in whether a company can transform wealth into liquid funds to finance operations at a lower cost or expand its operations more rapidly. 39. Financing inventory and accounts receivables requires careful legislative drafting and specific definitions; for example: * Can the collateral be described in general terms (such as all refrigerators in the debtor's inventory or all cows owned by the debtor from time A to time B)?; or must the inventory be described individually (refrigerators with specific serial numbers, cows with identifiable brands)? Requirements for the description of collateral are important elements of the concept of the floating security interest. 47 Similar legal restrictions on the debtor's disposition of collateral were found in primitive Roman law but were later abandoned. John H. Wigmore, "The Pledge Idea," 11 Harvard L. Rev. 18, 31 (1897). - 14 - * Can future (after-created or after-acquired) inventory secure a loan? If the property to serve as collateral is being manufactured, can the new property still secure the loan? Are parties allowed to create security interests in after-acquired property? * Can accounts receivable serve as collateral without being transferred to the lender? Such transfer is an impractical expense for businesses with many small accounts and often a poor business practice even for large accounts. That is, can security interests in intangibles such as accounts receivable be the objects of a security interest? Can such security interests be registered? * Does the security interest continue when the inventory is transformed into product, as would be expected in the ordinary course of business? Does the creditor automatically get a security interest in proceeds in whatever form from, say, the sale of the refrigerator? This requires provision for extension of the security interest in original collateral to the proceeds of that collateral. * When inventory or accounts receivable secure a line of credit for a borrower who periodically draws on and pays off part of the line of credit, will the creditor maintain the same priority in later advances as the rank secured when the first advance was disbursed? For example, will a lender who secures a first priority credit line on wool inventory -- which is followed by another lender's loan with a secondary claim - lose his priority with respect to subsequent advances on the initial credit line? This requires the statutory expression of the coverage of security interests of future advances and a specific rule that protects the priority of the security interest with respect to future advances vis-a-vis subsequent, inferior security interests and judicial liens. 40. When the law recognizes general collateral descriptions - such as security interests in shifting masses of collateral and in proceeds, coverage of future advances, and after-acquired property clauses - the secured party can make present and future advances to the debtor secured by inventory and accounts, acquired before or after the debt. In such a framework, the secured party never loses the security interest by reason of the debtor's disposition of the collateral. Rather, the security interest continues in the proceeds of the collateral, whether as cash, accounts, conditional sales, contracts, notes, or other property. When the creditor takes accounts as collateral, he has no need to notify debtors or to make any new filings in the registry. The creditor may continue providing future advances while maintaining the original priority against the collateral. This flexible and valuable type of financing is not presently sanctioned by Argentine law. - 15 - 1. Floating Security Interests 41. Many countries provide for a floating security interest that attaches to any movable property that satisfies a general description. When any piece of such property is sold and replaced, the security interest remains intact. Secured creditors do not need to re-register the security agreement; rather, they regularly inspect the value of the inventory. Thus, floating security interests permit debtors to use their inventories of merchandise or raw materials as collateral for loans without impeding their sales, their pledges to other creditors, or the normal rotation of their stock. 42. With floating security interests, secured parties do not care whether individual goods leaving the inventory by ordinary sale do so free of their security interests. They do not lose their security interest; rather, it continues in the new property that replenishes the inventory, or in the cash derived from the sale of the inventory, or in other proceeds, including other goods purchased with the proceeds of the original inventory. By allowing the sale of goods in the ordinary course of business, free of any security interest, the law permits the debtor to continue his normal business activities. This facilitates trade while limiting lender and creditor risk. 43. However, Argentine law permits a security interest to float only in limited situations: * It permits a floating security interest only in goods or raw materials held by a commercial or industrial establishment." Other types of property cannot serve as collateral under a floating security interest.49 For example, farmers in Argentina may not create a floating pledge against cattle.s0 * It limits the transactions that may be secured by a floating pledge. It allows only present or future loans for up to 180 days, implicitly prohibiting new collateral to secure past debts.s1 * It restricts floating security interests to collateral produced and used 4a PL, art. 14 (prendaflotante). See c6D.CIV. art. 3217, PL, art. 11(d), which requires that the security interest attaches to a specific, identified piece of property and may not otherwise lie in a group of goods. Manual de Procedimientos Administrativos, art. 84 (bienes): "es imprescindible que los bienes gravados est6n perfectamente individualizados en el contrato prendario, de acuerdo a las siguientes normas ... n) si la prenda recae sobre ganados, estos serdn individualizados mediante indicaciones sobre clase, nimero, edad, sexo, grado de mestizaci6n, marca, sefial, certificado o gufa con menci6n del nimero de inscripci6n y fecha; oficina en la que la marca o sefial esti registrada y la que haya expedido la guia o certificado.... 87)... si los bienes no fueran fungibles deberdn ser identificados..." 51 PL, art. 14. - 16 - in the normal course of business, such as woolen yarn used to produce carpets.s2 * When the law provides for warrants, the creditor keeps the debtor's goods in a warehouse and the law prohibits the commingling (mixing) of these goods with other goods in the warehouse. This explains why Argentines use warrants for sacks of sugar stored in a silo and not for grain stored in a silo: the sacks of sugar can be identified and locked in the warehouse, while the grain rotates53 44. Legal scholars in Argentina have taken a restrictive view of a floating security interest. They refer to it as an "error of legal technicality" because the security interest does, not permanently attach to a specifically identified piece of property.' This restrictive view comes from the original concept of a pledge - a security interest in a specific item of property of the debtor, given to the creditor to secure a specific debt. This original concept, however, does not serve modem commercial needs.'s In those countries where they exist, floating security interests expand merchants' access to credit by permitting their inventory to serve as collateral." Options for Solution 45. No obvious public policy issue arises here: no apparent social gain exists in hampering floating security interests. To permit and facilitate floating security interests, the law should permit a security interest against "generally described" collateral and not require that the security agreement identify the collateral in detail. Zavala Rodriguez, C6D.COM. t.E[: 301-302 No. 312. Law 9743, art. 4 (warrant). Alvo, Prenda con Registro, t. II: 7, no. 326. Alejandro M. Garro, "The Reform and Harmonization of Personal Property Security Law in Latin America," 59 Rev. Jur. U.R.P. 45 (1990) (hereinafter "Reform and Harmonization"). "There are special problems in attempting to create a security interest in goods held as inventory for sale. Among these are the difficulties of describing the specific units subject to the security interest, the question of how these units of inventory purchased to replace those sold in the ordinary course of business become subject to the security interest, and the conflict between the purchaser in the ordinary course of business and the secured creditor. If it is considered desirable to facilitate the use of inventory as collateral, special rules on these and related matters would be necessary to make it feasible to do so." Report of the Secretary-General: security interests; feasibility of uniform rules to be used in the financing of trade (A/CN.9/165), UNCITRAL Year Book, 1979, X: 85. - 17 - 2. Risks in Using Future Goods or Accounts as Collateral for Loan 46. In some countries, security agreements provide that any and all obligations described in the security agreement can be secured by after-acquired collateral. Such collateral includes tangible and intangible property acquired in the future and described by security agreements: for example, "all inventory now owned or hereafter acquired by debtor."57 47. A key economic advantage arises from provisions for after-acquired property clauses: they permit debtors to use as collateral property they do not yet have without stipulating the exact nature of the property or the time of its arrival. Such possibilities reduce transactions costs: the change in composition of the collateral occurs under the original loan agreement. It is not necessary to rewrite, amend, or re-register the security agreement as the underlying collateral changes. Consequently, it is a crucial stipulation for financing inventory. Such a security agreement can cover final sales whose composition changes, such as cars or clothes; it can also cover manufacturer's inventory of raw materials, unfinished goods, and finished goods, where the nature of the inventory changes. 48. In countries where inventory financing is flexible and inexpensive, accounts receivable financing would typically include an after-acquired property clause permitting a debtor to secure a revolving line of credit not only with the present accounts of his credit sales, but with accounts acquired in the future as well. 49. Permitting the use of after-acquired property as collateral reduces the transactions costs associated with the security agreement. Parties to the transaction need not continually enter into new security agreements to cover replacement inventory as old collateral is sold and new collateral is received. The after-acquired property clause permits a creditor to maintain his priority position established with his first registering. 50. Argentine law effectively prevents after-acquired property from serving as collateral. It requires that a debtor own and possess the collateral from the moment the security interest is created.5 The rationale for this restriction arises from the concept in pledge law that one can pledge only what one owns.59 Under this concept, if the pledgor does not own the collateral at the time of the creation of the pledge, the security Another illustration is: "all accounts due or to become due to debtor," or "all furniture and equipment in debtor's restaurant together with all property and articles that may hereafter be used or mixed with, added to or attached to or substituted for, any of the foregoing property." see C6D.CIV. arts. 3213 and 2316. see C6D.CIV. art. 3270. - 18 - interest is unenforceable." Some writers have argued that the pledge could become valid at the later time when the debtor became the owner of the pledged property. However, even in those situations, the courts have held that the creditor could not have priority from the earlier time that it registered the pledge, but only from the later time when the debtor became the owner of the collateral. 51. The current framework in Argentina, therefore, creates many risks for the secured creditor. Will a secured creditor have priority from the time he registers his pledge? or, only from the later time when the debtor acquires the collateral? This ambiguity creates uncertainty and risk for potential lenders. It allows the possibility that the prospective possessor of the collateral will pledge it to other creditors during the intervening period and threaten the priority of the original holder of the security interest. 