The Supreme Court reaffirms the “shared effort" principle in a pesification case

1.    The “Bessi” Case

In this case the Argentine Supreme Court of Justice (the “Court”) resolved to apply the “shared effort" principle for a mortgage loan below the amount of one hundred thousand Argentine Pesos which was agreed between individuals who are not related to the financial system, even when the debtor did not comply with all the requisites provided by Laws No 25,798 and No 26,167.

These Laws, enacted within the framework of the public emergency, regulate protection and refinancing mechanisms for mortgage debtors whose obligations are denominated in foreign currency, only if they comply with all of the following requirements:

(a)    the debt must be secured by a mortgage;

(b)    the debtor must be an individual or an undivided estate (inheritance);

(c)    the loan must be destined to the home's acquisition, improvement, construction and/or enlargement, or to the cancellation of loans originally constituted for any of the mentioned destinies;

(d)    such home must be the single home of the family;

(e)    the debtor must have defaulted their payments between January 1, 2001 and September 11, 2003; and

(f)    the amount of the loan shall not be above one hundred thousand Argentine Pesos. These laws also provide certain interpretation criteria for judges as regards the application of emergency laws.

In the “Bessi” case, the debtor did not prove that the proceeds of the loan were used for the "home's acquisition, improvement, construction and/or enlargement, or to the cancellation of loans originally constituted for any of the mentioned destinies".

The Court applied the formula which results from converting one Argentine Peso to one United States Dollar, plus 30% of the difference between such amount and the free exchange market rate, plus an interest of 7.5%, for the case of a mortgage debtor who gave as guarantee his single and family home.

The Court applied by analogy the provisions of Law No 26,164 to determine the maximum limit of the debt. Pursuant to this Law, it shall not exceed the calculation which results from converting one Dollar to one Peso plus 30% of the difference between that parity and the Dollar’s free market rate. The Court based its decision on the interpretation guideline provided by Article 15 which provides that “in case of doubt regarding the application (…) of this law, judges will decide in the most favorable sense for the subsistence and conservation of decent home and the integral protection of the family, in the terms of Article 14 bis of the Argentine Constitution”. These rights are not only protected by Argentine laws and Constitution, but also by international treaties that have the same hierarchy as the Constitution.

The Court considered that Law No 26.167 applies the “shared effort principle” because it provides that the debt’s readjustment must be made on the grounds of civil law guidelines such as lack of proviso (imprevisión), unjust enrichment, abuse of rights, usury and limits imposed by moral conventions and public order. 

2.    Court’s criteria regarding pesification

The Court’s criteria as regards pesification laws have varied in with time. The serious economic crisis that took place in Argentina in December, 2001 led to a series of emergency financial restrictions. After the enactment of the Public Emergency Law, the Argentine Executive Branch decreed limitations on withdrawals and transfers from bank accounts and the convertibility to Pesos of debts denominated in foreign currency. These measures are known as the corralito and pesification, respectively.

Laws and decrees issued as a consequence of the crisis originated a series of Court decisions. Although these pesification leading cases are related to the financial system, they show the understanding of the Court as regards the constitutionality of both the corralito and the pesification in general terms.

In re: “Smith”, dated February 1, 2002, the Court declared the unconstitutionality of the laws that provided the limitation of withdrawal of bank deposits. The Court considered that despite the existence of a serious situation of economic emergency, the restriction to the free availability of the funds was unreasonable and went against the depositor’s private property right as recognized by Sections 14 and 17 of the Argentine Constitution.

After the “Smith” case, the Argentine Executive Branch enacted Decree No 214/2002 which established the conversion into Pesos of all obligations and bank deposits denominated in Dollars or other foreign currencies at the rate of one AR$ 1.40 for each US$ 1 plus the Reference Stabilization Coefficient ("CER") published by the Central Bank of the Republic of Argentina.

In the “San Luis” case, dated March 5, 2003, the Court continued the standard of the precedent “Smith” and declared the unconstitutionality of the pesification. The Court considered that Decree No 214/2002 was unreasonable and violated the right to property, because it made the debtors support most of the burden of the crisis. For this reason, the Court ordered the restitution of the amount either in Dollars or the equivalent in Argentine Pesos necessary to obtain them in the free market.

The criteria of the Court held in “Smith” and “San Luis” changed totally in the “Bustos” case, dated October 26, 2004. In this third case, the Court admitted the constitutionality of the financial restrictions, since it considered that there were reasonable measures according to the emergency situation. The Court pointed out that to expect an immediate refund of the amounts in Dollars or their equivalent in Pesos would imply an excessive benefit for the creditor, whose property right was not violated with the parity of the Peso-Dollar plus CER ruled by Decree No 214/2002. The Court considered that the right to property was not violated because there were other alternatives available offered by the government to refund the amounts in foreign currency, such as bonds.

In the “Massa” case, the Court ruled on December 27, 2006 following the criteria of the “Bustos” case, admitting the constitutionality of the pesification. The “Massa” case differs from the “Bustos” case as regards the determination of the quantum because it establishes a benefit in favor of the depositor, since the Court added an interest of 4% per annum to the formula provided under Decree No 214/2002. The defendant bank had to return the amount of the money deposited converted into Pesos at the rate of Pesos 1.40 per each Dollar adjusted by CER, plus an annual interest of 4% per annum to the depositor.

All of the cases above relate to claims of depositors made against financial entities for the restitution of their deposits in the foreign currency that they were made. Until then, the Court had not ruled in the cases related to mortgage loans in foreign currency between individuals.

In re: "Rinaldi, Francisco A. y otro c/ Guzmán Toledo, Ronal C. y otra s/ Ejecución Hipotecaria", dated March 15, 2007, the payment of a mortgage debt between private parties was claimed. The Court applied the maximum limit of the debt by following the guidelines of Laws No 25,798 and No 26,167. In this case the debtor complied with all the requirements provided by such Laws.

In the "Bessi" case, which was also related to a mortgage debt between individuals, the Court applied the same criteria as in "Rinaldi" even when the debtor did not comply with one of the requirements of Law No 25,798 and No 26,167. The Court grounded its ruling on the fact that the guidelines established by Law No 26,167 show that the legislator intended to give greater protection to those mortgage debtors whose homes are at risk of foreclosure as a result of the crisis. For such reason, the Court decided that there were not enough reasons to exclude some debtors and benefit others with the provisions of the mentioned Law. Both factual situations refer to debtors whose homes in which they live with their families are in jeopardy, and therefore the same formula should be applied to all of them.

The "Bessi" case confirms the current tendency of the Court to resolve pesification conflicts on the basis of the "shared effort" principle.