New STJ opinion draws attention to the risks of seizing assets encumbered by a fiduciary lien to solve propter rem debts

In September 2024, an unexpected turnaround was seen in an opinion that had been almost unanimous until then in Brazilian courts: property encumbered by a fiduciary lien cannot be seized to pay off other debts owed by the fiduciary debtor, including debts of a propter rem nature, i.e., debts attached to the property itself.

This opinion is based on the legal text of fiduciary transfer, from which the fiduciary debtor, in a fiduciary capacity and as a collateral, hands over the property to the creditor. However, two recent judgments have paved the way for reviewing this opinion depending on the circumstances.

A new opinion

The case that triggered the review was analyzed within the context of Special Appeal 2,059,278 SC by the Fourth Panel of the Superior Court of Justice (“STJ”). The facts reported that the fiduciary debtor had stopped paying the common area charges levied on the property encumbered by a fiduciary lien, but continued to pay the installments owed to the fiduciary creditor, the financial institution that funded the acquisition of said property. The condominium then filed a collection action against the fiduciary debtor seeking to collect the amounts owed and, once the search for liquid assets had been exhausted, requested the seizure of the property encumbered by the fiduciary lein.

The district courts and court of appeals denied the request on the basis of then-well-established case law, which repeatedly denied alike requests, substantiated on the fact that the property was not part of the debtor’s estate. The condominium then submitted the claim to the STJ which, in Special Appeal 2,059,278, accepted the request to seize the asset sold in fiduciary capacity. Only a few days later, a monocratic decision was delivered on the AREsp 2,684,988 by the same judge inaugurating the controversy, allowing the seizure to be likewise performed.

Assessing the interests involved

In this context, balancing two equally legitimate interests over the same property is a complex matter. On this occasion, more important than debating the conflicting rights is drawing attention to the undeniable impacts on the collateral system and the need to reflect on the appropriate contract for each specific case. In this regard, it is necessary to introduce rules that allow the payment of ancillary debts to maintain the collateral, with the addition of any such amounts to the amount of the debt, as well as, regarding the management of the collateral, to allow such rules to be effective in defending the collateral.

The power and advantages of a fiduciary transfer have been very well tested over the last few decades, having survived all the cases in which a creditor sought to expropriate a debtor’s assets and was faced with the impossibility of accessing the assets transferred in fiduciary capacity to a third party, when the courts allowed the seizure to fall only on the rights to the conditional ownership of that asset. The fiduciary creditor would then be notified of the amounts already paid, which in turn would correspond to the appraised value of the rights to the resolvable property.

However, over time, it became evident that auctions of these rights were prone to frustration. Possibly because, in the event of an auction, the winning bidder would only take the resolvable ownership of the property associated with a debt, assuming the contractual position of fiduciary debtor. Therefore, the bidder would still be obliged to pay the creditor institution until the financing is paid off and full ownership of the property is acquired. This dynamic could frustrate the expectation of obtaining a more favorable price at auction, or perhaps it is too sophisticated to widely reach the public that attends auctions.

Next steps

This particular case takes place within the scope of a housing loan. In this context, after weighing the interests involved (creditor, debtor, and condominium) and considering the position of the condominium and the other unit owners, a solution was found that resulted, in fact, in the collateral created by the fiduciary lien being rendered ineffective. This has created a new interpretation that places a fiduciary creditor in a position of competition with other creditors, far removed from the legal text that governs the fiduciary transfer to seek a balanced situation for those involved in that specific case.

This circumstance requires extra attention to business contracts that include a fiduciary transfer covenant, either through the mechanisms mentioned above that make it possible to avoid defaults on ancillary sums or through the management of the collateral or the adoption of another form of collateral, so that discussions can be avoided and, if they do occur, they can be decided based on the concepts established by the law on fiduciary sale, particularly concerning the ownership position of the property given as collateral, which is no longer part of the debtor’s assets.

Demarest’s Real Estate team is available to provide any further clarifications that may be necessary.