The Law on General Storage Warehouses (Law 18.690 of 1998) sets forth a mechanism for executing a pledge on property stored in warehouses through the endorsement of the warehouse receipts.
On January 7 1997, the Court of Appeals of Santiago reversed a lower court's ruling in connection with a credit guaranteed with a pledge on warehouse receipts. In its decision, the Court of Appeals stated that property deposited in a storage warehouse is not subject to attachment. The court also stated that the provision regarding preferences of first class claims set forth in Article 147 of the Bankruptcy Law did not apply to assets subject to a pledge on warehouse receipts.
The lower court had decided in favour of a trustee in bankruptcy who had rejected the claim by a creditor in a bankruptcy proceeding. The creditor had asserted a pledge preference, pursuant to the Law on General Storage Warehouses, on assets deposited in a storage warehouse. In the trustee's opinion, the debtor's estate comprised the assets and they were therefore subject to attachment.
The Court of Appeals reversed the decision based on the fact that the pledged assets were not subject to attachment (i) because they had been deposited in a storage warehouse and (ii) because Article 10 of the law sets forth that it "will not be possible to attach the property deposited when such property has been pledged".
The Court of Appeals also instructed courts not to interfere in the foreclosure of a pledge on warehouse receipts. The court stated that the foreclosure proceeding should continue in case of bankruptcy, as provided by Article 14: "The auction of the pledged property, due to a default in the payment of the obligation guaranteed with the pledge, will not be suspended in case of a bankruptcy proceeding".
Article 148 of the Bankruptcy Law states that "the first class preferred credits will be preferred to any other preferential credit established in special laws". The trustee argued that this provision, which was incorporated by Law19.250 of September 30 1993, had superseded Article 10 of the Law on General Storage Warehouses.
The Court of Appeal disagreed, and stated:
"According to Article 64 of the Bankruptcy Law, such property is excluded from the stay that affects all property of the insolvent entity or person as well as from the seizure that occurs in bankruptcy proceedings. Consequently, the administration of such property is not entrusted to the trustee who, accordingly, is restricted to reject the preferences claimed by any entity or persons."
The trustee filed for a further appeal with the Supreme Court. The Supreme Court refused to hear the case because the trustee had failed to specify the Court of Appeals errors in applying the Law on General Storage Warehouses.
This case is significant because the Court of Appeals considered the amendment incorporated by Law 19.250 to the Bankruptcy Law and concluded that it did not alter the preference status of the pledge on warehouse receipts. Therefore, the trustee in bankruptcy is not authorized to seize the assets stored in a storage warehouse.
This conclusion is debatable and it is to be regretted that the Supreme Court did not render a decision on the merits of this case.
For further information on this topic please contact Marcelo Armas at Philippi, Yrarrazaval, Pulido & Brunner by telephone (+56 2 364 3700) or by fax (+56 2 364 3796) or by e-mail ([email protected]).
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