52. This ambiguity increases the risk in taking future goods and future accounts as collateral for loans in Argentina. This risk compounds difficulties in financing farming and manufacturing. For example, creditors will not accept as collateral a fixed pledge covering all cattle now and in the future possessed by a farmer; or the future accounts receivables of a business. 53. The Experience in the United States. In the United States, some experts opposed the after-acquired property clause of UCC9 because it permitted debtors to pledge all their present and future assets without limitation. Some scholars argue that protection of both the borrower and the borrower's creditors requires that the borrower preserve a cushion of free assets 61 Indeed, before enacting the Uniform Commercial Code, U.S. law did not permit the floating pledge. 6D This premise has been uniformly held by the appellate courts. If the grantor of the pledge was not the owner of the collateral the pledged contract is null. CNCom, Sala B, November 24, 1980, JL, X-1001, Vote of Dr. Martire, Morandi and Williams and CNCom., B, December 9, 1960, LL, 103- 172. "1 See Keith G. Mayer, "Should the Unique Treatment of Agricultural Liens Continue?," 24 Ind. L. Rev. 1315 (1991). - 19 - 54. However, this policy proved ineffective. Rather, a number of exemptions to the general rule were developed in order to better protect debtors.' Appropriate exempt-property provisions could provide the debtor with adequate safeguards. Moreover, an after-acquired property clause would not encumber debtors forever. They may acquire new goods on credit if the law gives superiority to purchase money security interests.' The same approach may better serve Argentina. Options for Solution 55. These requirements arise as a natural consequence of a segmented system of security interests in movable property. The segmentation of security interests in Argentine law makes priority unclear. Therefore, it should use "ownership" in order to keep the claims straight. Under such a framework, a creditor taking a pledge should require that the debtor own the collateral so that the creditor can be sure that other claims against the collateral do not exist. For example, in Argentina the ownership claim of a financial lessor or a consignor is not covered by the pledge law and does not require registration. Therefore, it might not be known to a secured creditor. Argentine law attempts to solve this problem by requiring that the debtor own the collateral. 56. Other systems, treat any transaction entered into for purposes of securing a loan with movable property, regardless of its form, as a secured transaction. Such systems make these transactions subject to a uniform framework of registration and priority. Requirements that the debtor own and possess the collateral become obsolete. Such a system should provide that: * A secured transaction will include all transactions, regardless of their form, entered into for purposes of security. * The debtor need not own the property used as collateral but only have some rights in it. "The widespread nineteenth-century prejudice against the floating charge was based on a feeling, often unstated in the opinions, that a commercial borrower should not be allowed to encumber all his assets present and future, and that for the protection not only of the borrower but of his other creditors a cushion of free assets should be preserved. That premise has much to recommend it." This article decisively rejects it, not on the ground that it was wrong in policy but on the ground that has not been effective. U.C.C. §9-205 cmnts. 63 Originally, Article 9 prohibited a security interest under an after-acquired property clause from covering crops that became such more than one year after the security agreement was executed, except when given in connection with a real estate transaction such as a lease, land purchase, or land improvement transaction, evidenced by a contract, mortgage, or deed of trust. This provision was contained in section 9-204(4)(a) of the 1962 version of Article 9 and was varied in a number of state enactments. However, it was regarded by many as unworkable and was eliminated in the 1972 version of Article 9. - 20 - The debtor need not possess the collateral at the time of creation of the security interest. 3. Lack of Registration of the Transfer of Accounts Receivable 57. Receivables financing creates loans based on security agreements that take as collateral the underlying accounts receivable of the business (such as facturas)." Receivables financing is essential for businesses whose sales generate accounts. By transferring accounts, businesses obtain the cash necessary to purchase more inventory and generate even more sales. Where such financing is possible, it permits credit to expand rapidly in response to the needs of the business. By contrast, the value of the firm's real estate and, consequently, its mortgage, need not rise with sales. 58. Receivables are often the only unencumbered floating assets a debtor has available to secure a loan for working capital. A defaulting debtor's receivables are often the only collateral with any value which a secured creditor may quickly convert to cash in satisfaction of the debt, either by collection or by foreclosure. 59. A system of accounts receivable financing typically rests on a large number of small accounts. To succeed, therefore, it requires inexpensive procedures for (i) assigning the receivables, (ii) physically transferring the related documentation, and (iii) making public that a lender has encumbered the receivables with a security interest by registration in a public registry. 60. Argentine law does not provide for such a system. Rather, it provides for three different possibilities, each of which is expensive and risky. Consequently, they are used infrequently 61. Argentine law provides for a pledge in accounts receivables embodied in a negotiable instrument. This costly and limited system requires that the borrower endorse and give physical possession of each instrument to the lender. Once the borrower has given negotiable instruments as collateral, he can no longer rotate them. For example, suppose a store generates $1000 in accounts receivable every month. In May it pledges 6* Under U.S. law, an account is any right to payment for goods sold or leased or for services rendered not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. An instrument generally means a negotiable instrument. Chattel paper is a writing or writings evidencing both a monetary obligation and a security interest in or a lease of specific goods. The obligation of the account debtor may be supported by a letter of credit. Financing of "accounts" depends on the general collection system of the company, how soon it knows that a client has not paid, how soon it sends a notice of default, or how soon it initiates collection procedures. Chattel paper financing involves the same issues, but also offers the financier the added protection of the security interest in the sold or leased goods. - 21 - the $1000 for May; at the end of May it pays off the $1000. it pledges the $1000 for June and gets another loan. So it always has debt of $1000 against its accounts receivables. The problem arises in that it must renegotiate the loan monthly. Moreover, if forces clumsy changes in dealing with customers. For example, the store may be locking in receivables due in 40 days with a 30 day loan because many are due in 30 days. Or the store may impose the same terms to all clients so that it can renegotiate receivables at the same time. To rotate such negotiable instruments in Argentina, parties would need to create a special purpose corporation. The high costs involved in that arrangement become prohibitively costly for small lenders. Moreover, by giving possession, a borrower may obtain financing with only one lender, since only one lender at a time may take possession. 62. Argentine law also provides for using accounts receivables as collateral by assigning the rights to receive payment. However, it is costly because it requires notifying each account debtor. 63. Finally, Argentine law provides for a pledge in accounts receivables. However, since that system has no public registration for any claims in accounts, a lender has no way to determine or publicize his priority. For example, Argentine law does not require that assignees of accounts receivable register in a public registry to have priority to collect against the accounts. Consequently, potential creditors can never learn if another creditor has a better claim in those accounts. 64. Suppose, for example, that a borrower transfers accounts to a lender but continues to collect payment on the accounts for the secured creditor, thus giving the appearance that the accounts have not been encumbered. This is often a desirable business practice, because customers (the account debtors) often dislike the idea that their account has been transferred to a third party, may fear dealing with the third party, and may take the assignment as a sign of financial distress of the borrowing firm and shift their business elsewhere. However, this very appearance of "normality" permits the borrowing firm to pledge those accounts receivable elsewhere because potential creditors cannot check a public register to learn if another creditor has a prior claim in these accounts. 65. Aware of these problems, lenders will not make these loans. These problems limit access to credit. Some businesses have many small accounts. Often they represent important channels in providing access to credit for small businesses and the poor. While these small accounts receivable, taken individually, are not of interest to a bank or a finance company, they may collectively serve as collateral for a larger loan. This instrument permits bridging, therefore, between the collateralized systems of the formal sector and reputational systems that small rural businesses use to make loans and sell on credit. - 22 - Options for Solution 66. To facilitate accounts receivable financing, the law should specifically provide that a security interest may attach to accounts and other intangibles. It should permit the inexpensive transfer of the accounts by eliminating requirements for endorsement and notification of the account debtor. Instead of requiring notice to the debtor to rank a creditor's priority, the law should set the rank of priority of creditors by providing for the registration of any security interests or transfer of accounts in the registry. It should give priority to the first creditor to register. 4. Security Interests in Proceeds 67. In some countries, the law allows security interests to continue in the proceeds of the collateral. That means that the original security interest is not lost when the collateral is transformed in the ordinary course of business, such as when a business transforms wool into rugs and rugs into cash, all of which constitutes proceeds of the original collateral. 68. Proceeds include whatever is received from the sale, exchange, collection, or other disposition of collateral including insurance recoveries from loss or damage." Continuation of security interests in proceeds of collateral permits the use of inventory of raw materials held for manufacturing, or of finished products ready to be exchanged or sold, as collateral for loans. 69. For example, suppose a car dealer gives to a bank a security interest in his inventory of motor vehicles. When the dealer sells a car to a buyer, the buyer pays a cash down payment, trades in his old car, and leaves a check for the balance. The cash, traded-in car, and check are all proceeds of inventory collateral.' If the dealer defaults, the creditor can seize and sell any of these proceeds under the terms of the original security agreement. 70. Argentine law has not developed a broad concept that security interests can continue in the proceeds of collateral. Rather, in Argentina, if the collateral transforms, the creditor would probably lose his security interest. 65 Academic meetings, specially in the Province of Buenos Aires (XI and XVIII "Encuentros of the Institutos de Derecho Comercial de la Provincia de Buenos Aires" in Bahia Blanca 1988 and Necochea 1993) and in the Province of San Juan (by A. Alvo), have already proposed registration of accounts receivable financing undertaken with facturas. 