The Fourth Panel of Brazil’s Superior Court of Justice (STJ) has confirmed that claims arising from Real Estate Credit Bills (Letra de Crédito Imobiliário, or LCI) are classified as unsecured (unsecured/ordinary) in bankruptcy proceedings.
In practice, this means that investors holding LCIs do not have payment priority, even if those LCIs are backed by mortgage or fiduciary lien guarantees.
1. Why don’t LCIs have priority in bankruptcy? Even when LCIs are backed by real estate credits with real guarantees (such as mortgages or fiduciary liens), the preference rights over such guarantees belong to the issuing financial institution, not to the LCI investor. Thus, in the relationship between the LCI investor and the issuing bank, there is only a contractual obligation, not a real right of guarantee. As a result, in the event of bankruptcy, LCI investors are treated as unsecured creditors, with no priority over other creditors without guarantees.
2. What are the practical consequences for your company? If your company has invested in LCIs issued by a financial institution that goes bankrupt, it will be treated as an unsecured creditor: payment will only occur after all creditors with real guarantees or legal privileges have been satisfied. This increases the risk of loss or delay in recovering the investment, especially if the bankrupt entity lacks sufficient assets to pay all claims.
3. Relationship between real rights of guarantee and credit instruments: The STJ emphasized that real rights of guarantee, such as mortgages and fiduciary liens, are exclusive to financial institutions when granting real estate loans. These rights are not transferred to the investors who acquire the LCIs, who therefore assume the risk of the issuer. The backing is merely a legal prerequisite for the issuance of the LCI, but does not give the investor the special protection of a mortgage or fiduciary creditor in the event of the issuer’s insolvency.
For corporate investors, LCIs, from a legal standpoint, are credit instruments without any payment priority in the event of bankruptcy of the issuing institution. In other words, the investor stands in line with other common creditors, without additional protection. Therefore, it is essential to be aware of this risk before choosing this type of investment.
