Assessing and Reinforcing Litigation in Mexico Part 2

Assessing and Reinforcing Litigation in Mexico Part 2: Risks

Contribution by Mr. Romelio Hernández

Romelio Hernández is President at HMH Legal, a professional corporation specialized in credit and collection services in Mexico. He is based in Tijuana, Baja California, México, where he works extensively with foreign exporting companies and collection agencies assisting them with their out-of-court and legal collection efforts throughout Mexico. His litigation experience of sixteen years and exposure to international commercial law has allowed him to provide guidance to foreign companies in mitigating the various risks of selling international. Romelio graduated from Universidad Autónoma de Baja California, and was admitted to practice law in Mexico since 1997. Romelio holds a Masters’ Degree in Comparative Law (LL.M.) from the University of San Diego School of Law (2011).

This is part 2 in a 3 part series.

View part 1 on Costs & Rewards here.

Once you have confirmed that you have a case worth considering based on costs and rewards, you have to assess the risks associated with your action to determine the likelihood of success. The bottom line is whether you will be able to seize assets from your debtor, and whether you can win your case. These questions should be analyzed in detail.

A. Will you be able to execute if you win?

If you are to consider legal action, you have to make sure that the debtor has sufficient assets worth seizing to pay your debt, and you have to make sure that you will be able to execute against the debtor. These are two different things, for which you will have to assess the debtor’s legal, financial, and commercial situation to make sure that your action will not present major risks.  It is important to address the following issues:

• Legal. A debtor that has changed its company name, or is conducting business under a different entity, presents a major challenge. While this may constitute fraud, prosecuting authorities are just not reliable enough to bet on them for legal redress. In addition, piercing the corporate veil in Mexico is extremely difficult, so it will be a risky case when your registered debtor is no longer there and you intend to pursue against a wealthy owner or parent company.
• Financial. If the debtor is still there, you want to make sure that he has enough assets to seize and pay your debt. These not only include real estate, but inventory, bank accounts, and other movable assets that you can also seize. While a physical inspection at the debtor’s premises is a good way to start to uncover assets and confirm business operations, an investigation at the public registry of property and commerce is highly recommended to find out about possible liens, lawsuits, loans, etc. If the company is totally encumbered it may mean that you will be at the end of the line of creditors, with nothing left to pay your debt.
• Commercial. The debtor may have assets now, as well as a sound business, but what will his situation be in a year or two when you win your case and are ready to execute? This is where you need to consider the debtor’s presence in the market, as well as its history. A debtor with no presence and no history will have no problem turning to fraudulent schemes to change its company name and conceal assets to avoid execution. A debtor with this possibility definitely presents more risk.
• Lawsuits. A Google search might provide information about possible lawsuits against the debtor, but it is not  always reliable. There are specialized reports that provide reliable information from court systems throughout Mexico. These are highly recommended to uncover additional exposure from the debtor, something that will also add risk to your case.
• Collateral. When the debtor’s situation is not good, you can always count on collateral to raise the likelihood of collection. If collateral was provided and your Mexican attorney can confirm that it is enforceable in Mexico, you are reducing unwanted risks. Thus, when all previous factors are unfavorable, collateral may be what saves your case. You will just want to make sure that the collateral has not depreciated to a point where it does not cover your debt.