Legal Mechanisms for Credit Security: Surety, Pledge, and Mortgage

Surety and Security Interests

Ancillary Contracts and Guarantees

Ancillary contracts establish a legal relationship intended to ensure or guarantee compliance with a principal credit entitlement.

Classes of Guarantees

• Personal Guarantees
• Real Security Interests

Personal Guarantees

They grant the creditor a right over the personal assets of the debtor or a third party.

• From the debtor: e.g., penal clause.
• From a third party: e.g., surety (fianza), bond.

Surety (Fianza)

Surety is a relationship where a credit is guaranteed by a person other than the debtor. (Section 1822 et seq. of the Civil Code).

Characteristics of Surety

1. Incidental nature
2. Subsidiarity

The bond may be conventional, legal, judicial, gratuitous, or paid.

Form Requirements

The bond must be explicit, never implied.

• If civil, it is valid whenever expressed in any way.
• If commercial, it is necessary that the bond be written (Art. 440 of the Commercial Code).

Commercial Surety is regulated in Arts. 439 to 442 of the Commercial Code.

Benefits of the Guarantor

The guarantor must pay the creditor if the debtor does not, but enjoys the benefits of order (excussion) and division.

Benefit of Order (Excussion)

The guarantor is responsible only if the debtor has not paid, and is insolvent. This general rule has exceptions.

Benefit of Division

If there are multiple sureties, each responds only for their share of the debt, unless the security is joint and several (solidarity) by agreement.

Actions Against the Debtor

The surety may take action against the debtor:

• Preventive Actions.
• Actions for Reimbursement and Subrogation.

A. Reimbursement

If the guarantor pays, they can claim the amount from the debtor.

B. Subrogation

The guarantor who pays is subrogated to all rights which the creditor had against the debtor.

Real Security Interests

Real security interests ensure compliance with a credit relationship using specific property (a good). They include the pledge, mortgage, and antichresis. They are covered by Articles 1857 et seq. of the Civil Code.

Essential Requirements

1. Established to ensure fulfillment of a principal obligation.
2. That the property pledged or mortgaged is the object of the security.
3. That the persons constituting the pledge or mortgage have free disposition of their property, or are duly authorized.
4. If the principal obligation is breached, the mortgaged or pledged assets may be disposed of to pay the creditor.

Types of Pledge (Pignus)

The pledge can be:

1. Possessory Pledge (Art. 1863 CC): The thing pledged must be placed in possession of the creditor or their nominee.
2. Non-Possessory Pledge: Regulated by Law 16/12/1954. It may be constituted by public instrument or operated by a broker.
3. Pledge of goods represented by securities: E.g., bill of lading.

Types of Mortgage

The mortgage can be:

1. Real Estate Mortgage: Regulated in the Civil Code (Articles 1874 to 1880) and in the Mortgage Act.
2. Chattel Mortgage: Regulated by the Law of 16-12-1954.