66 U.S. law adopts this broad definition of proceeds under U. C. C. § 9-306. 67 When the traded car is sold again by the dealer, other proceeds arise from that sale and might be considered as proceeds of proceeds in connection with the original sale of the new car. - 23 - 71. Argentine law provides that a pledge continues in proceeds only if the proceeds are new property that arise in the normal course of business, if they are payments to the debtor under an insurance policy on the collateral, or if the proceeds are producers of the collateral and the debtor still has possession of them.61 If goods transform in any other manner, the debtor will have committed a criminal offense, and the creditor will have lost his security interest. The creditor will be left unsecured. Options for Solution 72. A law that would allow security interests to continue automatically in proceeds of collateral would expand access to credit by reducing a lender's risk in securing loans with movable property. To be most useful, the law should define proceeds as anything received from the sale, exchange, collection, or other disposition of collateral or the proceeds of proceeds, including insurance recoveries due to loss or damage. It should make no distinction about whether those proceeds arise in the normal course of the debtor's business. 73. The law should not require that the security agreement make a specific reference to proceeds; such a requirement would more than likely be a trap for a secured party who was careless in drafting the security agreement. Rather, the law should provide for automatic continuation of security interests in proceeds. Then if the parties disagree, they may exclude such proceeds in the security agreement. 5. Problems in Future Loan Advances 74. In some countries, obligations secured by a security interest include obligations to advance future funds as needed, whether or not these advances were contemplated in the original security agreement. For example, this is how a secured line of credit would operate in the United States. 75. For future advances to become an important source of financing, the law should assure creditors that they can maintain their original priority in the collateral. Otherwise, the security for future advances could be lost to intervening creditors who registered a security interest in the same collateral after the original registration but before the future advances were disbursed. a8 PL, arts. 3 and 8. See also CAmara, p. 337. The doctrine of "subrogaci6n realr (C6D.CIV. arts. 2567-2600) would technically support continuation of the security interest in the proceeds of the collateral under these provisions. However, in practice, this principle has not been used for pledged collateral, given the limitations set out in Articles 3 and 8 of the pledge law. -24 - 76. Argentine law permits securing future obligations under the general principles applicable to contractual and conditional obligations.' However, the amount secured must be certain - fixed in sizeo. Moreover, the priority of future advances of a security interest are established only when the first payment is due or when the advance is actually made, not when the original security agreement was signed and perfected. 77. These legal usages derive from the rules that define a security interest as ancillary to a debt, and provide that a security interest should not exist without a debt to secure, and that a debt to secure should not exist until disbursed.7 This means a future advance, or future debt, cannot have its priority established against collateral until it is actually disbursed. Although logically attractive, this reasoning does not conform to business needs and practices. Parties will often be unable to determine the amounts they will need to draw in the future. Moreover, even if they did specify that amount, the rank of priority of a future advance could be lost to intervening creditors who registered after the original registering but before the future advances were disbursed. 78. The development of the home equity loan market in the United States, for example, required addressing this problem. Suppose a borrower goes to bank A for a home equity line, secures it with a second trust, and draws down half of the line. Suppose then that the borrower goes to bank B for a loan secured by a third trust. Finally, suppose the borrower draws the other half of the credit line secured by the second trust. Under US law in most states, the second drawing on the home equity line would still be treated as a second trust. Under Argentine pledge law, it would be treated as a fourth trust. From the point of view of bank A, this series of legal and potentially innocent transactions have left it with a much more risky loan that it contracted for at the outset. Options for Solution 79. The law should clearly sanction security agreements that provide for future advances of uncertain amounts. The uncertainty of the amount secured would not necessarily leave other creditors without protection. Third parties that want to contract with the debtor could request that he provide them with any details of the security agreement, including the present and potential amounts secured. If the amount is unlimited, they can request him to limit it as a condition of getting their financing. This 69 See, for example, PL, arts. 1 and 14. The principio de especialidad (C6D.CIV., art. 3109), however, suggests that it may be permitted only up to a certain amount specified in the security agreement filed in the registry. Muguillo, Rigimen General de la Prenda con Registro, 20, 1984. C4mara Nacional de Apelaciones en lo Comercial, sala A. July 29-1983, La Ley 1983-D-584. 71 Cmara, Prenda con Registro o Hipoteca Mobiliaria: 199, 1961, except for possessory types of security interests (Cimara, Prenda con Registro 1961: 204). - 25 - structure has the advantage of providing for maximum publicity of security interests in a public registry, while at the same time allowing parties to protect the privacy of their financial transaction by registering limited information -- the existence of a security interest exists and its rank of priority in time, but not its amount. 80. Moreover, to reduce lender's risk, the law should provide that secured future advances have priority at the time of registering the security interest in the registry regardless of when future advances are disbursed. This will permit lenders to offer lines of credit secured by inventory, accounts receivable, or any other movable property of the debtor. In Argentina, priority of future advances is only provided for in secured lines of credit guaranteed by real estate. Extending the law to permit property other than real estate as collateral for secured lines of credit would reduce the interest rates that Argentine business farmers currently pay. This would greatly help access to credit for businesses and farmers who do not own unencumbered land. F. Fragmented Legal Framework of security interests 81. Apart from the pledge, Argentines have developed other forms of security devices. Although they are not clearly sanctioned as secured transactions under the law,' there is no doubt that they are formed for purposes of security. The most important example is the credit sale, which by law carries a vendor's lien. 82. Often these devices, such as a credit sale or a lease, give creditor-vendors a privilege or priority in the goods sold or leased and in the cash proceeds of those goods if they are disposed of. In other cases, the creditor retains his name in the certificate or title of the goods sold which is registered in a public registry. For example, some dealers interviewed kept their names as owners in the title to an automobile sold on credit until the balance due on the sale was paid.' 83. In Argentina, the system of privileges has some advantages, but for several reasons it has not provided a viable framework for financing movable goods.' In Argentina, there is a great deal of controversy on whether the vendor's lien or privilege is a security interest. See Beatriz Arian, Curso de Derecho Reales, Abeledo-Perrot, 1992, at p. 619. This may not be enforced in court, as Argentinean law does not recognize a sale with retention of title. However, it is a preferred practice. "[The vendor's lien or privilege] comes into existence by operation of law if a seller is not paid for the goods sold; its effects are generally limited to the time during which the goods sold remain in the hands of the buyer. However, even during this period the privilege is generally not effective in the buyer's bankruptcy. It is this lack of effectiveness for all third persons that diminishes the practical value of the seller's privilege, making it merely a second-rate security device." Prof. Drobnig Ulrich, Report of the Secretary General: study on security interests (A/NC.9/13 1), Yearbook of the United Nations Commission on International Trade Law, Volume VIII, 1977: 175 [hereinafter UNCITRAL Yearbook]. -26 - 84. First, the privilege or priority, unlike the pledge, cannot follow the goods when they are transferred to third parties. This is particularly disadvantageous in financing goods such as heavy machinery and automobiles, which maintain their value and may be sold many times. 85. Second, no registration system exists for liens against collateral. The provisions of the pledge law that require registering in a public registry do not apply to other security devices like financial leases or conditional sales. In this respect, Argentine law is less developed than that of other civil law jurisdictions. For example, Quebec statutes do require registration of a conditional sale;15 an Uruguayan leasing law requires registration of a lease contract in the pledge registry." This lack of registration for other security devices threatens secured creditors with a pledge or mortgage, as they may be losing their rank of priority to unknown lien creditors. 86. Finally, the priorities among the different creditors may be unfair. There is no apparent reason why a financial lessor should have a different priority than a pledgee, or why that priority should be governed by different default provisions. Options for Solution 87. A new law on secured transactions that regulates a generic security interest should apply to all other transactions, regardless of their form, that are created for purposes of security. 88. This modem approach towards a broad application of the laws on secured transactions recognizes substance over form. The law should not question whether the transaction is a pledge, a lease, or a conditional sale. The law should determine whether or not the transaction provides a creditor with security for the repayment of a debt against a specific asset of the debtor. Furthermore, what the parties themselves choose to call the transaction should be legally irrelevant. The law should treat all creditors 75 The acts typically provide that where a sale has been made reserving title to the goods in the sellers with possession delivered to the buyer, the agreement or a true copy must be filed or registered in a particular place, within a specified time. Dellas W. Lee, "International Secured Transactions: United States and Canada," 17 Buff. L. Rev. 85, 102 (1967). 7 See Uruguay, Law No. 16072 of 10.9.89, arts. 7 and 8. 77 The distinction between "title-type secured transactions" and "pledge-type secured transactions" disguises the fact that a lender who makes a purchase possible deserves a similar priority status as a seller who is not paid. This priority position should be based on the economic function of the security interest: to facilitate the availability of credit to enable the debtor to purchase goods rather than on the basis of whether the creditor happens to be the owner of the collateral. The assimilation of the priority status of sellers and the purchase-money pledge or mortgagee will be an important step forward in the modernization and harmonization of personal property security law in Latin America. See, Alejandro M. Garro, "Reform and Harmonization." - 27 - uniformly regardless of the specific form of the transaction.78 1. Specific Problems in Leasing and in Accounts Receivable Financing 89. Some unique problems arise in distinguishing which transactions qualify as security devices and should be governed by the secured transactions legal framework. 