The real estate market in Brazil is going through a severe crisis, which resulted in big developers filing for judicial reorganization. Usually, the judicial reorganization request encompasses not only the developer, but also all of the companies of its corporate organization. In this sense, the developer is generally part of a larger corporate structure, formed by a holding company with participation in Specific Purpose Companies (“sociedades de propósito específico” – “SPEs”), which are the projects themselves. Thus, the projects are all included in a single judicial reorganization request.
On 12 June 2017, the Court of São Paulo, addressing the issue for the first time, excluded from the judicial reorganization procedure the “SPEs” under the regime of segregated assets (“patrimônio de afetação”).
The regime of segregated assets has been recently created. The bankruptcy of Encol, in 1999 – Encol was the biggest developer in Brazil at the time – caused damages to 40,000 families. The strategy of the company was like a bicycle: the new projects were financing the older. When the offer of units was superior to the capacity of the market to buy new projects, the bankruptcy of the company was unavoidable.
As a response, a new regime was created: the regime of segregated assets, included by Law No. 10,931/2004, which included articles 31-A to 31-F to Law No. 4,591/1964. Under this regime, the developer can isolate its assets, credits, debts and liabilities related to a specific project in order to ensure that the segregated assets will revert to the same project and not to other aspects of the company/developer.
The segregated assets regime does not extend to other assets, rights and obligations of the developer or of other segregated assets, and such assets are liable solely by debts and obligations related to the respective project.
The Appellate Court of São Paulo acknowledged that the segregated assets regime protects not only the purchasers of the units of the respective project, as a weaker part in the relationship, but also the credit that was responsible for the development of the venture, for the increase of the market.
In this specific case, the developer has 16 projects under the segregated estate regime. Although Brazilian Law has specific rules for the segregated estate regime in case of a bankruptcy, there is no provision regarding the judicial reorganization, and, considering the lack of ruling, the lower court judge ordered the “substantial consolidation” of all companies under the same reorganization, including the SPEs, except for these 16 projects under segregated estate regime.
This means that the judge did not accept the filing of only one reorganization plan for all the companies and the developer had to file one reorganization plan for each one of these 16 projects under segregated estate regime, apart from the one plan for all other companies. However, the developer presented an appeal requesting that the “substantial consolidation” of the reorganization reaches all projects, independently of having segregated assets.
The Court of São Paulo, then, decided that on the incompatibility between the judicial reorganization and Law No. 4,591/1964 (Law on real estate developments), since the latter restricts the autonomy of the developer in relation to all purchasers.
In this sense, pursuant to Law No. 4,591/1964, purchasers, through the Committee of Representatives, in case of bankruptcy of the developer, may decide between continuing the project or liquidating it, with the sale of the segregated asset. They may also resolve on the continuation of the construction under its own administration, or on the sale of the land, accessions and other assets of the affected estate.
In view of such legal provision, the Court understood that “the unilateral option of the developer for the filing for judicial recovery cannot be considered as a decision against the purchasers (…). The logic of the system, in short, is that, once the developer loses the conditions for conducting the project, the acquirers themselves assume that task, either through the removal of the former (with or without segregated assets) or by the most radical alternative of its liquidation (exclusive of the projects where there is a segregated asset).”[1].
Although the purchasers are the most interested in the effective conclusion of a real estate project, since the purchasers of the units do not have pecuniary credit to be submitted to the reorganization, they will not even participate, which is incompatible with the Law No. 4,591/1964.
Since the repercussions of the segregation of assets are expressly foreseen in case of bankruptcy, but both Law No. 11,101/2005 and Law No. 4,591/1964 are silent regarding the judicial recovery, several doctrinal positions have arisen. The Court of São Paulo resolved the discussion through a systematic logic: the law sets forth that in the event of a bankruptcy (which is more serious than the judicial reorganization), not only the segregated assets are preserved, but also the relations and obligations involving the developer are preserved in their essences, as if the bankruptcy did not exist, and therefore, it is not logic that the judicial reorganization (a ‘less grave’ measure) subjects creditors of projects with segregated assets to the modification of their rights, with a change of substance or form of payment.
Finally, the Court of São Paulo did not limit the incompatibility only in relation to SPEs with segregated assets, recognizing that the reorganization is incompatible with the situation of all SPEs, except for SPEs with works already completed. Whatever the incorporation regime, with or without segregated assets, the autonomy of the developer to the purchasers is limited by law[2].
Accordingly, the legal reorganization of the developer cannot prevent the purchasers from exercising their legally established prerogatives, and, therefore, real estate developments cannot decide on its own to file for judicial reorganization, and purchasers must always take decisions regarding the problems that the project may face. It is possible, however, for the acquirers themselves to decide on the judicial recovery of SPEs.
The Court firmly rejected the justification of a single fund of the developer to justify the substantial consolidation sought in the judicial reorganization. This confusion of assets should be understood as an anomaly in the functioning of the group companies, and the processing of judicial reorganization cannot be a “reward”. The equity segregation justified by the constitution of an SPE for each venture was aimed at the impossibility of joint action, cross-guarantees, transfers of resources between SPEs and the holding company, and single fund adoption, circumstances that led to the collapse of Encol.
However, the discussion is far from ending. In January 2017, the largest judicial reorganization involving developers was filed, with more than 500 SPEs in it. Certainly, new court decisions will arise out of conflicts deriving from such reorganization, as well as new developments on running the SPEs with or without segregated assets that have been excluded from the judicial reorganization.
The São Paulo Court, decided with a view to guaranteeing the real estate market, ensures that judicial reorganizations will not jeopardize new market operations, to the safety of buyers and financiers.
Ana Carolina Crepaldi de Arruda Penteado
Motta Fernandes Advogados, São Paulo
Short Abstract: Recent judicial decision in São Paulo refuses the judicial reorganization request for the projects (“specific purpose companies”) in view of the limitation of autonomy of the real estate developer
Keywords: developer – Brazil – judicial reorganization – specific purpose companies – substantial consolidation – buyer – purchaser – segregated assets – bankruptcy
[1] Interlocutory Appeal No. 2236772-85.2016.8.26.0000, 2nd Business Chamber Câmara, Reporting Judge Fabio Tabosa, judged on 12 June 2017.
[2] Interlocutory Appeal No. 2218060-47.2016.0000, 2nd Business Chamber Câmara, Reporting Judge Fabio Tabosa, judged on 12 June 2017.