Judgment against a Trustee for Labor Credits against the Settlor

On September 5, 2007, the Labor Court of Appeals of the Province of Mendoza in re: “Rosenstein c/ Parancogua S.A. y otros” ordered a trustee to pay the payment of amounts claimed by a fired former employee of a settlor.

On April 18, 2002, the company Parancogua S.A., arguing “loss of confidence”, fired an employee.

On April 19, 2002, Parancogua S.A., as settlor, executed a trust agreement with Machines & Trucks S.A., as trustee, whereby the settlor transferred all of its assets to the trustee. The former employee filed a claim against the settlor and the trustee for a severance payment and penalties.

The trustee filed a defense stating, inter alia, that the employment agreement was terminated before the execution of the trust. In addition, it claimed the existence of an indemnity provision in the trust agreement under which the settlor had to indemnify the trustee for any kind of liability or contractual claim related to the transfer of assets under the trust.

The Labour Court of Appeals declared that:

i)     the trust constitutes a means of disposition which “ties” the assets to a specific purpose for the benefit of someone different from that who owns the assets. Under the trust agreement all of the assets are transferred to the trustee so it can control and manage them according to its terms;

ii)     the transfer of assets to a trust is equivalent to the transfer of a facility under Sections 225 to 228 of Labor Law No 20,744, as amended (the “Labor Law”);

iii)    while the transfer of assets made to a trust is equal to the transfer of a facility under the terms of the Labor Law, all the existing obligations are transferred to the new “acquirer” and no agreement to the contrary can be enforced against the employee, even if such obligations are based on agreements existing or terminated at the date of the transfer of assets, according to Section 225 of Labor Law; and

iv)   the Labor Law is a public law and, therefore ranks above Trust Law No 24,441 (the “Trust Law”); consequently, the Labor Law prevails over the Trust Law.

Therefore, according to the decision of the Labor Court of Appeals of the Province of Mendoza, the trustee was considered jointly and severally liable with the settlor, and, consequently, was responsible for the obligations existing and/or terminated at the time of the transfer of the assets.

The subject of a hypothetical fraud seems not to have been addressed by the court in this case. However, it might be considered that such a fraud had actually taken place since the trust was created on the day after the plaintiff was fired and included the totality of the employer's assets, to the detriment of the rights of the employees. The Trust Law states that fiduciary property created by a trust cannot be touched by any claim of the grantor's and trustee’s creditors except in the case of fraud (as has been highlighted in this case).