90. Leases. When is a lease used as security and when is it a true lease? The line separating a functional security from a short-term rental is peculiarly difficult to discover. A legal reform may consider three approaches: * The issue could be left unresolved by statute, leaving the courts to decide on a case-by-case basis. This is the approach followed in Ontario, Canada.' However, it may create litigation. * The law may include distinctions based on a sophisticated list of criteria, including the expected duration of the lease.0 * Finally, the law may set an arbitrary maximum duration for non- security leases. Any lease that lasts longer than the maximum would be deemed to be a security lease." 91. Accounts Receivable. Argentines will find it practically difficult to distinguish between a transfer of accounts receivable as collateral for a loan and a transfer of accounts for any other purpose. Therefore, some modern statutes overcome this problem by requiring registration of any transfer of account receivables with exceptions for bulk assignments following the sale of a business and for assignments to debt collection agencies. 78 This approach is also followed by the United States in Section 9 of the Uniform Commercial Code. See U.C.C. § 9-102, Official Comments. 79 Personal Property Security Act 1989, S.O. 1989, c. 16, s.2(a)(ii): "a lease that secures payment or performance of an obligation," an earlier version of the act provided "a lease.. .intended as security." so 1988 edition of the U.C.C. § 1-201(37). 91 M.G. Bridge, "Form, Substance and Innovation in Personal Property Security Law," 1992 J. Bus. L. 1, 11. - 28 - I. Problems in Perfecting Security Interests 92. Public notice of a security interest establishes a creditor's rank of priority in the collateral. The practical importance of public notice arises from the protection the law gives to a secured creditor who gave public notice; from that time he will generally have priority to collect against the collateral. 93. However, not all means of giving public notice have that effect; perfection is the means that the law considers as legally giving public notice. Perfection occurs in different ways. The first to develop in Argentina was possession. The fact of possession by the creditor is open and public, so the law considered that this fact gives public notice, and it granted priority to collect to a creditor that had possession of the collateral. 94. This perfection method, however, required debtors to give up possession of the collateral while the loan was outstanding. Therefore, a debtor could not use that property. 95. Consequently, Argentines adopted a registered pledge law (later followed by the current pledge law). The perfection method under this law followed the system established for real estate transactions: It permitted a debtor to keep possession of the collateral while providing that the creditor would give public notice by registering his security interest in the pledge registry.82 Then the law granted priority to the creditor who first registered. 96. Broadly speaking, there exist two means of perfection of claims against movable property under Argentine law: possession and registration. The law establishes that the first creditor to perfect under either means will have priority in the collateral. Thus, problems in perfection make a creditor lose his priority position to collect against the collateral. This section discusses these problems. A. Problems in Perfecting through Possession 97. Argentine law includes two types of security interests where the creditor must perfect his security interest by taking possession of the collateral: the civil pledge and the commercial pledge. The civil pledge is the security interest most commonly used by pawnshops, and the commercial pledge is the one most commonly used in warehouse receipt financing. Both present several problems. 92 Publication in a bulletin or newspaper and registration in the merchants books are other methods of giving public notice, but these have not been adopted in Argentine law. - 29 - 98. Pawnshops. There are no pawnshops in Argentina. Under current legislation, the judicial process required by law for selling collateral after default is too slow and costly for the civil pledge to become a useful means of financing." A creditor must initiate a suit and obtain a court order before judicially selling the pawned collateral. 99. Warehouse Receipt Financing. Few farmers in Argentina finance goods stored in warehouses through a warrant -- a negotiable instrument issued in connection with the warehouse receipt and always attached to it. This instrument creates a security interest against the goods listed. 100. The law forbids authorized warehouses, including grain elevators, to issue warrants if they trade goods similar to those taken for deposit. Since most warehouses or grain elevators undertake such activity, they may not issue warrants." An exception permits wineries to trade goods of the type taken for deposit." Not surprisingly, wineries were one of the few businesses mentioned to be trading warrants. 101. The legislation that governs warrants has the following disadvantages: * Only one security interest may exist against specific collateral." * The warrant may not be issued in blank; it must always be issued in the names of a specific debtor and creditor." * High costs arise in foreclosing on a warehouse receipt by public auction. * The goods must be locked up and may not be rotated. This explains why the warrant is used for non-perishable sugar but not for perishable grain. * The only registration of the warrant is in the books of the warehouse; there is no public place to record the security interest, nor does the law provide for public access to warehouse registries." 83 The court administers the sale. The creditor may obtain a court order for a privately administered sale only for goods of less than 200 pesos. C6D.CIV. art. 3224 (civil pledge). 84 Law of warrants, art. 3. 95 Law of warrants, art. 32. * Law of warrants, art. 7(2). 87 Law of warrants, art. 8. *9 Law of warrants, art. 11. - 30 - * A security interest in the goods deposited in a warehouse may be created other than by taking a security interest in the warehouse receipt. For example, if one creditor has the warehouse receipt endorsed to him and another has taken possession or has filed in a public registry, then no rules establish which creditor would have priority. Moreover, the law does not preclude taking other security interests in the goods when a warehouse receipt has been issued. * Finally, warrants may be issued only in tangible form, such as a manual record in the warehouse books." If the law were to allow warrants issued in intangible form, it would have to provide for registration in a public registry. Otherwise it would be impossible to determine whether a security interest exists in the goods. Options for Solution 102. The proposed legal framework should overrule the specific restrictions found in the law of warrants. Providing for private sale will reduce the risks of collecting debts under these possessory types of secured transactions. Also, the restriction on registering warrants should be repealed. The proposed legal framework of floating security devices will also benefit possessory types of secured transactions, such as financing through pawnshops (which do not now exist) and warehouses. 103. Registration of warehouse receipts and warehouse receipt financing also requires specific rules and uniform automation guidelines applicable to all warehouses. B. Problems in Perfecting by Registering in a Public Registry 104. In non-possessory security interests, where the debtor retains possession of the collateral, the creditor registers his interest in the collateral in a pubic registry. The agreement is not perfected until it is registered in the appropriate registry giving notice to third parties that a security interest exists. These secured transactions are most important since they permit a debtor to make use of the collateral, as with a tractor or with other items of farm machinery.' Thus, modem financial practice calls for the 99 The drafters of the law of warrants did not foresee that warrants be issued in intangible form. See law of warrants, arts. 6 and 8. 90 A study recommending the reform of the personal property security laws of England paid special attention to the non-possessory types: "...the only effective security over productive assets is non- possessory in nature: the debtor must remain free to use those assets in the ordinary course of trade." M.G. Bridge, "Form, Substance and Innovation in Personal Property Security Law," 1992 J. Bus. L 1. Prof. Catzman who undertook the drafting of Ontario's Personal Property Act acknowledged the importance of a filing system: "...we considered that the trouble with our existing statutes which commanded most urgent attention was that of registration of security interests. This problem - 31 - collateral to stay with the debtor in order to remain economically productive, while registering in the public registry provides adequate publicity of the security interest.91 105. In Argentina, registration establishes the priority of claims allowing potential lenders to determine whether other lenders have prior and conflicting claims to the same collateral. In the simplest example, perfection gives notice to other potential creditors that a prior security interest exists in the specific collateral. A borrower could grant another security interest in his property, but only one with less seniority than the first perfected security interest; and the creditor would have to decide whether to grant the secured loan subject to an inferior claim on the collateral. 106. Nevertheless, creditors in Argentina have unclear priority against collateral because of problems in the registration and retrieval of information from the registry. These problems threaten the development of the most crucial type of secured transactions. This section discusses the problems in registering and in filing information. 1. Problems in Registering Information 107. In Argentina, pledge registries are the legally designated places to register security interests in movable goods that do not have a licensing registry, such as television sets, farm equipment, shipping containers, and cattle.' The pledge registries are supervised by the Direcci6n Nacional de Cr6ditos del Automotor y de Cr6ditos Prendarios, an agency of the Department of Justice. A private party, usually a notary, is licensed by the Direcci6n to operate the pledge registry exclusively within a jurisdiction. Any pledge against a debtor domiciled in that area (in a floating pledge) or any pledge against goods located there (in a fixed pledge) must be registered in the pledge registry of the designated jurisdiction." 108. In a way, pledge registries have been privatized. The licensed registrars transcended all others because of its frequent incidence and its chaotic state. The determination of priority between perfected security interests depends mainly on registration. The granting of credit, both secured and unsecured, depends on the availability to the searcher of a total and accurate record..." Fred M. Catzman, W.C., "The Uniform Commercial Code in Canada," 1966 Bus. Law. 209, 216. 91 Zavala Rodriguez, C6digo de Comercio, t. m no. 291:287. 92 Security interests in licensed goods, such as cars, must be filed only in the licensing registry. That is, a pledge in a car must be filed only in the department of motor vehicles where the car's title is registered (DL 15438/46, arts. 12, 13, and 35; and DL 9722/60). Security interests in motorcycles, pedigreed horses, aircraft, and ships are filed in the respective licensing registries. The law requires that licensing registries annotate the security interest in the certificate of title (PL, art. 21). 93 See PL, art. 4, and CAmara, Nacional de Apelaciones en lo Comercial, sala C, November 12, 1980, en El Derecho 92-404. However, if other creditors filed within 24 hours, registration would be deemed to have taken place at the time the security agreement became effective (PL, art. 19). - 32 - operate the registries with their own resources and retain a percentage of the registering fees.' While they solely control registering and retrieving, they are governed by the Direcci6n, which sets registering and retrieval fees, specifies operating hours, approves the design of forms, and inspects operations." 