A recent decision by the Court of Justice of Minas Gerais has reignited the debate surrounding legal certainty in credit assignment operations for litigation funding in Brazil.
The Court deemed the partial transfer of credit rights from a construction company to an investment fund as a case of fraud against execution, highlighting the critical importance of due diligence practices in such transactions.
A heavy construction group, already under judicial execution by a financial institution, assigned approximately 4% of the potential gains from arbitrations (equivalent to around R$ 185 million) to a receivables fund (FIDC). The purpose of the transaction was to raise funds to finance an arbitration proceeding against a public-private company.
The Court recognized that the assignment of credit constituted fraud against execution, mainly because the transfer of assets resulted in a significant reduction of the construction company’s assets, thereby undermining its ability to repay the debt being claimed by the original creditor.
The Court also noted that the second assignment contract was executed only after the initiation of the enforcement action, revealing a potential intent to hinder the satisfaction of the previous debt. Although the Court considered possible good faith on the part of the acquiring fund, it ultimately chose to prioritize the principle of chronological priority of credit, thus protecting the interests of the original creditor. In summary, the operation was interpreted as a maneuver capable of weakening the guarantees of the ongoing enforcement process, ultimately prejudicing the effectiveness of the debt recovery.
This decision signals a restrictive interpretation of legitimate litigation financing transactions—an industry that is growing in Brazil and internationally recognized as a valid instrument for access to justice.
This scenario highlights the crucial need for stricter governance and due diligence procedures in credit assignment transactions involving investment funds, establishing safeguards to prevent judicial challenges and preserve legal certainty in this market.
To mitigate the risks highlighted by this decision, it is recommended to:
1. Carry out a thorough analysis of the assignor’s financial and legal situation, identifying any ongoing lawsuits, particularly enforcement actions.
2. Verify the chronology between the creation of the credits, any pending legal actions, and the timing of the assignment.
3. Assess the financial impact of the assignment on the solvency of the assigning company.
4. Ensure robust documentation demonstrating the legitimacy of the transaction and lack of fraudulent intent.
5. Structure additional guarantees that may reduce the risks of judicial challenges.