109. At present, the registry operations have the following problems: 110. Their indexing system does not satisfy the needs of modern movable property financing. The registries use only a track index instead of both a track and a name index. The track index system requires identifying each movable good according to elaborate rules. This presents two sets of difficulties. First, in practice, the registries restrictively enforce the rules requiring the identification of the collateral. For example, all televisions must be indexed under "audio" and must include a serial number, year, trademark, and features. Television parts not yet identified and stored in a free zone warehouse may not be registered. Or, registries may not accept registering security interests in animals or farm products that cannot be easily identified. Second, this index system limits the search criteria. For example, it does not permit a search for any security interest against any property of a debtor. 111. The legal requirements imposed on the registries are troublesome. The registries provide the public with forms to fill out when the security agreement is registered. Still, the registry offices keep a copy of the security agreement," register a copy of the form, and manually enter the transaction into an index book.' If they enter this information in a computer system, they are still required to enter it manually into index books. The registry gives a registration time to each document submitted for registering. The law requires that registry officials register the contract and notify the creditor of completion within 24 hours." The registry also issues a pledge certificate, an acknowledgement on the reverse side of the form stating that the security interest has been registered. The registry must turn this pledge certificate over to the creditor within 48 hours." All this is done manually and in person because fax or mail is not allowed. 112. But manual operation is unnecessary and costly compared to a computer indexing system. Moreover, there is no need to register the whole security agreement in the registry in order to give notice that a claim exists. A potential lender can always ask the debtor to provide him with more information. Registries are overloaded with documents that may be damaged, destroyed, or that are redundant. The registrar deposits the balance in a public bank to the order of the treasury. 9 See Manual de Procedimientos Administrativos, Resoluci6n No. 119/93. 96 Manual de Procedimientos Administrativos, arts. 101-103 (inscripci6n). 9 It is called a filing system by extraction. See DR 10574/46, arts. 6 and 7. 9* PL, art. 20. 99 PL, art. 21. - 33 - 113. Finally, registration of security interests in goods that move between jurisdictions or against debtors that have many business locations requires multiple registering.'" Different claims are often registered in different registries, and registering a claim in the wrong registry typically invalidates perfection. A second secured creditor could convincingly claim that public notice was incomplete because notice of the first security interest was registered in a registry in which other potential creditors would not normally look. If a creditor misregisters his claim, priority on the collateral is lost.'0o 2. Problems in Retrieving Information 114. Argentine law limits retrieving information from the pledge registries. This reduces the economic usefulness of movable property as collateral. Two key limits exist. 115. Denial of Public Access. Registries in Argentina do not make the information fully public, but may provide information only to interested parties. This makes it difficult for a potential lender to determine if there are any superior claims in the collateral. Interested parties are narrowly defined as those with a prior interest in the collateral or those that the registries so identify at their discretion.'0 The law requires that requests for registry information be in writing. Registry authorities will not allow an interested party to inspect the registry records directly, the registry will issue a certificate of information on payment of a fee." Argentine scholars have also criticized this limitation to public access." 116. High Costs of Retrieving Information. Argentine law grants registry officials, who are in charge of registering information, exclusive responsibility also for retrieving information from the registers. Registry authorities guarantee the accuracy of the information they retrieve through a certificate. If registry authorities wrongly issue a certificate, they are liable under civil and criminal statutes to the injured party. Still, 1W The floating pledge must be filed in the registry office of the domicile of the debtor; the fixed pledge must be filed in the registry office where the property is located [PL, arts. 4, 12, and 16]. For many pledge contracts in goods located in different jurisdictions, the creditor needs to register only one pledge in the registry office where one of the goods is located [DL 15348/46, art. 12, para. 1]. In such cases, that registry office will send the information to the other registry offices. 10 According to PL, art. 12, the creditor who wrongly files will not have priority over other creditors who filed in good faith and without knowledge of the previous claim. In DL 10574/46, 9.13.46, art. 15. 10 DL 10574/46, 9.13.46, art. 18. 104 "la terminologfa del art. 18 nos demuestra que la publicidad del registro de contratos de prenda es limitada, pues las certificaciones e informaciones que produzca el Registro de Prenda deberAn hacerse; a) por escrito, y b) respecto de quienes tuvieran inter6s en el requerimiento, o sea un inter6s legitimo en la averiguaci6n del respectivo gravamen. De allf que esta publicidad deba considerarse mds una expresi6n de deseos que una efectiva puesta en conociniento del pdblico de los gravAmenes registrados." Fernandez, Prenda con Registro: 291, nos. 285-286. - 34 - this liability only offers relief if the licensed registrar does not have assets to pay for the damages arising from a wrongful registration or retrieval of information.105 Moreover, there is no competitive pricing for the retrieval of information. Only the registrar has direct access to the records. The certificate is always processed in writing and is expensive. A petitioner or his representative must physically go to the registry and must bring documentary evidence of his status as an interested party. The request for information takes several days, but errors seem to be infrequent despite the fact that most registries operate manually." Options for Solution 117. Some of these options address the problems identified; others will allow the system to adapt to a new and more comprehensive secured transactions framework. 118. Improve the Registries' Technical Functioning. The Direcci6n de Registros should introduce computerized indexing systems that identify secured interests by the name of the borrower and by the serial number of the collateral, and should permit public access to these records." Registry reform should distinguish between creating and computerizing an index - which is essential -- and computerizing record retrieval - which is desirable but not as urgent. These technical issues should be examined more thoroughly. 119. Notice Filing. A short form of the security agreement and a financing statement, should replace a copy of the entire security agreement. This is similar to the extraction system used for the pledge, but a financing statement requires even less information than the extraction system. The financing statement is a simple sheet in 105 Licensed registrars are not required to carry insurance. However, they may lose their notarial license, which was mentioned as posing a strong incentive in their good performance. 106 Errors in retrieving information could substantially harm a creditor's claim: the creditor may not request the repossession of goods bought in reliance of a mistaken certificate (Law 15348/46, art. 47). 107 See Alejandro M. Garro, "Recordation in Argentine Law," 15 Rev. Jur. U.I. 175 (1981); Douglas Whalan, "Immediate Success of Registration of Title to Land in Australasia and Early Failures in England," 2 New Zealand Universities L. Rev. 416 (1967); Paul R. Welshons, "The Mini- Computerization of an Abstract Office," Tile News, Feb. 1984:8; M. Scott Stovall, Efficiency 'From the Ground up,' Title News, June-July 1984; Beginning an Automated Title Operation, Title News, September-October 1985, p. 11; Herbert N. Morgan, Workshop: Automation in the Local Title Office (Future Office or Future Shock - the Office of the Future Contrasted with the Office of the Present), Title News, January 1984; Richard J. Oliver, Automation: What Agents and Underwriters Should Expect, Title News, January-February 1985:30; and David L. Drury, Computerization Increases Productivity, Title News, September-October 1986:13. p. 13. Different academic meetings, especially in the Province of Buenos Aires (XI and XVIII "Encuentros of the Institutos de Derecho Comercial de la Provincia de Buenos Aires" in Bahia Blanca 1988 and Necochea 1993) and in the Province of San Juan (by A. Alvo), proposed improving the operation of the registries including quicker proceedings and enforcing full disclosure to the public of registered information. - 35 - block or tabular form giving essential details of the security agreement. To balance the privacy rights of the parties and the notice demands of the public, the financing statement should disclose only that a secured party has a security interest in specified types of collateral owned by the debtor. Unless a copy of the security agreement itself is registered as the financing statement, which should be optional, third parties are told neither the amount of the secured obligation nor which assets are covered. If other creditors need more information, they may seek details from the debtor. Accordingly, the debtor should be given the right to demand from the secured creditor a statement of account and a list of collateral secured under the financing statement. 120. Notice filing should take effect from the date of registration. This permits registering a financing statement before the security agreement is actually concluded, and allows a single statement to cover the entire, continuous credit relationship of the parties. For example, a creditor may register a single statement with respect to an unstated number of future advances. 121. Other advantages of registering a financial statement form include the ease of uniform registration requirements among different registries and easier communication across frontiers. 122. Centralized Registering. Under local registration, the law must prescribe whether registration is mandated in the locality where the goods are located or in the domicile of the debtor, and whether parties need to reregister when the collateral is moved to another locality as may occur with agricultural machinery or trucks. 123. The problem becomes irrelevant if all registry offices that register security interests in movable goods are connected by computer, permitting parties to register and retrieve information at will. In such case, there is no need to reform the current structure of local pledge registry offices. 124. A central registration for security interest in goods, whether with a central computer or a linked network, gives creditors important advantages. Creditors can avoid confusion about where to register their security interests. With local registration, the appropriate registry depends on the domicile of the debtor or the location of goods. If creditors are unsure of where the debtor resides or where he has placed the goods, and register their interest in the wrong registry, they can easily lose their priority in the collateral. With central registration, creditors will register the security interest immediately after they enter the information into the central computer. Anyone can have easy access to the central computer with the necessary software and modem. A creditor will be able to record computer-to-computer transmissions. The system may require facsimile machines to comply with the legal requirement of the debtor's signature or it may set up a system where debtors are given notice of the registration and must, within a time framework, claim correction to any mistakes. - 36 - 125. Technical comparisons of the computer registry network systems will require a separate assessment. For example, there could be a central registry for the whole country equipped with a computer to store and retrieve essential registration data. Local offices could undertake registrations and searches, but not store the information. They could serve only as depots connected to a dedicated network with the main computer at the central registry. Registration at the local office would be transmitted instantaneously and would become effective when recorded at the central registry. 126. Improving Management in Local Registry Offices. The Argentine pledge registry system reflects a unique combination of private and public control. A thorough economic analysis of their operation suggests several ways to improve the institutional organization of Argentine pledge registries, to achieve a sustainable and efficient registration system for the entire country. In one clever proposal, which merits consideration, introducing fuzzy boundaries between districts would introduce competition and increase consumer welfare without introducing any further regulatory regime or otherwise radically altering the existing structure of the Argentine pledge registries. 108 0 See Gianluca Bacchiocchi, Astrid Dick, and Gabriel Loeb, Maximizing the Social Surplus Within the Politically-Constrained Argentine Registry System by Increasing Efficiency and Distributional Equity between Registries and Consumers [Processed, The World Bank, 1994] - 37 - IV. Problems in Enforcing Security Interests 127. Based on investigation of about 400 debt collection cases, it appears that it takes about two years to repossess and sell the collateral that underlies a security interest in movable property in Argentina." The law requires that the creditor initiate legal action before the appropriate court. Generally speaking, a creditor may obtain a court order for seizure and sale of collateral only after the court renders its final decision on the case. The creditor is then paid after the collateral is seized and sold, and after the court approves the distribution of the proceeds of the sale of collateral. Exceptions to this procedure are rare. 128. The delay in enforcing security interests arises from procedural rules for seizure and sale of collateral that require substantial court involvement and that treat the process as a judicially litigated case. This also makes the process very costly. 129. A creditor must follow two set of rules to enforce a non-possessory edge: first, he must seize the collateral; he must sell it. This section explains the problems in these two stages, seizure and sale. Enforcing possessory pledges will not require seizure -- the creditor is already in possession of the collateral. However, they will require the second step, the sale of the collateral. 130. The applicable enforcement rules may vary according to the type of pledge and the qualification of the creditor. A creditor with a fixed or floating pledge will follow the acci4n ejecutiva prendaia.no The first final holding of this process will conclude with an order for the seizure and sale of collateral. The second stage will conclude with a public auction (public sale) and thereafter with the distribution of the proceeds of the sale to the creditor, after approval of the statement of the liquidated amount due. This chapter discusses only the acci6n ejecutiva prendaria process. Other legal procedures apply to collection under other contracts."' A. Problems in Seizing Collateral 131. A creditor pledgee will follow the acci6n ejecutiva prendaria to seize the collateral. The acci6n ejecutiva prendafia seems to set out a short procedure. However, a close examination of the procedure reveals several delays. 109 Nuria de la Peia and Roberto Muguillo, Case Disposition Tune for Seizing and Selling Movable Property in Capital Federal Commercial Courts [Processed, The World Bank, 1995]. 110 PL, art. 26, and Law 21309, arts. 4 and 5. Nuria de la Pefia and Roberto Mugillo, Case Disposition 7me for Seizing and Selling Movable Property in Capital Federal Commercial Courts [Processed, The World Bank, 1995] - 38 - 132. Upon filing the complaint in the appropriate court12 and serving process on the defendant, the defendant has three days to file his answer (demurrers)."' In practice, however, it takes a week to have a judge appointed in the case and another week for the court to serve process on the defendant. The defendant has three business days to file his answer. Many more delays arise since with his answer a debtor may present defenses. Although the acci6n ejecutiva prendaria limits the defenses or demurrers that the debtor may raise, he may still file many defenses. The process provides a debtor with the defenses of lack of jurisdiction, lack of standing, creditor's renunciation of the obligations due to him, payment, and statute of limitations. Other defenses he may file may include litispendencia,114 falsedad o inhabilidad del titulo," cosa juzgada,116 and nulidad"' (the agreement is null and void). The court may open the case to receive evidence on any defense the debtor may raise, and the seizure may not proceed until the court decides on these defenses. 133. The procedure contains three-day deadlines for most exchanges between the parties in the process. In practice the exchanges take longer: on average, it takes five to six months to seize the collateral."'s Deviations from the process are not addressed by the pledge procedural rules but are governed by the general trial procedural rules and supplementary rules of the proceso ordinario, a common set of procedural rules used for most court cases. These rules, which are meant to fill gaps, are used frequently in collateral seizure cases and result in a much longer process than the time limits specified in the acci6n ejecutiva prendaria. 134. The final holding of the acci6n ejecutiva prendaria will order the seizure and sale of collateral. However, this final holding may be appealed to the appellate court in 112 Commercial courts will have subject matter jurisdiction to enforce a pledge. Cimara Nacional de Apelaciones en lo Comercial, sala A septiembre 20, 1978, in El Derecho, 81-466. 113 The court need not demand that the debtor acknowledge his signature [PL, art. 26]. The creditor may use the special provisions in the pledge law only if he has properly registered the pledge contract. Endorsees of the security agreement must sue within 30 days of default and must notify subsequent endorsees [PL, arts. 9, 24, 26]. 114 C6D.PROC.CIV. Y COM. art. 600. Litispendencia means that another lawsuit is pending on judicial decision. This defense delays collection where a debtor that foresees his default files lawsuit against the creditor, say, claiming a dispute on the interest rate. Later when the debtor defaults and the creditor sues to collect, the debtor may stop the foreclosure action, claiming litispendencia until a judicial decision is granted in his first lawsuit. 115 c6D.PROC.CIV. Y COM. art. 600. This defense refers to the crime of using falsified property titles to commit fraud. 116 C6D.PROC.CIV. Y COM. art. 600 (Resjudica). "1 PL, art. 30. Ex-C4mara Nacional Especial en lo Civil y Comercial, sala H, agosto 28-1980, en Boletfn de esa Cimara 696-402. "19 Nuria de la Pefia and Roberto Muguillo, Case Disposition Time for Seizing and Selling Movable Property in Capital Federal Commercial Courts (World Bank, Processed, September 1995) - 39 - certain situations."' If appealed, the lower court may proceed with the auction of the collateral only after the appellate decision upholds the decision of the lower court. 135. A debtor's insolvency will also produce additional delays. The enforcement process for a pledge should continue parallel to a bankruptcy. However, even when the enforcement of the pledge process can continue, it must stay until the creditor files his claim in the bankruptcy court.120 The bankruptcy court often stays the pledge foreclosure because the trustee wants to assure that bankruptcy costs and legal fees that will become due can be collected against that collateral.121 136. In all cases, self-help repossession is prohibited. Any provision in the security agreement providing for self-help repossession will be null and void and unenforceable.22 137. Exceptionally, Article 39 of the pledge law gives financial institutions the right to directly request a court order for seizure and proceed to sell the collateral in a public auction controlled by the creditor.'" If the debtor has defenses he may sue the creditor in a separate trial.'" This would obviate the acci6n ejecutiva prendaia. However, most creditors do not take advantage of this right because, after enactment of Article 39, the courts held that a seizure and sale under the article may not continue separate to a bankruptcy procedure. If the debtor incurs in bankruptcy, the trustee will stay the seizure and sale and will require that the creditor verify his credit before the bankruptcy court. The bankruptcy court will decide on the rank of priority of the 119 PL, art. 30, and C6D.PROC.CIV. Y COM., arts. 551 and 554. 12 Law 19551, art. 203 and uniform court decisions. See, for example, Cimara Nacional de Apelaciones en lo Comercial, sala E, diciembre 30, 1982, in La Ley 1983-B-586. 121 Bankruptcy costs and fees will have priority against a pledge. See C6D.CIV. art. 3222, and PL, art. 36. PL, art. 39, provides that when the creditor is a government entity or financial institution, the judicial procedure may be omitted. The creditor shall be entitled to sell the pledged assets according to the procedure established under Article 585 of the Commercial Code (creditor-controlled sale). The debtor in this case shall be able to sue in an ordinary proceeding for any claim against the creditor derived therefrom. To facilitate the sale provided for under this article, the court shall order the seizure of the collateral in question upon the sole presentation of the pledge certificate, giving the debtor no right to challenge or appeal such order. The out-of-court sale procedure provided for under this article shall not be suspended by garnishment of the assets in question, insolvency proceeding, incapacity or death of the debtor. The creditor must proceed with a public auction because it is the sale that offers more assurance to debtors that the collateral will be sold at a market price and counter-balances what judges consider the exceptional power granted to creditors under Article 39. CAmara Nacional de Apelaciones en lo Comercial, sala A, December 24-1981, Bulletin of that court 981-706. See Ex-CAmara Nacional Especial en lo Civil y Comercial de la Naci6n, sala IU, September 4-1981, Bulletin of that court 981-706. -40- pledgee and will control the sale of the collateral in a public auction.`5 These rules may delay the enforcement of the pledge beyond what it would take under the acci6n ejecutiva prendaria. Those attorneys interviewed consider that, if it were not for this difficulty, the ability for a secured creditor to obtain the seizure and sale of collateral without a trial, shifting the burden on the debtor to later sue the creditor if he has any defenses, could substantially speed up repossession of collateral. The options for solution below discuss a revised procedure founded on Article 39. Options for Solution 138. Several broad remedies exist for these slow court procedures. Argentines may accelerate seizure of collateral by introducing procedures that do not require judicial intervention. These include harmless repossession, administrative repossession, and receivership. They may also accelerate collection by providing summary procedures for court-ordered seizures. This may be accomplished with or without establishing special judges dedicated solely to processing these orders. A new legal framework on secured transactions should include all of the following options.12 1. Repossession without Judicial Intervention 139. Harmless Repossession. The law should give creditors an expeditious way to enforce collection. If creditors could seize collateral from debtors without disturbing the peace and then sell it, they could bypass judicial procedures in numerous situations. Debtors' rights certainly should be protected in such a system. Typically, this protection has two aspects: a consumer debtor is given more safeguards than a business debtor; and a debtor is entitled to recover from the secured creditor any loss caused by the secured party's failure to observe the general rules governing harmless repossession. 1 In addition, and consistent with the parties right to contract freely, the law may allow the debtor and creditor to agree on alternative collection measures should the debtor default.'2 125 Ex-Cmara Nacional Especial en lo Civil y Comercial, sala II, May 24, 1982, in ElDerecho 100-320. The seizure and sale under Article 39 may be stopped because it does not strictly qualify as an enforcement procedure, like the acci6n ejecutiva prendaria. 126 See C6D.C1V. art. 3222, and PL, art. 36. 127 For example, this is provided for in U.C.C. § 9-507. 128 The success of a comprehensive secured transactions law lies in giving creditors considerable freedom to enforce their security interests. "Essentially, the model rules should be oriented toward permitting secured creditors considerable freedom in the exercise of their remedies, irrespective of the location of title to the collateral. These remedies should include the right to agree on forfeiture clauses, the right to take possession of the collateral after default with the consent of the debtor, the right to pursue the debtor for any deficiency remaining after realization of the security (except where this had arisen from the secured creditor's failure to act in a commercially reasonable manner), and the right to private foreclosure." "Reform and Harmonization* at 53. Under all legal systems it is difficult - 41 - 140. In non-consumer transactions, the law may extend the right of repossession to a secured party, even when the agreement does not expressly authorize it. To protect the general public, under no circumstances may a creditor breach the peace by using violence, actual or potential force, intimidation, or fraud. The creditor may not engage in any activity that is a violation of the public order, not just a violation of the law, or in any activity that is likely to result in violence. Moreover, the law should specifically forbid creditors from using the assistance, or including the presence, of any government official such as the police."" Self-help repossession facilitates commercial transactions because it is less expensive than more formal methods of remedying defaults in secured transactions. 141. Article 39 of the Argentine pledge law permits faster repossession for only a few creditors.3o Only financial institutions may request court orders for seizure before trial. Some writers explain the origin of this restriction as an attempt to avoid the abuses that took place under the previous Argentine pledge law, Law 9644. Curiously, however, the debate that took place at the time of passage of the present Argentine pledge law revealed not a single instance of the abuse of debtors through more rapid repossession. Rather, the abuses cited were committed by dishonest debtors and false creditors, who pretended to hold non-possessory security interests in collateral. These false claims were used to defraud legitimate creditors, or to assist some creditors to the detriment of others in bankruptcy cases. 142. Such limitations have some merit in that it is typically true that licensed financial institutions will act within the law because they have reputations they will seek to protect. However, limiting the number of creditors who may seize quickly as a means of avoiding the aforementioned abuses is a weak remedy for the problem that carries a high cost in limiting access to credit. The provision will not end simulations of security interests or usurious transactions; at the same time it will reduce the amount of secured lending 131 If the scope of the law is limited, so too will be the number of secured transactions. The law can better address possible abuses by providing for better systems of registration, permitting debtors to sue creditors for money damages, imposing on creditors a loss of their right to a deficiency, and by imposing penalties on creditors who to reconcile the due process right of a defaulting debtor and the economic need to provide creditors with efficient means to enforce their rights. 129 See Burke & Reber, 'State Action, Congressional Power and Creditor's Rights: An Essay on the Fourteenth Amendment," 47 S. Cal. L. Rev. 1, 5 (1973). 330 The legislation of some provinces in Canada, prior to enacting statutes modeled to U.C.C. art. 9, provided for harmless repossession in chattel mortgages, the equivalent to Argentine current pledge. Under these statutes, and providing the agreement so stated, upon default the mortgagee could enter the debtor's premises and peaceably seize the goods. For example, the Seizures Act, Alta. Rev. Stat. c. 307 (1955). The concept of harmless repossession was also defined in more detail over the years through case law. 131 See infra "Court Order for Seizure." - 42 - violate the law. 143. Administrative Repossession of Collateral. Under administrative repossession,132 a creditor could seize collateral after licensed private parties issue an ex-parte repossession order. The secured transactions law would have to establish which private parties can be licensed. Potential candidates for a license could include arbitrators, registry officials, notaries, accountants, merchants, and attorneys. The security agreement could include a consent clause which would allow the creditor to use this administrative procedure for the repossession and sale of the collateral. This procedure would require the enactment of provisions which regulate the licensing of individuals and which establish their liabilities. 144. The relevant associations, whose members are eligible for licenses, would have to guarantee the debtor against a wrongful issuance of a repossession order. This could be assured by requiring the licensed private party to post a bond as a precondition for obtaining the license. A licensed private party should be required to issue a repossession order only after the secured creditor presents him with specific documentation, such as evidence of the security agreement and of the registration, and an affidavit by the secured party verifying the lack of compliance with the loan terms. The licensed private party would be required to carry insurance against risk of forged documents. 145. The procedure should require that the licensed private party notify the debtor of the pending repossession order. This would satisfy the constitutional requirements of due process by giving the debtor the opportunity to pursue legal action in court challenging the creditor's right to the collateral and enjoining its repossession and sale. Alternatively, this would give the debtor the opportunity to correct the default by paying the amounts due. On the other hand, it would also give a debtor an opportunity to hide the collateral -- or even sell it in another jurisdiction. For this reason, it is most likely that creditors would first attempt to harmlessly repossess the collateral. The procedure should impose severe civil and criminal penalties on licensed private parties that disobey any court order. 146. Receivership. The procedure of receivership may be provided for in a secured transactions law, but it should apply only if agreed upon by the parties in the security agreement. In countries that provide for receivership, the process is generally used by secured creditors that have a security interest in all of the assets of a debtor. The procedure should allow the parties to a security agreement to agree to the appointment of a receiver before or after default and to prescribe his rights and duties. Under the procedure, a creditor would be able to have a manager in the debtor's business 132 The term administrative repossession is used here because private parties who are licensed by the state would be acting on behalf of the state administration. -43 - and would thus be able to monitor the business. The receivership procedure provided by law would serve as a default agreement filling in any deficiencies or ambiguities in the parties' security agreement. For example, the receiver would be given the power to control the business of the debtor by suspending the powers of the directors in an incorporated business. He would also be required to maintain accounts and records and to prepare periodic reports. These accounts and reports would then be made available to anyone whose interests are affected by the receiver's actions. The receiver would have complete access to the debtor's affairs, bank accounts, and other business dealings. The procedure is most useful when collecting against accounts receivables, as access to the business records of the debtor is crucial for collecting payment of each account. 2. Repossession with Judicial Intervention 147. Court Order for Seizure. We described above the right'to request a court order for seizure under Article 39 of the pledge law. Although the process seems expeditious, it has not been employed in Argentina because it would not continue if bankruptcy occurs. This process may be revised and improved in a secured transactions law. Bankruptcy laws, however, should be amended and made consistent with this right. Otherwise, bankruptcy laws would prevail vis-a-vis procedural provisions in a secured transactions law. To further improve the operation of this process, a creditor's right to demand seizure should be preserved even if an attachment is levied on the goods (a lien) or if the debtor dies or becomes incapacitated. Also, to lower the costs of obtaining this court order, creditors should be permitted to represent themselves in court without counsel. They should not be required to hire an attorney. The procedure could also be expanded to allow that the court order the garnishment of monies held in bank accounts or by other third parties when these monies are subject to the security interest or are proceeds of the collateral and the third party does not pay the secured creditor. Liability should be established for third parties that disobey these court orders. 148. The procedure should not exclude non-financial institutions. Lawmakers originally decided to exclude non-financial institutions from the Article 39 procedure in the Argentine pledge law based, among other reasons, on the assumption that financial institutions would be solvent defendants if they were potentially liable for any damages.133 However, this protection to debtors may be addressed by other means. For example, private lenders may be required to insure against wrongful repossessions, debtors may be given an effective means of redress, or creditors who misbehave may be held liable for civil damages. On the contrary, granting expeditious processes only to some financial institutions will impair financial institutions' ability to extend credit. Non- financial lenders could best serve small businesses. However, without effective collecting rights, non-financial lenders will not have strong lending documents with their clients. This will hamper their ability to use their lending documents as chattel paper m33 Informe del Proyecto de Ley de Prenda con Registro del Colegio de Abogados de Argentina. -44- collateral to secure bank loans. Banks will not want to lend to these non-financial lenders because they will find that their chattel paper is not good collateral. B. Problems in Selling Collateral 149. Once the creditor has seized the collateral, he must sell it to pay the loan. Argentine law provides for a court-administered sale and a creditor-administered sale of collateral. 150. A court-administered sale of collateral applies in the civil pledge, and in the fixed and floating pledges when the secured creditor sued under the acci6n ejecutiva prendaria. The procedures include appraisal of the goods, appointment of an auctioneer if not specified in the contract, and publication of the sale for three consecutive days." The financial basis of the auction is the amount of the loan secured with the pledge. The process will continue even if the debtor has registered for bankruptcy.15 151. The law also provides for a privately administered sale of collateral in the fixed and the commercial pledges, when the creditor is a financial institution that sued under Article 39, and in the commercial pledge and warrant.'" In the case of a warrant, the warehouse administrator must sell through the stock market or through a court-authorized auctioneer. The Commercial Code imposes criminal liability to any creditor that disposes of collateral in violation of the procedure set out there." The applicable provisions for the privately administered sale of collateral attempt to balance the rights of debtors and creditors. The debtor, if harmed, may sue the creditor for damages. The creditor, within 20 days of the sale, must register an accounting of the sale with the court where he requested the seizure of the collateral. 152. However, several problems exist in the laws that govern the sale of collateral. Generally, when the court administers the sale of collateral it turns the processing of the sale into a judicial trial. As a practical matter, any time the court intervenes, the process takes more time than provided by law and becomes more expensive. Some steps that require time include: * An advertisement of the sale must be registered with and approved by the court, then placed for publication. PL, art. 31. PL, art. 32. PL, art. 39 (registered pledge), and C6D.COM. art. 585 (commercial pledge). 137 The sale must be advertised for 10 days. A private sale may not be held; nor may a warehouse, if it is also the creditor, conduct a sale of collateral. See Law of Warrants, art. 17, and C6D.COM. art. 598. -45 - * An auctioneer must be appointed and must accept its appointment." * Ten days must elapse between the last publication and the auction.139 * If the goods to be auctioned are not those pledged, a court order must be sent to the debtor requiring his appearance in court within three days to challenge the court order for the sale. * Notification of the auction must be given to other creditors with rights in the collateral." * The court must request that registries submit a certification of encumbrances in the collateral.4' * The creditor-administered sale under Article 39 does not always assure a prompt disposition of collateral. A debtor's registering for bankruptcy may stop the procedure.42 153. The sale does not necessarily need to be a public auction; a pledge agreement could also be provided for a creditor-administered sale.143 However, since Argentine law lacks specific rules for creditor-controlled sales, creditors may risk facing subsequent claims from a debtor that is unsatisfied with the manner the creditor sold the collateral. I-V Parties may agree in the security agreement to the appointment of a specific auctioneer. However, they may chose only from those that hold the required license. Ex-CAmara Nacional Especial en lo Civil y Comercial, sala V, diciembre 29-1978, en La Ley 1979-B-477. 139 C6D.PROC.CIV. Y COM. art. 147. 140 C6D.CIV. art. 3196: Any sale will be void if the court has not previously notified the debtor and secured creditors on the collateral. 4 C6D.PRoC.CIV. Y COM. arts. 563-574. 142 Courts have held that court protection and continuation parallel to a bankruptcy may not be had when the creditor is selling the collateral privately, since such a sale is not considered a pledge foreclosure according to PL art. 32 (Article 32 isolates pledge foreclosure proceedings from bankruptcy). As attorney Julio Kelly has correctly pointed out, the bankruptcy law (Law 19, 551) prevails over the pledge law. As a result, any secured party must comply with the provisions thereof in order to foreclose or continue the foreclosure procedure initiated before the bankruptcy was declared or before the procedure for reorganization of the debtor began. The bankruptcy foreclosure provisions are inconsistent and determine a much slower process than that provided in the proceso de ejecuci6n prendaria and PL, art. 39. 143 Under the principle of freedom of contracting, Argentine law permits parties to negotiate other means for disposing of the collateral than a public auction (C6D.COM. art. 585). -46- Therefore private sale agreements are rarely used and a judicial sale is most common.1" 154. Although the judicial sale of the collateral cannot be stopped, events usually develop that substantially delay the disposition of collateral." The most common occurrences are: judicial deposit of payments, third-party impleader,14 service of process to legal representatives of absentees, incapacity and death," issues of subject matter jurisdiction,14 litispendencia,149 concurrence of cases in a bankruptcy procedure, and other complications such as parallel issues to void parts of the process.150 155. A creditor also incurs high costs in a judicial sale of collateral. These costs include appraiser and auctioneer fees (3 percent of the amount claimed)151 and attorney's fees, as well as publication, storage and transportation costs if necessary. Most court decisions would make the losing party, generally the debtor, pay the creditor's legal fees, and if he does not pay, these costs would be paid out of the proceeds of the sale of the collateral. Options for Solution 156. The laws governing the sale of collateral should balance the creditor's need for an expeditious sale against the debtor's right of due process. They should also balance the creditor's right to receive the outstanding debt after the sale against the debtor's right to obtain the highest possible price from the sale of the collateral, so he may keep any surplus. A legal framework could balance these rights by providing for a privately administered sale of collateral.s2 157. Privately Administered Sale of Collateral. A new legal framework for secured transactions should provide a unique set of rules for a creditor-controlled sale of collateral. These rules should apply uniformly to all creditors, and judicial intervention during the process should be minimal. If judicial issues arise, the law should postpone their resolution until after the collateral has been sold and the creditor has been paid. I" See also footnote no. 149 above. 145 PL, art. 32. 146 PL, art. 38. 147 PL, art. 33. 14n c6D.PROC.CIV. Y COM. art. 12. 149 C6D.PROC.CIV. Y COM. art. 193. ISO Law 19551, arts. 22 and 136. 11 The fees for the appraiser and the auctioneer are 3 percent of the amount claimed against each party (Decree No. 1813 9.29.92, art. 8). See also Law 20266 of April 10, 1973, which regulates the duties and obligations of auctioneers. I52 The decree law 15348 authorized the judge to appoint. - 47 - 158. Although Argentine law provides for private sale, it does not satisfactorily address the needs of a comprehensive law on secured transactions and requires additional rules. The main revisions to regulations on private sale should ensure that: * The debtor receives the maximum sale price from the sale of the collateral. * The debtor receives any surplus remaining after the creditor has been paid. * The law establishes maximum private action and minimal court intervention. * The procedure has broad application to all secured transactions. 159. A creditor-administered sale lowers the costs of collection to the creditor. This is because the creditor is paid first, without his claim being offset by other claims on the collateral that usually arise in a court-administered sale, such as court costs, fees for an appraiser or expert, and commissions to the court-appointed auctioneer. Moreover, the sale can proceed as soon as the creditor desires, without any expensive delays. 160. Also, a comprehensive law on secured transactions should allow parties to agree to private disposition of the collateral in a creditor-controlled sale in case of debtor default. The law should neither impose nor deny such a remedy, but should leave it up to the parties. To protect debtors against unfair disposition of the collateral, the law should hold creditors to a standard of "commercial reasonableness" when conducting such sales, requiring a creditor to sell goods in a manner customary for dealers of that type of good. Any delay in the disposition of perishable collateral, or any delay likely to reduce the value of the collateral, may constitute a failure to act in a commercially reasonable manner. The law would allow the secured creditor to collect any deficiency between the outstanding debt and the proceeds of the sale only if he had complied with the legal requirements for the private sale, including the requirement of commercial reasonableness.153 153 Under Argentine Commercial Code a creditor can sell the collateral without a court order (C6D.COM. art. 585). The Civil Code, however, does not contain a similar provision for the civil pledge (COD.CIV. art. 3224). The law did not require a prior court order in the commercial pledge because in a commercial pledge at least one of the parties is a merchant. Then, commercial law imposes merchants to carry accounting books that would register all transactions, including the sale of collateral. On the contrary, this is not required in a civil pledge, where a debtor would find it more difficult proving damages for inappropriate sale or claiming the surplus of the sale. Therefore, imposing on all creditors (merchants or not) the standard of commercial reasonableness, and economically sanctioning all creditors (for example, loss of the right to claim any deficiency) if they - 48 - 161. The law would require creditors to notify debtors and junior secured creditors before any resale of the collateral. The law should always give the debtor a redemption period during which he can reclaim the collateral by paying the debt." The law should void any stipulation that allows the debtor to waive his right to redeem the collateral before foreclosure. The debtor should also be allowed to recover any damages arising from a wrongful seizure, including cases where the debtor actually did not default or where the creditor in fact had no security interest in the seized property.15 162. Once the secured creditor recovers the collateral, he should be allowed to retain it in complete satisfaction of the secured debt (strict foreclosure). The law should provide that the parties may not agree to strict foreclosure before the debtor receives notice of default. The law may prohibit strict foreclosure against a consumer who has paid a fixed percentage of the debt, since strict foreclosure does not allow a creditor to recover any deficiency, nor a debtor any surplus. C. Creditor's Loss of Priority 163. Argentine law guarantees priority to secured creditors, but a secured creditor's priority is sometimes offset by other claims in the collateral. 164. Out of the proceeds of the sale and before the secured creditor is paid any amounts due on the debt, the court or the creditor must pay other claims on the collateral. These claims may include court costs and expenses for the maintenance of the collateral."6 Higher rank of priority to that of the secured creditor is also granted to rents due on the premises where the goods were located; appraisal fees; commission fees due the auctioneer; attorney fees for both sides;' accrued property taxes related to the collateral;5 claims by an owner of the goods if the goods seized for auction belong to somebody else; or claims by a third-party, good-faith purchaser of the goods who bought without knowledge that the goods were pledged.' They debtor may have claims on the collateral if the goods qualify as exempt property because they are indispensable for his or his family's living.'60 fail to comply with such requirement, will establish the necessary protection for expanding the creditor-control sale to all transactions, civil or commercial. 154 Such a provision is made under U.S. law; s U.C.C. §9-506. 155 Legal costs are not always recoverable under U.S. law. National procedures differ, however: U.K. law and Argentinean law do permit recovery of legal costs by the winning party. See also, "C6digo Procesal Civil y Procesal Penal Modelo para Iberoamrica," art. 328. 156 PL, art. 43(1). 157 Ex-C4mara Nacional Especial en lo Civil y Comercial, sala IV, septiembre 19-1980, en Boletfn de esa Cdmara 981-706. 15 PL, art. 43. 15 This protection applies to all goods, not just to consumer goods. PL, art. 38. 1*0 With the exception of property purchased with the amounts received by that same loan. PL, art. 40. -49 - 165. For a creditor who contemplates making a loan, any unknown potential claim will increase the risk of collection on the loan. Options for Solution 166. The new secured transactions law should clearly establish the priority of secured creditors by listing on a case-by-case basis the different priority rules governing all possible conflicts. These priority rules should apply to all secured transactions regardless of their form. CATALOGUERS/FILE CONFIDENTIAL Report No: 15456 AR Type: SR